Abstract
This study aims to examine the effects of different factors influencing on financial distress. The population of this study includes industrial companies listed on the Indonesia Stock Exchange. Samples were processed by choosing 69 companies for three years of information which leaves us to have 150 observations. The sampling technique uses purposive random sampling and data is analyzed using PLS. The results show that firm size and liquidity negatively affect the financial distress while leverage positively affects the financial distress. In addition, institutional ownership moderates liquidity towards financial distress, firm size negatively affects liquidity, and liquidity does not mediate the effect of firm size on financial distress. The conclusion of this research is that management teams can avoid financial distress if they are able to manage liquidity ratios and leverage well, both ratios must be maintained so that they would not exceed firms’ financial abilities. Companies with big amount of total assets have an advantage in competition since it is not overshadowed by the condition of financial distress and they can easily gain stakeholders’ confidence. Institutional ownership in this study seems to encourage management to take risks related to company liquidity to generate profits by utilizing long-term debt in financing its operations.
Highlights
Financial distress describes the condition of companies that are experiencing poor financial situations
Institutional ownership moderates the effect of liquidity on financial distress by weakening the effect while liquidity is not a mediation between firm size and financial distress
The findings showed that firm size and liquidity have a negative effect on financial distress
Summary
Financial distress describes the condition of companies that are experiencing poor financial situations. Companies that experience financial distress cause concern for internal parties such as managers and employees, as well as external parties such as investors and creditors. The investor gets risks to lose their shares invested in the company and the creditors suffer losses from their fund they have lent. This makes bankruptcy prediction analysis (financial distress) indispensable in making investment decisions (Yuliastary & Wirakusuma, 2014). Financial distress or financial distress can be identified through information reported by the company. According to Hanafi and Halim (2012:259) financial distress information can be useful for various parties, such as lenders, investors, governments, accountants, and especially management. If management can detect bankruptcy early, actions to help the situation can be taken so that bankruptcy can be avoided
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