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.
Highlights
Financial Distress is a condition in which a company experiences financial difficulties before becoming bankrupt (Mafiroh & Triyono, 2018)
It is seen that the Independent Commissioners (IndCom) had a beta coefficient of -5.147 with a significance value of 0.038, lesser than 0.05, which indicated that it had a significant negative effect on financial distress
This study examined and analyzed the influence of independent commissioners, audit committee, institutional ownership and managerial ownership as a proxy for corporate governance mechanisms on financial distress in manufacturing companies listed on the Indonesia Stock Exchange in 2016-2018
Summary
Financial Distress is a condition in which a company experiences financial difficulties before becoming bankrupt (Mafiroh & Triyono, 2018). Some signs of financial difficulties include Increases in capital costs, more stringent requirements from creditors and suppliers for corporate financing, decreased cash flow, increased financial leverage and regular changes of key employees. These difficulties are caused by inefficient and ineffective operational system, deficiencies in market conditions such as recession and decline in market share and mismanagement of the company (Kordestani et al, 2011). Having good corporate governance enhances the economic development of a country This is because its implementation strengthens the performance and protects companies against the risk of financial distress (Murhadi et al, 2018). Good corporate governance practices are needed to strengthen the performances and prevent financial distress
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