Moderation Analysis of Good Corporate Governance on the Effect of Financial Ratio and Market Ratio on Financial Distress
DOI:
https://doi.org/10.26668/businessreview/2023.v8i7.2933Keywords:
Financial Distress, Financial Ratio, Market Ratio, Institutional Ownership, Audit CommiteeAbstract
Purpose: This study aims to analyze the influence of financial ratios and market ratios on the financial distress condition during the COVID-19 pandemic, as well as to determine the role of institutional ownership and the audit committee, which are mechanisms of corporate governance, in moderating the influence of financial ratios on financial distress.
Theoretical framework: This study highlights the importance of identifying financial distress conditions in companies during the COVID-19 pandemic. The occurrence of the pandemic, which puts significant pressure on companies, poses a threat to their survival and can lead to bankruptcy. The combination of financial, market, and corporate governance analyses can be utilized to identify and predict financial distress.
Design/Methodology/Approach: This study refers to the Signalling Theory and the Agency Theory. It is a quantitative causal study, and the population of the research consists of companies in the infrastructure, trade, services, and investment sectors listed on the Indonesia Stock Exchange in the years 2020-2021. The study utilizes a purposive sampling method, and a total of 27 companies were obtained as samples. The data source for the study is secondary data obtained from company reports, and it was analyzed using SPSS software with logistic regression analysis and moderated regression analysis techniques.
Findings: The research findings indicate that financial ratio analysis, specifically profitability and solvability ratios, can be used to identify financial distress conditions during the COVID-19 pandemic. However, the other two financial ratios, liquidity and activity ratios, as well as the market ratio, do not provide predictive results for the financial distress of companies. Based on the results of moderate regression analysis, the corporate governance mechanism of institutional ownership can moderate the influence of profitability and solvability ratios. On the other hand, the monitoring mechanism of the audit committee cannot moderate this influence.
Research, practical & social implications: The findings of this study can be used by companies, investors, and stakeholders as a guide in making decisions. In addition, these findings can serve as a stimulant and reference for future research and can add other predictors from a macroeconomic perspective.
Originality/Value: This research contributes by providing a combination of predictive models through financial ratio analysis and corporate governance mechanisms for financial distress, which can be utilized by companies in formulating preventive strategies and by investors in making financing decisions for companies.
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