The Role of Corporate Governance Mechanisms in Financial Distress: Evidence from Indonesian Manufacturing Firms
DOI:
https://doi.org/10.65150/EP-jefrr/V2E4/2026-08Keywords:
Financial Distress, Corporate Governance, Audit Committee, Independent Commissioners, Institutional OwnershipAbstract
This study examines the role of corporate governance mechanisms—namely the audit committee, the proportion of independent commissioners, and institutional ownership—in explaining financial distress among manufacturing firms in Indonesia during the 2020–2023 period, a time characterized by significant economic pressure. Using a quantitative approach with panel data analysis, the study analyzes 51 manufacturing firms (204 firm-year observations) selected through purposive sampling. Financial distress is measured using the Altman Z-score model, while the Random Effects Model with robust standard errors is employed to ensure reliable estimation. The findings reveal that the audit committee and the proportion of independent commissioners do not have a significant effect on financial distress, suggesting that structural proxies such as committee size and board composition may not adequately capture the effectiveness of monitoring functions. In contrast, institutional ownership is found to have a significant effect, indicating that institutional investors play a more substantive role in influencing firms’ financial conditions through monitoring, reducing information asymmetry, and disciplining managerial behavior. Overall, the results highlight that the effectiveness of corporate governance mechanisms in mitigating financial distress is highly dependent on their functional quality and level of active engagement rather than their mere formal existence. These findings contribute to the corporate governance literature in emerging markets and provide practical implications for managers, investors, and regulators in strengthening governance practices to enhance financial resilience.
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