The Effect of Good Corporate Governance Mechanisms and Earnings Quality on Non-Performing Loans: Evidence from Indonesian Banking Companies

Background: Corporate governance plays a crucial role in ensuring transparency, accountability, and effective risk management, particularly in the banking sector where weak governance can lead to financial crises and corporate failures. In Southeast Asia, persistent governance weaknesses and rising Non-Performing Loans (NPLs) highlight the importance of strong governance mechanisms in maintaining banking stability and financial performance. Aims: This study aims to examine the effect of Good Corporate Governance (GCG) mechanisms and earnings quality on Non-Performing Loan (NPL) in banking companies listed on the Indonesia Stock Exchange (IDX) during the 2020–2024 period. Study Design: This study employed a quantitative research design using panel data regression analysis. Place and Duration of Study: The study used panel data from 43 banking companies listed on the Indonesia Stock Exchange (IDX) during 2020–2024, resulting in 215 firm-year observations. Methodology: This study used secondary data obtained from the annual reports and financial statements of banking companies listed on the Indonesia Stock Exchange (IDX). The sample was selected using purposive sampling techniques based on predetermined criteria. The independent variables consisted of institutional ownership, independent commissioners, gender diversity, and earnings quality, while Non-Performing Loan (NPL) served as the dependent variable. Panel data regression analysis with the Random Effect Model (REM) was applied to test the relationship between the variables. The study was grounded in agency theory and stakeholder theory to explain the role of corporate governance and earnings integrity in controlling credit risk. Results: The findings show that institutional ownership, independent commissioners, and gender diversity have negative but statistically insignificant effects on Non-Performing Loan (NPL). Meanwhile, earnings quality has a significant positive effect on NPL. These results indicate that the Good Corporate Governance mechanisms examined in this study have not been effective in significantly reducing credit risk, while earnings quality demonstrates a significant relationship with NPL in Indonesian banking companies. Conclusion: Good Corporate Governance mechanisms and earnings quality play an important role in reducing Non-Performing Loan (NPL) levels in Indonesian banking companies. Stronger governance structures and higher-quality earnings can improve monitoring effectiveness, support prudent decision-making, and enhance banking financial stability. These findings provide empirical evidence for regulators, investors, and banking management regarding the importance of governance quality and earnings integrity in credit risk management.