Journal of Accounting and Investment Vol. 22 No. 3, September 2021 Article Type: Research Paper The Effect of Board and Ownership Structure on the Possibility of Financial Distress Joanne Jovita Jodjana*, Sherin Nathaniel, Rinaningsih, and Titin Pranoto Abstract: Research aims: This study aims to examine the effect of corporate governance, specifically relating to the ownership structure and board structure, on the possibility of financial distress. Design/Methodology/Approach: The sample used in this study are companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2019, excluding the financial industry. Conditional logistic regression is used as the study uses paired data based on the total assets of the company. Research findings: The results of this study indicate that board ownership, independent commissioners, and the board of directors can increase the likelihood of financial distress. On the other hand, institutional ownership and concentrated ownership are proven to have no effect on the likelihood of financial distress. The results of sensitivity testing using logistic regression showed different results on the variable institutional ownership, which is that institutional ownership can increase the likelihood of financial distress. Meanwhile, the other variables showed the same outcome as the main regression used in this study. Theoretical contribution/Originality: This study contributes to the knowledge on the relationship of board ownership, institutional ownership, concentrated ownership, independent commissioners and board size and the possibility of financial distress. Also, this research found that the provision of incentives in the form of shares to the board may not be an effective way to overcome financial distress in Indonesian firms. Keywords: Financial Distress; Corporate Governance; Ownership Structure; Board Structure Introduction The monetary crisis that hit Asia in 1997 to 1998 was an extraordinary event that resulted in many companies experiencing financial distress (Helena & Saifi, 2018). The Asian Development Bank [ADB] (2000) stated that one of the main sources that caused a huge economic downturn in Indonesia was the weak corporate governance structure of Indonesian companies. This propelled the Indonesian government to establish a committee called Komite Nasional Kebijakan Corporate Governance (KNKCG) or National Committee on Good Corporate Governance in 1999 AFFILIATION: Department of Accounting, Universitas Prasetiya Mulya, Jakarta Capital Special Region, Indonesia *CORRESPONDENCE: joanne.jodjana@gmail.com THIS ARTICLE IS AVAILABLE IN: http://journal.umy.ac.id/index.php/ai DOI: 10.18196/jai.v22i3.12659 CITATION: Jodjana, J.J., Nathaniel, S., Rinaningsih, R., & Pranoto, T. (2021). The Effect of Board and Ownership Structure on the Possibility of Financial Distress. Journal of Accounting and Investment, 22(3), 602-624. ARTICLE HISTORY Received: 30 Aug 2021 Revised: 15 Sep 2021 Accepted: 15 Sep 2021 https://scholar.google.co.id/citations?user=1vsUtFQAAAAJ&hl=en https://scholar.google.co.id/citations?user=g0Jh29sAAAAJ&hl=en https://www.prasetiyamulya.ac.id/en/undergraduate-programs/s1-accounting/ https://www.prasetiyamulya.ac.id/en/undergraduate-programs/s1-accounting/ https://www.prasetiyamulya.ac.id/en/undergraduate-programs/s1-accounting/ https://www.prasetiyamulya.ac.id/en/undergraduate-programs/s1-accounting/ mailto:joanne.jodjana@gmail.com http://journal.umy.ac.id/index.php/ https://journal.umy.ac.id/index.php/ai/article/view/12659 https://crossmark.crossref.org/dialog/?doi=10.18196/jai.v22i3.12659&domain=pdf Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 603 in hopes that Indonesian companies can implement better corporate governance (Otoritas Jasa Keuangan [OJK], 2014). However, today, weak implementation of corporate governance is still a recurring source of problems that can lead to a company’s failure. One example is the case of PT Asuransi Jiwasraya, which is one of the state-owned enterprises in Indonesia, that failed to pay its customers’ insurance claims amounting to Rp802 billion in 2018 (CNN Indonesia, 2020). Kompasiana (2021) stated that Jiwasraya failed to apply three main principles of good corporate governance. First is transparency, because the company did not present their financial statements objectively and did not display its actual figures, which can be seen from the audit done by PricewaterhouseCoopers in 2017, who corrected Jiwasraya’s previous income of Rp2.4 trillion to Rp428 billion. There is also accountability and responsibility, which was violated because the company invested in risky assets, causing them to be unable to fulfill their insurance claim obligations (Kompasiana, 2021). From this case, it can be seen how important it is for companies to implement good corporate governance as a mechanism for controlling and managing the company (Kholis, 2015). Kaen (2003) stated that corporate governance is about who controls the company and why control must be carried out. The word "who" refers to a company's shareholders, the board of commissioners, the board of directors, creditors, and other related parties in the company, while "why" is because there are conflicts of interests between these parties which can lead to asymmetric information and harm the company. This conflict of interest can lead to wrong decision making by management which leads to financial distress (Cinantya & Merkusiwati, 2015). Shleifer and Vishny (1986) stated that concentrated ownership is one of the corporate governance variables that can help companies minimize the possibility of financial distress. This is because shareholders will get incentives in return for maximizing firm value and reducing information asymmetry through monitoring opportunistic management behavior, thus avoiding financial distress (Claessens, Djankov, & Klapper, 2003; Deng & Wang, 2006). However, Jensen (1993) and Younas et al. (2021) said that concentrated ownership can lead to information asymmetry, monopolistic decision- making and hinder the management from running the company, thereby increasing the possibility of financial distress. According to Manzaneque, Priego, and Merino (2016) another corporate governance mechanism that can affect the probability of financial distress is institutional ownership, which are financial institutions that have shares in the company. Cinantya and Merkusiwati (2015), Helena and Saifi (2018) and Li, Crook, Andreeva and Tang (2020) found that institutional parties have expertise in detecting companies that are eligible for investment and the ability to supervise management in carrying out company activities and detect potential risks, so they can help reduce the possibility of financial distress. However, Donker, Santen, and Zahir (2009) argue that institutional investors will act passively because most times they also provide financial services to the companies they have ownership in, and so they do not want to oppose the management in fear of damaging business relationships. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 604 Board ownership can also reduce the likelihood of financial distress (Miglani, Ahmed & Henry, 2015; Salloum, Schmitt & Bouri, 2013). Board ownership can make the board members’ goals align with the goals of other shareholders, which is the long-term performance of the company (Donker at al., 2009). Therefore, the board members will feel compelled to supervise and lead the management properly so that the company's performance increases, which prevents financial distress (Li et al., 2020; Manzaneque et al., 2016; Miglani et al., 2015). However, Wang and Deng (2006) and Hui and Jing-jing (2008) argue that large board ownership can be used for personal welfare which in turn, harms the company. In addition, Bodroastuti (2009), and Cinantya and Merkusiwati (2015) say that share ownership by the company's board does not have an impact on the possibility of financial distress because sometimes the board only have a small or insignificant amount of the company’s shares, so it does not provide an incentive to lead and supervise management. The corporate board structure can also be used to address agency problems (Manzaneque et al., 2016). Previous research found that the proportion of independent commissioners can reduce the possibility of financial distress because one of the board of commissioners’ duty is to control the potential for opportunism made by management, hence this can reduce agency problems (Freitas Cardoso, Peixoto, & Barboza, 2019; Hui & Jing-jing, 2008; Li et al., 2020; Manzaneque et al., 2016; Salloum et al., 2013). However, Cinantya and Merkusiwati (2015) and Miglani et al. (2015) found that the number of independent commissioners can actually increase the possibility of financial distress because often times, independent commissioners have a lack of independence, so the monitoring of the performance and behavior of company’s management becomes weak. This will result in an increase in agency problems and may result in financial distress. In their research, Bodroastuti (2009) and Manzaneque et al. (2016) found that the board of directors can reduce the likelihood of financial distress. A large board of director size can help to monitor a more optimal financial reporting process (Bodroastuti, 2009; Manzaneque et al., 2016). However, Helena and Saifi (2018) and Salloum et al. (2013) found that a larger board of director size can actually increase the possibility of financial distress. This is because a size that is too large can actually make communication and coordination less effective, so that the company's decision making becomes less optimal (Helena & Saifi, 2018). This study follows previous research by Manzaneque et al. (2016) conducted in Spain regarding the effect of corporate governance on the possibility of financial distress. The difference in application of corporate governance, legal systems, and different codes of ethics in each country causes contradictions in the results obtained by several researchers, therefore it is important to investigate this further in different countries (Manzaneque et al., 2016). Another thing that makes this research interesting is the measurement of financial distress used by Manzaneque et al. (2016), which follows the ex-ante model by Pindado, Rodrigues, and de la Torre (2008). The ex-ante method, which can be used as an early warning for companies, is found to be more effective compared to the bankruptcy prediction model that was previously widely used (Farooq, Jibran Qamar & Haque, 2018). Unlike bankruptcy, the definition of financial distress itself is not Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 605 something that can be determined legally, so the application of this ex-ante model can be generalized to different industries and countries (Farooq et al., 2018; Pindado at al., 2008). Through this ex-ante model, this research wants to address the ongoing issue regarding the weak implementation of corporate governance in Indonesian firms, such as the case of Jiwasraya, despite having KNKCG since 1999. Therefore, this becomes the motivation of this research to discover which implementation of good corporate governance can help companies reduce the possibility of financial distress in Indonesia. This study uses a sample of companies listed on the Indonesia Stock Exchange (IDX) in the 2015-2019 period. More than that, this research is expected to provide benefits to the academic world by adding and being a reference for further research regarding board and ownership structure in overcoming and preventing the possibility of financial distress. This study can also help company’s management in evaluating their implementation of corporate governance to help minimize the possibility of financial distress. Lastly, this can aid investors in examining which company to invest by considering their implementation of corporate governance. This research is divided into five parts, first the introduction, which consists of the background, problem formulation, objectives, and benefits. Second, the literature review and hypothesis development which is then followed by the research methods used. After that, the results and discussion of the results are given, alongside with the results from the sensitivity test. The last section of this research shows the conclusions, limitations, suggestions, and implications of this study. Literature Review and Hypotheses Development Agency Theory According to Jensen and Meckling (1976), agency theory explains about the relationship between two parties referred to as principal and agent. The principal assigns tasks and delegates the agent to make the best decision in the principal’s favor. However, sometimes the agent does not always act in the interests of the principal, and this is what is known as the agency problem. Generally, the principal monitors and provides incentives or special rewards to agents. The costs incurred to minimize agency problems are referred to as agency costs. Jensen and Meckling (1976) said that agency costs are the accumulation of 3 costs, namely monitoring costs, bonding costs, and residual loss. In a company, shareholders are the principal, while management is the agent who should act in the interests of the shareholders. However, it is not uncommon for management to prioritize their own interests, therefore it is necessary to implement good corporate governance in order to minimize agency problems (Dwiridotjahjono, 2009). Bonazzi and Islam (2007) said that building an effective board structure is important in implementing corporate governance because it helps minimize the possibility of management acting in their own interests, thus minimizing agency problems. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 606 Resource Dependency Theory Resource Dependence Theory (RDT) was introduced by Pfeffer and Salancik (1978). This theory focuses on the importance of external relations for a company to have in order to obtain sufficient resources for the survival of the company. Hillman and Dalziel (2003) stated that when an organization appoints a board of directors, there is an expectation that the board of directors will support, involve themselves in the problems that exist and help the organization. The structure of the board of directors, such as the number of boards of directors and the number of foreign directors, can have a good influence in identifying problems, evaluating strategies, giving advice and creating relationships with the external environment (Singh, 2007). Therefore, a large board of directors is expected to be able to provide solutions, information and wider resources so to overcome company problems and improve the company’s performance which will minimize the possibility of companies experiencing financial distress (Haynes & Hillman, 2010; Widhiastuti, Nurkhin & Susilowati, 2019; Zahra & Pearce, 1989). The Effect of Board Ownership on the Likelihood of Financial Distress Li et al. (2020), Miglani et al. (2015), and Manzaneque et al. (2016) found that board ownership has the potential to reduce agency problems and the possibility of financial distress. In the company, the board has a significant role in determining the strategy to achieve the company's goals (Tarigan & Hadiprajitno, 2018). In general, a board that owns shares in a company will have the same goals as other shareholders as they will have an incentive to further monitor the performance of the company’s management and ensure operational activities run well (Budiarti & Sulistyowati, 2016; Hastuti, 2014). Ownership owned by the board can make them feel the same risks and responsibilities as other shareholders, so the board will be motivated to reduce the potential for financial distress. Thus, board ownership will greatly affect the company's financial performance and lessen the probability of financial distress (Jensen & Meckling, 1976). On the other hand, Wardhani (2007) and Kirana (2018) found that board ownership can increase the likelihood of financial distress. According to Wardhani (2007), one of the reasons why the ownership of shares by the board of commissioners and the board of directors can increase the possibility of financial distress is because the board tends to carry out expropriation actions through decisions or voting rights that they own, which can harm the company. Kirana (2018) also found that the control rights owned by the board of commissioners and directors can be used to involve rules that deviate from good corporate governance practices as a tool to maintain their careers even though they are no longer competent. According to Jensen and Meckling (1976), board ownership can increase the value of the company and reduce the possibility of financial distress. Board ownership is one example of what Jensen and Meckling (1976) call bonding costs and monitoring costs, therefore, following the agency cost by Jensen and Meckling (1976), the hypotheses to be studied is: H1: Board ownership can reduce the likelihood of financial distress. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 607 The Effect of Institutional Ownership on the Likelihood of Financial Distress Helena and Saifi (2018) and Younas et al. (2021) found that companies with large institutional ownership can avoid financial distress. Li et al. (2020) explains that the presence of institutional investors will reduce the possibility of financial distress to occur because institutional investors have the expertise and ability to detect companies that are eligible for investment, so companies with large institutional ownership will be trusted to have better performance. Claessens and Djankov (1999) in their research in the Czech Republic, said that a company owned by a bank would be valued higher because it can carry out a good monitoring function and is trusted not to expropriate the company's assets and can more easily provide an injection of funds to the company. According to Shleifer and Vishny (1986), large institutional ownership will have a stronger voice to encourage monitoring activities of investment developments. Thus, with large institutional ownership, it is hoped that they can contribute to controlling and monitoring the behavior of company management and reducing agency problems so the potential of financial distress can be further suppressed. Contrarily, Donker et al. (2009) argued that institutional investors have a passive nature in carrying out supervisory activities on company management. This is because institutional investors often also provide financial services to the companies they own, so they are believed to not oppose the company’s management in fear of damaging their business relationship. Passive supervision can lead to agency problems or decision making that are detrimental to the company, and this will increase the potential for financial distress to happen (Pramudena, 2017). Based on the agency theory by Jensen and Meckling (1976) regarding monitoring costs, supervisory acts by institutional investors can help companies reduce agency problems. Therefore, following the agency theory, the second hypotheses to be studied is: H2: Institutional ownership can reduce the likelihood of financial distress. The Effect of Concentrated Ownership on the Likelihood of Financial Distress Companies with concentrated ownership will be followed by high controlling rights by the controlling shareholder, where this controlling right can affect the company's performance and minimize the possibility of the company experiencing financial distress (Wang & Deng, 2006; Mariano, Izadi & Pratt, 2021). In the situation of company failure, the controlling shareholders will suffer huge losses due to their participation in the company. Thus, controlling shareholders will monitor management behavior to prevent opportunism, or in other words, controlling shareholders have incentives to monitor management and prevent conflicts of interest that can cause harm to the company (Mariano et al., 2021). On the other hand, Tarigan and Hadiprajitno (2018) and Younas et al. (2021) found that concentrated ownership can increase the likelihood of financial distress because it can Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 608 lead to monopolistic decision making and can reduce the independence of the company. In addition, Jensen (1993) also said that concentrated ownership can lead to information asymmetry between majority and minority shareholders, thereby increasing the probability of financial distress. The party with the largest ownership can use their power to influence the management and use it for their own benefit, which in turn can harm minority shareholders and increase the likelihood of financial distress (La Porta et al., 2000; Lee & Yeh, 2004). Based on the research by Wang and Deng (2006) and Mariano et al. (2021), controlling shareholders will have more incentives to monitor management behavior because their participation or investment in the company is quite significant. In accordance with the agency theory of Jensen and Meckling (1976), the supervision carried out by the controlling shareholder is an example of monitoring cost. Therefore, following the agency theory, the third hypotheses to be studied is: H3: Concentrated ownership can reduce the likelihood of financial distress. The Effect of Independent Commissioner on the Likelihood of Financial Distress Freitas Cardoso et al. (2019), Li et al. (2020), Wang and Deng (2006), Hui and Jing-jing (2008) and Salloum et al. (2013) found that the proportion of independent commissioners can reduce the possibility of financial distress. This is because the independent commissioner plays a role in controlling the potential for opportunism and preventing managers from making decisions that can harm shareholders, so with the presence of an independent commissioner, agency problems will be reduced (Li et al., 2020). On the other hand, Cinantya and Merkusiwati (2015) and Miglani et al. (2015) found that independent commissioners can actually increase the likelihood of financial distress. This happens because sometimes independent commissioners have a lack of independence, so their monitoring and advisory roles are not optimal and can lead to financial distress. Based on Subrata (2020), the role of independent commissioners is to reduce risk and increase shareholder’s welfare. This independent commissioner's supervision is an example of the agency theory proposed by Jensen and Meckling (1976), namely monitoring cost. Therefore, following the theory, the hypotheses to be studied is: H4: Independent commissioners can reduce the likelihood of financial distress. The Effect of Board Size on the Likelihood of Financial Distress Helena and Saifi (2018) and Salloum et al. (2013) found that the possibility of financial distress will increase if the size of the board is larger because it can increase communication and coordination problems within the board. Younas et al. (2021) also stated that a large board size can slow down the decision-making process, so this can Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 609 reduce the board’s ability and effectiveness to manage the company and result in deteriorating company performance which can lead to financial distress. However, Bodroastuti (2009), Manzaneque et al. (2016) and Mariano et al. (2021) found that a large board size can reduce the potential for financial distress. According to Manzaneque et al. (2016) and Mariano et al. (2021), a greater number of board members will be able to provide greater benefits and have wider connections to provide more resources to help the company. This statement is in accordance with the resource dependence theory developed by Pfeffer and Salancik (1978) which implies that a larger board size can provide more benefits and advantages to the company, especially during difficult times. Therefore, following the resource dependence theory by Pfeffer and Salancik (1978), the hypotheses to be studied is: H5: The board of directors can reduce the likelihood of financial distress. Theoretical Framework Figure 1 shows a research framework consisting of one dependent variable, five independent variables and three control variables. Figure 1 Theoretical Framework The dependent variable of this study is a dummy variable, where ‘1’ denotes companies that are in financial distress, while healthy companies are categorized as ‘0’. The independent variables of this study are board ownership, institutional ownership, concentrated ownership, independent commissioner, and board size while the control variables are profitability, financial expense, and retained earnings. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 610 Research Method Population and Sample This study uses all companies listed on the Indonesia Stock Exchange (IDX) from recent years from 2015 to 2019, except companies in the financial industry because of the different regulations governing companies in the financial industry. Samples were taken using the match-pair method to control the size of companies that could cause bias. The data source of this research is the annual report published on the Indonesia Stock Exchange (IDX), data obtained from www.idx.co.id, the company's website and data from the Capital IQ database. The first stage of sampling is done by obtaining data from the Indonesia Stock Exchange (IDX), which contains 728 companies or equal to 3,640 observations. Among the 728 companies, 110 companies operate in the financial industry, so they were excluded. Furthermore, there were 249 companies that did not have complete data in their annual reports and/or financial statements during 2015 to 2019, so they were also eliminated. Finally, the data that has been obtained will be categorized as financially distressed or healthy and paired within the same industry category and period. Companies that do not have a suitable pair will be excluded from the sample. Overall, the research sample obtained is 344 companies or 990 observations. Of the 990 observations, 495 of them are companies with financial distress category and the other 495 observations are companies with healthy categories. Variable Measurement and Operation The dependent variable in this study is financial distress, in the form of a dummy variable, where ‘1’ denotes a company in financial distress and ‘0’ means that the company is considered financially healthy. The measurement of financial distress used in this study follows the measurement created by Pindado et al. (2008), hence the companies in this research sample will be categorized as financially distressed if they meet one of the following two conditions: (1) financial expense is greater than EBITDA for two consecutive years and/or (2) there is a decline in the market value in two consecutive periods. The EBITDA and financial expense used are financial data for years t-2 and t-1. Meanwhile, the market value used is the market value at the end of year t-3, t-2, and t-1 to determine the condition of the company in year t, which is obtained through Capital IQ. The independent variables in this study are categorized into two main categories which are ownership structure and board structure. The variables that define ownership structure are board ownership, institutional ownership, and concentrated ownership. Meanwhile, the company's board structure consists of independent commissioners and board of directors. Board ownership is measured using the percentage of shares owned by the board of directors and board of commissioners in the company to the number of shares in the company. The formula used is as follows: http://www.idx.co.id/ Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 611 (1) This measurement method follows the measurements used by a number of previous studies (Bodroastuti, 2009; Cinantya & Merkusiwati, 2015; Wang & Deng, 2006; Hastuti, 2014; and Manzaneque et al., 2016). Institutional ownership is measured using the percentage of shares owned by an institution or financial institution. The formula used is as follows: (2) This measurement is in accordance with that used by Bodroastuti (2009); Cinantya and Merkusiwati (2015); Helena and Saifi (2018); Li et al. (2020); Manzaneque et al. (2016); Udin, Khan, and Javid (2017); Younas et al. (2021). Concentrated ownership is measured using the percentage of shares owned by the largest shareholder in the company. Following Manzaneque et al. (2016), Miglani et al. (2015) and Paramastri and Hadiprajitno (2017), the formula used is as follows: (3) The variable independent commissioners are measured using the proportion of independent commissioners divided by the total number of members of the company's board of commissioners. The measurements used follow several previous studies (Cinantya & Merkusiwati, 2015; Tarigan & Hadiprajitno, 2018; Wardhani, 2007) as follows: (4) The board of directors is measured using the number of members of the board of directors in the company. The formula used is as follows: (5) This measurement follows the research of Bodroastuti (2009); Freitas Cardoso et al. (2019); Helena and Saif (2018); Manzaneque et al. (2016); Rahmawati and Hadiprajitno (2015). This study also uses three control variables, which are profitability, financial expense and retained earnings. Profitability is measured using Return on Assets (ROA). This ratio Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 612 measures the company's ability to manage its assets efficiently to generate net income to meet its financial obligations, so the higher the net profit, the less likely it is the company to encounter financial distress (Pindado et al., 2008). Following previous research by Manzaneque et al. (2016) and Pindado et al. (2008), the ROA ratio used is as follows: (6) Financial Expense is measured by dividing financial expenses with the total assets at the beginning of the year (Manzaneque et al., 2016; Pindado et al., 2008) found that financial expense has a significant impact on the probability of financial distress. If the financial expense is greater, then the possibility of the company to experience financial distress increases. Therefore, based on the research of Pindado et al. (2008), the Financial Expense ratio is as follows: (7) To predict future net income and self-financing capacity, this study will use Retained Earnings (RE) divided by the number of assets at the beginning of the company's year as follows: (8) This measurement follows Manzaneque et al. (2016) and Pindado et al. (2008) who found that the greater the retained earnings, the less likely the company is to experience financial distress. Research Model The research model used in this study is as follows: (9) Where β0 is the constant and β1 β2 β3 β4 β5 β6 β7 β8 β9 is the Regression Coefficient. FD is the dependent variable which stands for financial distress (measured using a dummy, 1 if it is classified as financially distressed and0 if it is classified as healthy). The independent variables are BOARDOWN, which is the percentage of board ownership, INSOWN, the percentage of institutional ownership, CONOWN, the percentage of concentrated ownership, IND is the proportion of independent commissioners in the company, and BSIZE is the number of board of directors in the company. For the control variable, return Journal of Accounting and Investment, 2021 | 613 Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … on asset (ROA) is measured by profit before tax and interest divided by total assets at the beginning of the year, FE is financial expense, measured by interest expense divided by total assets at the beginning of the year, and lastly, retained earnings (RE) is measured by RE at the beginning of the year divided by total assets at the beginning of the year. i denotes the company number, t means the year of t, t-1 means year before t, and Ɛ means error. This study uses conditional logistic regression method for paired subjects, which means that each company that is classified as financially distressed (Y=1) is paired with a company that is classified as healthy (Y=0). The assumption used in logistic conditional regression is that the variables do not have to be normally distributed, therefore do not require heteroscedasticity and autocorrelation tests because they have different characteristics from linear regression. However, to find out whether the independent variables are correlated with each other, a multicollinearity test is conducted. This study also uses a sensitivity test to compare the consistency results of hypothesis testing with different methods by using logistic regression. In the logistic regression method, the match-pair method is not used. Result and Discussion Descriptive Statistics Data adjustment is done by changing the outliers using the calculation of the mean plus or minus three standard deviations to find the upper and lower limits (Leys et al., 2013). Following the empirical rule, normal distribution in the form of a bell-shape or normally distributed data is spread over plus and minus three standard deviations from the average or about 99.7% of observations. Therefore, data that are outside the normality are categorized as outliers (Lind, Marchal, & Wathen, 1999). Table 1 and 2 show the Descriptive Statistics after and before treatment, respectively. Table 1 Descriptive Statistics Variable Mean Std. Dev. Min Max Dependent Variable FD 0.500 0.500 0.000 1.000 Independent Variable BOARDOWN 0.055 0.137 0.000 0.953 INSOWN 0.123 0.202 0.000 0.897 CONOWN 0.521 0.217 0.044 0.976 IND 0.411 0.112 0.000 1.000 BSIZE 4.816 1.957 2.000 16.000 Control Variable ROA 0.045 0.120 -0.709 0.832 FE 0.026 0.047 0.000 0.844 RE -0.267 3.159 -75.099 1.058 Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 614 Note: Number of observation = 990 companies; FD = financial distress (measured using a dummy code 1 if it is classified as financial distress and code 0 if it is classified as healthy); BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. Table 2 Descriptive Statistics After Treatment Variable Mean Std. Dev. Min Max Dependent Variable FD 0.500 0.500 0.000 1.000 Independent Variable BOARDOWN 0.053 0.126 0.000 0.683 INSOWN 0.121 0.198 0.000 0.869 CONOWN 0.520 0.217 0.044 0.976 IND 0.409 0.104 0.167 0.800 BSIZE 4.794 1.862 2.000 1.000 Control Variable ROA 0.045 0.109 -0.454 0.569 FE 0.024 0.023 0.000 0.166 RE -0.126 1.401 -12.783 1.058 Notes: Number of observation = 990 companies; FD = financial distress (measured using a dummy code 1 if it is classified as financial distress and code 0 if it is classified as healthy); BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. Correlation Matrix The correlation matrix is used to examine the multicollinearity between the independent variables through the Spearman’s rho correlations shown in Table 3. Table 3 Correlation Matrix BOARDOWN INSOWN CONOWN IND BSIZE ROA FE RE BOARDOWN 1.00 INSOWN -0.15 1.00 CONOWN -0.19 -0.18 1.00 IND -0.07 0.01 0.07 1.00 BSIZE -0.016 0.12 0.02 0.01 1.00 ROA -0.01 -0.07 0.08 0.06 0.17 1.00 FE 0.03 0.04 -0.13 0.01 -0.03 -0.07 1.00 RE -0.02 -0.09 0.16 -0.03 0.24 0.50 -0.42 1.00 Notes: BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 615 beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. The result of the correlation matrix shows that all correlations are below 0.4, which shows that the variables are free from multicollinearity (Tabachnick & Fidell, 1996). Multicollinearity Test To ensure that the independent variables did not have a linear relationship with each other, a multicollinearity test is carried out as shown in Table 4. Table 4 Multicollinearity Test Variable VIF 1/VIF BOARDOWN 1.06 0.943 INSOWN 1.07 0.938 CONOWN 1.07 0.937 IND 1.03 0.976 BSIZE 1.06 0.947 ROA 1.14 0.875 FE 1.28 0.781 RE 1.39 0.722 Mean VIF 1.14 Notes: BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. The results of the multicollinearity test show that all independent variables have a VIF value that does not exceed 10 and a tolerance value above 0.1. Therefore, the independent variables in this study are free from multicollinearity symptoms. Coefficient of Determination Test (McFadden R2) Coefficient of determination test is conducted to see how much the independent variable can explain the dependent variable itself. The test results show the value of McFadden R2 of 0.213 or 21.30%. This figure shows that the dependent variable, namely financial distress, can be explained by the independent variable by 21.30%. In his research, Hensher and Stopher (1977) stated that the range of McFadden R2 values between 0.2 to 0.4 for regression models other than ordinary least squares is an excellent fit. Therefore, the value of McFadden R2 in this study is included in the very good category or can be said to have a model that is already fit. Likelihood Ratio Test The likelihood ratio test aims to see the effect of the variables used on the regression model. The model was tested by comparing the model with complete independent Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 616 variables (m1) with the model without incomplete independent variables (m2). The null hypothesis in this test is that the independent variable has no effect on the dependent variable simultaneously. If the prob value > chi2 resulting from this test does not exceed the alpha value, then the null hypothesis will be rejected. The likelihood ratio test shows the chi-square value of 0.000, this number is lower than the alpha value of 0.05. Therefore, the null hypothesis is rejected, or that the independent variable has an effect on the dependent variable simultaneously. Wald Test The Wald test is conducted to see whether the independent variables in the model have an influence on the regression model used (Stephanie, 2016). In Wald's test, the null hypothesis is the independent variable that has no significant effect on the dependent variable. If the p-value or prob > chi2 is greater than 0.05, the null hypothesis is accepted. The results show that the value of prob > chi2 is smaller than alpha 0.05, which is 0.0003. Therefore, the null hypothesis is rejected, which means that the independent variable in this study has a significant effect on the dependent variable. Hypothesis Test Results and Discussion The results of hypotheses testing are shown in Table 5. It is found that board ownership can increase the possibility of the company experiencing financial distress. In Table 2, regarding the descriptive sample of this study, it can be seen that the ownership of the board of commissioners and the board of directors in this research sample has a fairly low average, which is 5.3%. This finding is in line with research done by Putri et al. (2017) which shows that low ownership can reduce the board’s motivation in carrying out their roles optimally to monitor the management activities due to lack of incentives or encouragement. Therefore, this can increase opportunistic actions that can be done by management. Table 5 Results of Conditional Logistics Regression Hypothesis Testing FD Coef. Std. Err. Z P > | z | Two-Tailed P > | z | One-Tailed Conclusion BOARDOWN 0.837 0.613 1.37 0.172 0.086* Not supported INSOWN 0.091 0.384 0.24 0.811 0.406 Not supported CONOWN -0.044 0.365 - 0.12 0.903 0.452 Not supported IND 1.158 0.733 1.58 0.115 0.058* Not supported BSIZE 0.132 0.045 2.89 0.004 0.002*** Not supported ROA -8.982 1.019 - 8.81 0.000 0.000*** Supported FE 6.826 4.140 1.65 0.099 0.050** Supported RE -0.081 0.076 - 1.07 0.285 0.143 Not supported Notes: ***, **, * significant at 1%, 5%, and 10% respectively; BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 617 BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. The next variable, institutional ownership, has no effect on the possibility of financial distress. This finding is in line with research by Bodroastuti (2009), Manzaneque et al. (2016), Paramastri and Hadiprajitno (2017) and Udin et al. (2017) which says that sometimes institutional investors do not carry out strict and effective monitoring, so the presence of institutional investors is only passive. Passive nature arises because institutional investors do not have sufficient incentives or authority to improve company performance, so this will increase the possibility of management making decisions that benefit themselves and increase the probability of financial distress (Manzaneque et al., 2016; Sunarwijaya, 2017; Udin et al., 2017). Like institutional ownership, concentrated ownership is also found to not have an effect on the possibility of the company experiencing financial distress. This finding is in line with the results from Hui and Jing-jing (2008), Manzaneque et al. (2016), Nitami (2020), Paramastri and Hadiprajitno (2017), and Lee and Yeh (2004) who said that sometimes controlling shareholders do not have the ability to carry out the supervisory and control functions of company activities and result in inappropriate decisions taken by management (Nitami, 2020). Manzaneque et al. (2016) also said that controlling shareholders have a passive nature so they do not carry out good monitoring of the company's management, hence controlling shareholders do not contribute to preventing the company from experiencing financial distress. In addition, concentrated ownership can lead to information asymmetry between majority shareholders and minority shareholders as well as reduced transparency in the use of funds (Lee & Yeh, 2004). Therefore, this study cannot empirically prove that concentrated ownership will monitor management behavior in order to protect its investment and have a significant influence in preventing companies from experiencing financial distress. The regression results also show that independent commissioners can increase the likelihood of financial distress. Previous research by Baysinger and Hoskisson (1990), Cinantya and Merkusiwati (2015), Miglani et al. (2015), and Tabalujan (2002) said that sometimes independent commissioners lack independence, so they do not monitor the performance of the company’s management well, which can lead an increase of agency problem and cause financial distress. Baysinger and Hoskisson (1990) also state that sometimes independent commissioners do not have good experience or knowledge related to the industrial sector and the company they hold, so they cannot provide good decisions to improve company performance. In addition, companies in Indonesia often determine independent commissioners only to fulfill regulations, so they do not carry out their functions optimally and do not help to improve company performance and avoid financial distress (Tabalujan, 2002). The results of the fifth hypothesis test indicate that a larger board size can increase the likelihood of financial distress. This is similar to the findings of Helena and Saifi (2018), Salloum et al. (2013), Siagian (2010), and Younas et al. (2021). A larger board of directors usually causes an increase in two main problems, communication and coordination which Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 618 can slow down the decision-making process (Helena & Saifi, 2018; Salloum et al., 2013; Younas et al., 2021). Meanwhile, companies that are in distress will really need big decisions and considerations by the board of directors in order to influence the company's financial condition (Siagian, 2010). If the board of directors takes too long to coordinate and make decisions, it can increase the possibility of the company experiencing financial distress (Younas et al., 2021). The results of testing control variables of profitability show that the higher the profitability, the less likely financial distress occurs. Claessens et al. (2003), Pindado et al. (2008) and Utami (2019) say that companies with a high level of profitability usually attract investors because the company has a high rate of return on investment and sales of high profits. Additionally, tests on the financial expense variable indicate that the higher the financial expense, the more likely the company will experience financial distress. These results are in accordance with the research of Utami (2019) and Pindado et al. (2008). Utami (2019) who said that a company with a high financial expense ratio can indicate that the company has a lot of debt to outsiders and tends to have high financial risk. Table 5 shows that retained earnings have no effect on the possibility of financial distress. According to Rahmawati and Hadiprajitno (2015), the level of retained earnings does not necessarily indicate that the company will experience financial distress. This is because some companies use retained earnings for business expansion, so that company assets are planted in the form of factories not in bank accounts (Baridwan, 1982). In addition, this study found that 106 observations have negative retained earnings values, but still included in the category of healthy companies. So, this is not in line with the findings of Pindado et al. (2008) which states that there is a negative relationship between retained earnings and financial distress. Sensitivity Test To test the robustness of the results of the hypothesis test, this study conducted a sensitivity test using a different method, which is logistic regression (Table 6). The difference between logistic regression and conditional logistic regression is that logistic regression does not need matching data, so this method uses a wider range of samples. The sensitivity test shows different results on the INSOWN and CONOWN variables. Logistic regression suggests that institutional ownership can increase the likelihood of financial distress, while in conditional logistics regression, this variable is found to have no effect. Wei et al. (2016) said that institutional ownership can reduce company performance because sometimes financial institutions only focus on getting returns and are not interested in helping companies make strategic decisions, therefore this can increase the probability of financial distress. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 619 Table 6 Results of Sensitivity Testing Conditional Logistic Regression Logistic Regression FD Coef. P > | z | One-Tailed Coef. P > | z | One-Tailed BOARDOWN 0.837 0.086* 0.729 0.037** INSOWN 0.091 0.406 0.402 0.071* CONOWN -0.044 0.452 0.210 0.207 IND 1.158 0.058* 0.919 0.037** BSIZE 0.132 0.002*** 0.103 0.001*** ROA -8.982 0.000*** -9.111 0.000*** FE 6.826 0.050** 8.613 0.001*** RE -0.081 0.143 -0.268 0.247 Notes: ***, **, * significant at 1%, 5%, and 10% respectively; BOARDOWN = % board ownership; INSOWN = institutional ownership; CONOWN = concentrated ownership; IND = independent commissioner; BSIZE = board of directors; ROA = profit before tax and interest / total assets at the beginning of the year; FE = interest expense / total assets at the beginning of the year; RE = Retained earnings at the beginning of the year / total assets at the beginning of the year. The difference in the results found in the INSOWN variable can occur because in the conditional logistic regression method, a lot of samples are eliminated during the matching process. In the logistic regression method, it was found that financially distressed companies had an average institutional ownership of 13.3%, while healthy companies had a lower average institutional ownership of 11.1%. So this implies that greater institutional ownership can increase the likelihood of financial distress occurring. The variable CONOWN or concentrated ownership in logistic regression shows opposite coefficient values in comparison to the conditional logistic regression results, which shows a positive direction. However, the results show that the effect is not significant on the possibility of the company experiencing financial distress, so in the end, it has the same conclusion as the main test of the study. Conclusion This study proves that board ownership can increase the possibility of financial distress due to lack of motivation to monitor and take control of the company. Independent commissioners are also proven to be able to increase the possibility of financial distress due to their lack of independence, thus making their supervision on company’s management weak which can increase opportunistic actions that lead to financial distress. Also, the size of the board of directors can also increase the likelihood of financial distress because a large board of directors can create communication and coordination problems. Hence, this can slow down the decision-making process and reduce the effectiveness of controlling management. On the other hand, institutional ownership and concentrated ownership have no effect on the possibility of financial distress. Institutional investors sometimes do not have sufficient authority and incentives to closely monitor management behavior, so their presence is passive. Jodjana, Nathaniel, Rinaningsih, & Pranoto The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 620 Meanwhile, concentrated ownership also does not have the ability to carry out the supervisory and control functions of the company's activities and result in inappropriate decisions made by management. Overall, this research has implications for several parties. First is for the academic world, by contributing to the research literature on the structure of board ownership, institutional ownership, concentrated ownership, independent commissioners, and the size of the board of directors against possible financial distress. Second, for the company’s management, this research found that the provision of incentives in the form of shares has not been an effective way to overcome financial distress, hence, other methods might be needed, such as internal motivation and a supportive work environment. Lastly, for investors, to be more careful in determining the company they want to invest in so that they do not only use financial ratios as a consideration, but also analyze the implementation of corporate governance in overcoming the risk of financial distress. This study has several limitations, first, this research uses a matching system which is done manually using excel and personal considerations, thus, allowing for less accurate installation. Therefore, it might be better for further research that uses the matching system to focus on certain industries so that the matching process can be more accurate. Second, this study uses decrease in market value for two consecutive years as one of the methods to measure financial distress. However, the study does not consider other factors such as stock split that might decrease the market value. This consideration can be done in future research in order to more accurately categorize financially distressed firms. 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