Abstract
The study aims to prove whether good corporate governance (GCG) is able to predict the probability of companies experiencing financial difficulties. Financial ratios that traditionally used for predicting bankruptcy remains used in this study. Besides, this study also compares logit and probit regression models, which are widely used in research related accounting bankruptcy prediction. Both models will be compared to determine which model is more superior. The sample in this study is the infrastructure, transportation, utilities & trade, services and hotels companies experiencing financial distress in the period 2008-2011. The results show that GCG and other three variables control i.e DTA, CR and company category do not prove significantly to predict the probability of companies experiencing financial difficulties. NPM, the only variable that proved significantly distinguishing healthy firms and distress. In general, logit and probit models do not result in different conclusions. Both of the models confirm the goodness of fit of models and the results of hypothesis testing. In terms of classification accuracy, logit model proves more accurate predictions than the probit models.
Highlights
Implementation of good corporate governance (GCG) consistently will support firm’s performance and reduce the likelihood of financial distress
To reduce the potentially disturbing results, companies that have an extreme value of Current ratio (CR) are excluded from testing
There are four companies that are not included in the testing due to the extreme value of CR, and one company with NPM extreme value is excluded from the sample, so the number of samples remaining 95 companies consisting of 64 healthy companies and 31 unhealthy companies
Summary
Implementation of GCG consistently will support firm’s performance and reduce the likelihood of financial distress. Fich & Slezak (2007) and Daily & Dalton (1994) proved that the implementation of GCG kept companies from financial distress and made companies sustain. McKinsey in one of its survey conducted jointly with the World Bank, Park and Institutional Investor Magazine in 2000 (in Coombes & Watson, 2000), revealed that companies which implement a high standard of CGC will further attract investors and keep them in the capital market. Investors believed that their investment will be protected in well-managed companies. Elloumi & Gueyie (2001); Supatmi (2007); Huang & Zhao, (2008); Fich & Slezak (2008); Ward & Foster (1997), Yin & Tsui (2004) and Sengupta & Faccio (2011) proved that the probability of financial difficulties of implementing GCG, is lower than companies that do not implement GCG
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