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Corporate Governance Structures and Probability of Financial Distress: Evidence From Indonesia Manufacturing Companies

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  • Maria Goreti Kentris Indarti
  • Jacobus Widiatmoko
  • Imang Dapit Pamungkas

Abstract

This study aims to examine the effect of four variables, which include independent commissioners, audit committees, institutional ownership and managerial ownership as a proxy for the corporate governance mechanisms on financial distress. This was carried out on the manufacturing companies listed on the Indonesia Stock Exchange (IDX) in 2016-2018. The samples were selected using the purposive sampling method and 224 data were obtained. The hypothesis in this study was tested using logistic regression. The results showed that independent commissioners have a negative influence on financial distress, while the audit committee, institutional ownership and managerial ownership have no effect. This implies that an independent commissioner functions as an effective supervisory mechanism to prevent a company from experiencing financial distress. Furthermore, two control variables used in this study, namely leverage and profitability, were able to produce results as predicted. It was discovered that a higher leverage level leads to a greater possibility of experiencing financial distress and conversely, the higher the profitability of a company, the lower the probability of experiencing financial distress.

Suggested Citation

  • Maria Goreti Kentris Indarti & Jacobus Widiatmoko & Imang Dapit Pamungkas, 2021. "Corporate Governance Structures and Probability of Financial Distress: Evidence From Indonesia Manufacturing Companies," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(1), pages 174-183, January.
    • Handle: RePEc:jfr:ijfr11:v:12:y:2021:i:1:p:174-183
    DOI: 10.5430/ijfr.v12n1p174
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    References listed on IDEAS

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    1. Jacobus Widiatmoko & Maria Goreti Kentris Indarti & Imang Dapit Pamungkas, 2020. "Corporate governance on intellectual capital disclosure and market capitalization," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1750332-175, January.
    2. , Aisdl, 2020. "Corporate social responsibility and firm financial performance: A literature review," OSF Preprints aymk7, Center for Open Science.
    3. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    4. Geng, Ruibin & Bose, Indranil & Chen, Xi, 2015. "Prediction of financial distress: An empirical study of listed Chinese companies using data mining," European Journal of Operational Research, Elsevier, vol. 241(1), pages 236-247.
    5. Ciftci, Ilhan & Tatoglu, Ekrem & Wood, Geoffrey & Demirbag, Mehmet & Zaim, Selim, 2019. "Corporate governance and firm performance in emerging markets: Evidence from Turkey," International Business Review, Elsevier, vol. 28(1), pages 90-103.
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