The Influence Of The Mechanism Of Corporate Governance, Leverage, And Profitability On Financial Distress With Liquidity As A Moderating Variable In Manufacturing Companies Listed On The Indonesia Stock Exchange

The Influence of Corporate Governance, Leverage, and Profitability on Financial Distress with Liquidity as a Moderating Variable in Manufacturing Companies Listed on the Indonesia Stock Exchange

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a significant number of manufacturing companies listed on it. However, these companies are not immune to financial distress, which can have severe consequences on their operations and stakeholders. In this study, we aim to investigate the influence of corporate governance, leverage, and profitability on financial distress in manufacturing companies listed on the IDX, with liquidity as a moderating variable.

Corporate Governance and Financial Distress Mechanisms

Corporate governance is a critical mechanism that ensures the interests of stakeholders are protected and that companies are managed transparently. A good corporate governance mechanism can prevent financial distress by enabling companies to make strategic and responsible decisions. Research has shown that companies with good corporate governance mechanisms have a lower risk of financial distress. This is because corporate governance provides a framework for decision-making, risk management, and accountability, which are essential for preventing financial distress.

The Role of Leverage in Financial Distress

Leverage refers to the use of debt in a company's capital structure. While debt can be a useful tool for financing business operations, excessive debt can increase the risk of financial distress. This is because companies with high levels of debt may struggle to meet their financial obligations, especially in unfavorable market conditions. Our study reveals that there is a significant influence between leverage and financial distress, where companies with high levels of debt are more susceptible to financial pressure.

Profitability as an Indicator of Financial Health

Profitability is a measure of a company's ability to generate profits. A higher profitability indicates that a company is more capable of absorbing various risks, including financial distress risks. Our results show that profitability has a significant positive influence on a company's financial condition, which is related to its ability to face a crisis. This suggests that companies with high profitability are better equipped to manage financial distress.

Liquidity as a Moderating Variable

Liquidity measures a company's ability to fulfill its short-term obligations. In this study, liquidity acts as a moderation variable in the relationships between leverage and financial distress. This means that in companies with high liquidity, the negative impact of leverage on financial distress can be minimized. However, our study found that liquidity could not moderate the relationship between corporate governance mechanisms and profitability to financial distress.

Conclusion

Overall, this study has shown that the mechanism of corporate governance, leverage, and profitability has a significant influence on financial distress in manufacturing companies listed on the IDX. Liquidity plays an important role in moderating the negative impacts of leverage, but this is not the case for corporate governance and profitability. This finding provides useful insights for company management and investors in understanding the factors that can affect a company's financial health in the manufacturing sector.

Implications of the Study

The findings of this study have several implications for company management and investors. Firstly, companies should prioritize good corporate governance mechanisms to prevent financial distress. Secondly, companies should manage their leverage carefully to avoid excessive debt. Thirdly, companies should focus on increasing their profitability to improve their financial health. Finally, companies should maintain high liquidity to minimize the negative impacts of leverage on financial distress.

Limitations of the Study

This study has several limitations. Firstly, the sample size is limited to 48 manufacturing companies listed on the IDX. Secondly, the study only examines the influence of corporate governance, leverage, and profitability on financial distress, without considering other factors that may affect financial distress. Thirdly, the study uses secondary data, which may not be comprehensive or up-to-date.

Future Research Directions

Future research should build on the findings of this study by examining the influence of other factors on financial distress, such as market conditions, industry trends, and regulatory requirements. Additionally, future research should investigate the impact of corporate governance, leverage, and profitability on financial distress in other industries and countries.

Conclusion

In conclusion, this study has shown that corporate governance, leverage, and profitability have a significant influence on financial distress in manufacturing companies listed on the IDX. Liquidity plays an important role in moderating the negative impacts of leverage, but this is not the case for corporate governance and profitability. The findings of this study provide useful insights for company management and investors in understanding the factors that can affect a company's financial health in the manufacturing sector.
Frequently Asked Questions (FAQs) on the Influence of Corporate Governance, Leverage, and Profitability on Financial Distress

Q: What is the main objective of this study?

A: The main objective of this study is to investigate the influence of corporate governance, leverage, and profitability on financial distress in manufacturing companies listed on the Indonesia Stock Exchange (IDX).

Q: What is corporate governance, and how does it affect financial distress?

A: Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. Good corporate governance can prevent financial distress by ensuring that companies are managed transparently and that the interests of stakeholders are protected.

Q: What is leverage, and how does it affect financial distress?

A: Leverage refers to the use of debt in a company's capital structure. Excessive debt can increase the risk of financial distress, as companies may struggle to meet their financial obligations, especially in unfavorable market conditions.

Q: What is profitability, and how does it affect financial distress?

A: Profitability is a measure of a company's ability to generate profits. A higher profitability indicates that a company is more capable of absorbing various risks, including financial distress risks.

Q: What is liquidity, and how does it affect financial distress?

A: Liquidity measures a company's ability to fulfill its short-term obligations. In this study, liquidity acts as a moderation variable in the relationships between leverage and financial distress.

Q: What are the implications of this study for company management and investors?

A: The findings of this study have several implications for company management and investors. Firstly, companies should prioritize good corporate governance mechanisms to prevent financial distress. Secondly, companies should manage their leverage carefully to avoid excessive debt. Thirdly, companies should focus on increasing their profitability to improve their financial health. Finally, companies should maintain high liquidity to minimize the negative impacts of leverage on financial distress.

Q: What are the limitations of this study?

A: This study has several limitations. Firstly, the sample size is limited to 48 manufacturing companies listed on the IDX. Secondly, the study only examines the influence of corporate governance, leverage, and profitability on financial distress, without considering other factors that may affect financial distress. Thirdly, the study uses secondary data, which may not be comprehensive or up-to-date.

Q: What are the future research directions based on the findings of this study?

A: Future research should build on the findings of this study by examining the influence of other factors on financial distress, such as market conditions, industry trends, and regulatory requirements. Additionally, future research should investigate the impact of corporate governance, leverage, and profitability on financial distress in other industries and countries.

Q: What are the practical implications of this study for policymakers and regulators?

A: The findings of this study have several practical implications for policymakers and regulators. Firstly, policymakers and regulators should prioritize the development of good corporate governance mechanisms to prevent financial distress. Secondly, policymakers and regulators should implement policies to regulate the use of leverage and ensure that companies maintain high liquidity.

Q: What are the potential applications of this study in real-world settings?

A: The findings of this study have several potential applications in real-world settings. Firstly, the study can be used to inform the development of corporate governance policies and regulations. Secondly, the study can be used to guide the management of companies in terms of their leverage and profitability. Finally, the study can be used to inform the development of financial distress prevention and management strategies.

Q: What are the potential limitations of applying the findings of this study in real-world settings?

A: The potential limitations of applying the findings of this study in real-world settings include the following: Firstly, the study is based on a limited sample size and may not be generalizable to other industries or countries. Secondly, the study only examines the influence of corporate governance, leverage, and profitability on financial distress, without considering other factors that may affect financial distress. Thirdly, the study uses secondary data, which may not be comprehensive or up-to-date.