The role of moderating audit quality relationship between corporate characteristics and financial distress in the Indonesian mining sector

Abstract

Financial performance and corporate governance play an important role in financial distress in the mining sector, which is one of the most significant contributors to the Indonesian economy. This study aims to analyze the effect of corporate characteristics on financial distress (FD), which is moderated by corporate governance (audit quality), and uses the controlling variables (inflation rate and GDP). The study uses data from audited financial statements from mining sector in the Indonesia Stock Exchange for the period 2013–2018. Since the dependent variable (FD) is dichotomous, this study used a binary logistic regression model, as it is the case in many studies regarding the probability of bankruptcy filing. In line with the current study and some previous studies, leverage, efficiency (activity), market-to-book value, audit quality, and GDP affect the probability of financial distress significantly. Only liquidity and inflation do not impact FD. Besides, the moderating audit quality weakens the effect of liquidity and PBV; otherwise, it strengthens leverage and efficiency in predicting financial distress. As for managerial implications, this study concludes that corporate performance, corporate governance, and macro-risk factors affect the probability of financial distress. The authors suggest that mining firms need to pay attention to corporate governance and should watch the economic condition for business sustainability.

The Effect of Financial Performance and Innovation on Leverage: Evidence from Indonesian Food and Beverage Sector

“…Agency cost has a negative correlation with leverage or capital structure but does not affect firm leverage significantly. This finding does not support agency theory that the correlation between agency cost and leverage is significant, but is in line with previous research by Santosa et al (2020) and Kyriazopoulos (2017). Besides, Vijayakumaran and Vijayakumaran (2019) state that agency costs in industries or business sectors that have been transparent and apply the principles of good corporate governance tend to be stable and decline.…”

“…The leverage policy in capital structure conducted by management, in addition to being influenced by weighted average cost of capital itself, is related to other factors that can generally affect funding sources, including company size, dividend payments, sales, company assets, company growth, profitability, tax benefits (tax shield), the target of leverage, liquidity, business risk and corporate governance itself (Ross, Westerfield, Jaffe & Jordan, 2017;Santosa et al, 2020). The effect of some factors on capital structure and financial performance is not the same empirically because it depends on the type of company or the respective business fields in which the company operates (Santosa & Puspitasari, 2019).…”

“…Profitability is the return on capital investment, which is calculated from net profit divided by investment. Some previous studies show that firms with high returns on investment or assets use relatively smaller debt ( Jermias & Yigit, 2019;Santosa et al, 2020). The high profitability enables management to finance most of its investment internally with its retained earnings.…”

“…The company's goal is to maximize the welfare of the owner by increasing the value of the firm, and the most important thing that must be considered by the company to achieve these goals is the substantial aspect of capital related to leverage (Prieto & Lee, 2019;Peng Chow, 2019). The aspect of capital structure is very closely related to business activities and financial distress because the company runs and develops well if management has sufficient capital according to the business expansion and working capital needs (Santosa, Tambunan, & Kumullah, 2020). Management use capital expenditure for investment and operations that comes from the internal funds.…”

Pengaruh Kinerja Keuangan dan BI Rate terhadap Return Saham Sektor Otomotif Indonesia

“…Indikator penting lainnya adalah solvabilitas merupakan rasio yang menunjukkan bagaimana perusahaan memenuhi kewajiban jangka panjangnya atau kemampuan untuk mengelola utangnya dalam rangka memperoleh keuntungan dan juga mampu untuk melunasi kembali utangnya (Santosa & Puspitasari, 2019). Semakin tinggi rasio utang maka nilai perusahaan akan meningkat, namun keuangan perusahaan berpotensi mengalami financial distress karena meningkatnya biaya kebangkrutan (Santosa, Tambunan, & Kumullah, 2020). Sugiarto & Santosa (2018) menunjukkan bahwa Net Profit Margin dan Return on Equity memberikan dampak positif dan signifikan terhadap return saham.…”