A Interest Rate, Net Income, and Share Price

The Mediating Role of Profitability in Indonesia’s Industrial Sector

Abstract

This study examines how interest rates influence share prices in Indonesia’s industrial sector by explicitly modelling net income as a mediating variable. While conventional valuation theory assumes a direct impact of interest rates on stock prices, empirical evidence in emerging markets remains inconclusive. Addressing this gap, the study adopts a parsimonious, earnings-cantered framework to clarify the financial transmission mechanism from monetary policy to equity valuation. Using a quantitative explanatory design, the study analyses longitudinal data from industrial companies listed on the Indonesia Stock Exchange over the periods 2012–2019 and 2023–2024, excluding the COVID-19 years to avoid structural distortions. The hypotheses are tested using Structural Equation Modelling with Partial Least Squares (SEM-PLS). The results show that interest rates have a significant negative effect on net income, but no direct effect on share prices. In contrast, net income has a strong and positive effect on share prices and significantly mediates the relationship between interest rates and share prices. The findings demonstrate that the impact of interest rates on equity valuation operates indirectly through corporate profitability, rather than through immediate market repricing. The novelty of this study lies in empirically confirming net income as the critical transmission bridge linking monetary policy to stock market outcomes in an emerging market context. From a policy perspective, the study highlights that stable stock prices may mask underlying profitability pressures, underscoring the importance of incorporating firm-level financial indicators into monetary policy assessment and investment decision-making.