Stable capital structure composition

Oct 13, 2025 by talynt.org 52 views

The Influence of Return on Assets, Company Size, and Institutional Ownership on Financial Distress with Capital Structure as a Moderating Variable: An Empirical Study of Manufacturing Companies Listed on the Indonesia Stock Exchange

Introduction

Financial distress is a significant concern for companies, particularly in the manufacturing sector, as it can lead to bankruptcy, job losses, and economic instability. The Indonesia Stock Exchange (IDX) is home to numerous manufacturing companies, and understanding the factors that contribute to financial distress is crucial for stakeholders, including company management, investors, and regulators. This study aims to examine the effect of return on assets (ROA), company size, and institutional ownership on financial distress in manufacturing companies listed on the IDX, with capital structure as a moderating variable.

Literature Review

Previous studies have investigated the relationship between financial distress and various factors, including profitability, company size, and ownership structure. However, the role of capital structure as a moderating variable has received limited attention. Research has shown that profitability is a significant predictor of financial distress, as companies with high profitability may be more likely to take risks, such as expansion or uncontrolled investment, which can lead to financial crisis (Altman, 1968; Beaver, 1968). Company size has also been found to be a significant factor, as larger companies may be more vulnerable to financial distress due to their increased complexity and exposure to market risks (Lang & Stulz, 1992). Institutional ownership has been found to have a negative impact on financial distress, as institutional investors may provide a stabilizing influence on company management and reduce the risk of financial crisis (Shleifer & Vishny, 1986).

Methodology

This study uses secondary data from 84 manufacturing companies listed on the IDX during the 2016 to 2020 period. Purposive sampling techniques were used to select company samples, resulting in a total of 240 observations. Data were analyzed using SPSS software. The study employs a regression analysis to examine the relationship between ROA, company size, institutional ownership, and financial distress, with capital structure as a moderating variable.

Results

The results of this study show that ROA has a positive and significant influence on financial distress, indicating that companies with high profitability are more likely to experience financial distress. Conversely, institutional ownership has an insignificant negative influence on financial distress, suggesting that share ownership by financial institutions does not have a significant impact on the company's risk of experiencing financial distress. The capital structure, in this study, was not proven to be able to moderate the influence of ROA, company size, and institutional ownership on financial distress.

Discussion

The results of this study indicate that profitability is an important factor that can cause financial distress in manufacturing companies. Possibly, companies with high profitability tend to be more aggressive in taking risks, such as expansion or uncontrolled investment, which in turn can cause financial distress. The inability of the capital structure in moderating the effect of independent variables on financial distress can be interpreted as follows:

Stable capital structure composition: Manufacturing companies in Indonesia may have a relatively stable capital structure during the study period, which can be caused by strict banking regulations or company preferences to certain funding sources.
External factors: External factors such as macroeconomic conditions or government policy changes can have a stronger influence on financial distress compared to the company's capital structure.

Implications for Stakeholders

The results of this study have important implications for various stakeholders:

Company Management: Important for company management to be aware of the effect of profitability on the risk of financial distress. They must carry out effective risk management and maintain company profitability at a healthy level.
Investors: Investors need to pay attention to company profitability and risk management strategies before investing. They also need to pay attention to the company's capital structure as a risk indicator.
Regulator: Regulator can formulate policies that support effective risk management and financial information transparency to reduce the risk of financial distress in manufacturing companies.

Further Research

This research can be expanded by considering other factors that might affect financial distress, such as:

Asset Quality: Exploring the effect of asset quality on financial distress.
Macroeconomic factor: Connecting macroeconomic conditions with financial distress in manufacturing companies.
Managerial ownership: Analyzing the effect of managerial ownership on financial distress.

By understanding the factors that influence financial distress, manufacturing companies in Indonesia can take preventive steps to minimize risk and maintain the continuity of their business.

Conclusion

This study contributes to the existing literature by examining the effect of ROA, company size, and institutional ownership on financial distress in manufacturing companies listed on the IDX, with capital structure as a moderating variable. The results of this study indicate that profitability is an important factor that can cause financial distress in manufacturing companies. The inability of the capital structure in moderating the effect of independent variables on financial distress highlights the importance of considering external factors, such as macroeconomic conditions and government policy changes, in reducing the risk of financial distress. The implications of this study are important for stakeholders, including company management, investors, and regulators, and highlight the need for effective risk management and financial information transparency in reducing the risk of financial distress in manufacturing companies.
Q&A: Understanding the Influence of Return on Assets, Company Size, and Institutional Ownership on Financial Distress

Introduction

In our previous article, we discussed the influence of return on assets (ROA), company size, and institutional ownership on financial distress in manufacturing companies listed on the Indonesia Stock Exchange (IDX). We also examined the role of capital structure as a moderating variable. In this Q&A article, we will address some of the most frequently asked questions related to this topic.

Q: What is the relationship between ROA and financial distress?

A: Our study found that ROA has a positive and significant influence on financial distress. This means that companies with high profitability are more likely to experience financial distress. This is because companies with high profitability may be more aggressive in taking risks, such as expansion or uncontrolled investment, which can lead to financial crisis.

Q: How does company size affect financial distress?

A: Our study found that company size has an insignificant influence on financial distress. This means that the size of a company does not have a significant impact on its risk of experiencing financial distress. However, it's worth noting that larger companies may be more vulnerable to financial distress due to their increased complexity and exposure to market risks.

Q: What is the role of institutional ownership in financial distress?

A: Our study found that institutional ownership has an insignificant negative influence on financial distress. This means that share ownership by financial institutions does not have a significant impact on a company's risk of experiencing financial distress. However, institutional ownership can provide a stabilizing influence on company management and reduce the risk of financial crisis.

Q: Can capital structure moderate the influence of independent variables on financial distress?

A: Our study found that capital structure was not able to moderate the influence of ROA, company size, and institutional ownership on financial distress. This means that the use of debt or equity in the capital structure does not change the effect of these independent variables on financial distress.

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

A: Our study highlights the importance of effective risk management and maintaining company profitability at a healthy level. Company management should be aware of the effect of profitability on the risk of financial distress and take steps to minimize risk.

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

A: Our study suggests that investors should pay attention to company profitability and risk management strategies before investing. They should also pay attention to the company's capital structure as a risk indicator.

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

A: Our study suggests that regulators can formulate policies that support effective risk management and financial information transparency to reduce the risk of financial distress in manufacturing companies.

Q: What are some potential limitations of this study?

A: Our study has several potential limitations, including the use of secondary data and the limited sample size. Future studies could address these limitations by using primary data and a larger sample size.

Q: What are some potential avenues for future research?

A: Some potential avenues for future research include exploring the effect of asset quality on financial distress, connecting macroeconomic conditions with financial distress in manufacturing companies, and analyzing the effect of managerial ownership on financial distress.

Conclusion

In this Q&A article, we have addressed some of the most frequently asked questions related to the influence of ROA, company size, and institutional ownership on financial distress in manufacturing companies listed on the IDX. We hope that this article has provided valuable insights and information for stakeholders, including company management, investors, and regulators.