The Effect of Profitability and Leverage on Financial Performance: A Comparative Study Between Companies Included in and Not Included in The IDX ESG Quality 45 Index

Abstract

The increasing importance of Environmental, Social, and Governance (ESG) considerations in investment decisions has raised questions about whether financial characteristics are associated differently with financial performance across companies with different ESG classifications. This study examines the effects of profitability and leverage on financial performance and investigates whether these relationships differ between companies included in and not included in the IDX ESG Quality 45 Index. Profitability, leverage, and financial performance are measured using Return on Assets (ROA), Debt-to-Equity Ratio (DER), and Tobin's Q, respectively. Using panel data from 50 companies listed on the Indonesia Stock Exchange during 2019–2024, this study applies pooled Ordinary Least Squares (OLS) regression with interaction terms, year fixed effects, and company-clustered robust standard errors. The findings indicate that profitability has a positive and significant relationship with financial performance, with a stronger association among companies included in the IDX ESG Quality 45 Index. Leverage is not significantly associated with financial performance among companies outside the index but becomes positively associated for companies included in the index. Overall, the findings suggest that index inclusion distinguishes how profitability and leverage are associated with market-based financial performance, providing insights for investors, companies, and policymakers in evaluating firm performance.