Corporate Governance Mechanism and Financial Ratios on the Indonesia Stock Exchange: How do they Affect Financial Distress?

Abstract

Aims: The purpose of this study was to determine the effect of institutional ownership, board of directors, audit committee, company size, and sales growth on financial distress. Study Design: The population of this study consisted of 41 retail subsector companies listed on the Indonesia Stock Exchange (IDX) for the 2019-2022 period. The total observation data is 164 and obtained 64 data samples that meet the criteria and 100 data samples that do not meet the criteria (Loss, Gray Area, Incomplete variables).  This research data comes from the company's annual financial statements. Methodology: The data collection method is purposive sampling and the analysis technique is model fit test, coefficient of determination test, and logistic regression. Financial distress is calculated using the Altman Z-Score calculation, and hypothesis testing is tested using the SPSS 26 analysis tool. Results: The results showed that good corporate governance proxied by the board of directors and audit committee has no effect on financial distress, while institutional ownership affects financial distress. Company size variables affect financial distress. While sales growth has no effect on financial distress. Conclusion: Based on this study, it is known that institutional ownership has an effect on financial distress, meaning that the greater the percentage of institutional ownership will reduce the possibility of the company experiencing financial distress. The board of directors has no effect on financial distress, meaning that the number of directors in a company does not affect the occurrence of financial distress. The audit committee has no effect on financial distress, meaning that the number of audit committee members is not able to reduce the problem of financial distress. Company size has an effect on financial distress, meaning that a higher total asset value owned by company would reduce the probability of financial distress. Sales growth has no effect on financial distress, meaning that the high or low level of sales growth does not reflect that it can be followed by an increase in profits earned by the company. To avoid financial distress, it is done by higher percentage of institutional ownership, as well higher total asset value owned by the company properly.