DIVA AYU IMANDA SARI SARI

Financial Distress in Manufacturing Companies: The Effects of Profitability, Liquidity, and Leverage Ratios with Audit Committee Moderation

Introduction

Financial distress in manufacturing companies: the effects of profitability, liquidity, and leverage ratios with audit committee moderation. Study financial distress in Indonesian manufacturing companies. Find profitability & liquidity reduce distress, while leverage & audit committee show no significant effect. Empirical analysis from IDX data.

Abstract

This study aims to provide empirical evidence on factors influencing financial distress in Indonesian manufacturing companies. Financial distress occurs when operating cash flow is insufficient to cover short-term liabilities, such as trade payables and interest expenses. The independent variables are profitability, liquidity, and leverage, with the audit committee as a moderating variable. From 181 companies listed on the IDX, 104 were selected through purposive sampling over a four-year period. Using descriptive statistics and logistic regression, the results show that profitability and liquidity have a negative and significant effect on financial distress, while leverage shows no significant effect. The audit committee does not moderate the relationships between these variables and financial distress.

Review

This study investigates the critical issue of financial distress within Indonesian manufacturing companies, specifically examining the influence of profitability, liquidity, and leverage ratios. A key objective was to assess the moderating role of the audit committee on these relationships. The authors utilized a dataset derived from 104 purposively sampled firms listed on the Indonesian Stock Exchange (IDX) over a four-year period, employing descriptive statistics and logistic regression for analysis. The empirical findings reveal that both profitability and liquidity significantly and negatively impact the likelihood of financial distress, aligning with conventional financial theory. However, interestingly, leverage did not demonstrate a significant effect, and the audit committee was found not to moderate any of the relationships between the independent variables and financial distress. The research addresses a highly relevant topic, offering valuable insights into the determinants of financial stability in an emerging market context. The choice of logistic regression is appropriate given the binary nature of financial distress as the dependent variable, and the clear definition of financial distress based on operating cash flow offers a consistent measurement framework. A notable strength is the focused examination of specific financial ratios commonly associated with distress. However, the non-findings regarding leverage and audit committee moderation warrant deeper exploration. The abstract, while providing results, does not elaborate on potential reasons why leverage might be insignificant in this context, nor why the audit committee, a core governance mechanism, failed to exert a moderating influence. Further discussion on the specific characteristics of Indonesian corporate governance or the measurement of the audit committee variable would enhance understanding of these unexpected outcomes. Overall, this paper makes a useful contribution to the literature on corporate finance and financial distress, particularly for manufacturing companies in Indonesia. The findings regarding profitability and liquidity provide empirical confirmation in a specific geographical setting. For future research, it would be beneficial to delve into the specific characteristics of the chosen leverage metrics or the composition and effectiveness of Indonesian audit committees to explain the observed lack of significance. Expanding the scope to include other corporate governance mechanisms or alternative proxies for financial distress could also yield further insights. Practitioners and policymakers in Indonesia could benefit from a more detailed discussion of the practical implications of these findings, particularly in light of the unexpected non-results concerning leverage and the audit committee's role.

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