Financial Ratios, Corporate Governance, and Macroeconomic Indicators in Predicting Financial Distress

Abstract

Purpose: This study analyzed the effect of financial ratios, corporate governance, and macroeconomic variables on financial distress. This research was conducted during the covid-19 pandemic when many companies experienced difficulties due to activity restrictions during the pandemic.   Theoretical framework: Prolonged financial difficulty can lead to the company's insolvency. As a result, understanding the company's health status is critical. Internal company factors, such as the firm's financial situation and company management, as reflected in corporate governance, and external company factors, such as macroeconomic conditions, can all influence the occurrence of financial hardship in the company.   Design/Methodology/Approach: This study uses a sample of property and real estate sector companies listed on the Indonesia stock exchange. The model used was 270 observations. This research is a quantitative approach using a logistic regression test. The unit of analysis in this study is property, real estate, and building construction sector companies listed on the Indonesia Stock Exchange, where each company is undoubtedly influenced by internal company factors, namely financial ratios and corporate governance, and external factors, namely macroeconomics.   Findings: The results showed that the relevant financial ratios are sales total assets and retained earnings to total assets. At the same time, the corporate governance included in the model is director size and macroeconomic variables in the form of inflation entering the financial distress model. The accuracy of the model in classifying its observations is 84.1%.   Research, practical & social implications: The implication of this study's results is that financial ratios, governance, and macroeconomic indicators can be used as a benchmark to detect the possibility of financial distress.   Originality/Value: This research was conducted in the real estate industry during the Covid-19 pandemic when many companies experienced financial difficulties. This research combines financial ratios, corporate governance, and macroeconomics that impact the possibility of financial distress. This research is different because it combines financial ratios that reflect company performance, governance practices, and macroeconomic indicators to predict bankruptcy.