The Role of Non-Financial Factors in Detecting Bankruptcy by Mediating Financial Performance

Ani Nuraini, Farah Margaretha Leon, Bahtiar Usman

Abstract

This study aimed to determine whether non-financial factors directly or indirectly affect bankruptcy through financial performance as a mediating variable. The novelty of this study combines non-financial information as an independent variable and financial performance as a mediating variable in determining the probability of bankruptcy. The population included 19 manufacturing companies listed on the Indonesia Stock Exchange from 2009 to 2019. Furthermore, secondary cross-section and time-series data analyzed using a structural equation model were used to examine the direct and indirect effects. Logistic regression was also performed to determine the effect of the bankruptcy probability. The data processing results show that the non-financial variables, including Corporate Governance, Market Information, Research and Development (R&D), and Macro Factors, do not directly affect bankruptcy. However, they significantly affect the mediation of Financial Performance on Return on Equity (ROE), while the Debt to Asset Ratio (DAR) is insignificant. This leads to a model that detects bankruptcy apart from direct financial performance. Furthermore, it is necessary to detect beforehand the effect of non-financial variables, comprising Good Corporate Governance (Boards of Commissioners and Directors), Market Information (Market Book), R&D, and Macro Factors (Interest and Exchange Rates). These results may help predict company bankruptcy using various non-financial information as independent variables. However, the information is inseparable from financial performance as a mediation determinant of the company's health.

 

Keywords: bankruptcy, corporate governance, financial performance, research, development.


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