Financial Factors and Non-Financial to Financial Distress

Insurance Companies That Listed in Indonesia Stock Exchange

Liahmad1, Kartika Rusnindita2, Yuni Putri Utami3, Saleh Sitompul4
1,2,3
Universitas Bahaudin Mudhary Madura, Indonesia
4
STIE ITMI Medan, Sumatera Utara, Indonesia
[email protected], [email protected], [email protected]

Abstract Keywords
This study aims to test the influence of financial factors in the form financial factor; factor non-
of liquidity, cash flow, company size, institutional ownership, financial; financial distress
earnings and the factors of non-financial form of the independent
commissioner against the financial distress of insurance
companies that listed in Indonesia stock Exchange. The population
of this research as many as 17 of the insurance company. The
sampling technique using purposive sampling method, so that the
obtained 15 sample company for 4 years of observations of the
years 2017 - 2020, with 60 observations of the study. Data analysis
using descriptive statistical analysis and logistic regression
analysis. The results show that liquidity, cash flows, institutional
ownership and independent commissioner does not affect
significantly to financial distress, while the method of the size of
the company and profit and significant effect on financial distress.

I. Introduction

The financial issue is a common phenomenon that can happen in a company. The
financial problems that occur continuously can bring the company to a more serious
condition that is financial distress. Platt and Platt (2002) defines financial distress as the
stages of deterioration in the financial condition experienced by a company that occurred
prior to the occurrence of bankruptcy or liquidation. If this is the case, then management is
not able to monitor the financial condition of the company, which will result in increased
business risk. Financial distress is usually started from the liquidity pressures that
increasingly heavy, then continues on the condition of the declining assets which resulted
in the company is not able to pay its financial obligations so as to bring the company
towards bankruptcy.
Financial distress is usually caused due to the presence of a series of errors that occur
in the company, decision-making by managers, and the weaknesses that relate directly or
indirectly to the management (Brigham and Daves, 2004). Internally, the financial distress
of the company occurs due to several factors including the amount of the debt, operational
losses and the difficulty of cash flows. Internal factors also is a factor in the occurrence of
financial distress is the strategy of the company. Porter (1991) stating the reason of a
company's success or failure is caused by the strategy set of the company. Not only
because of internal factors, financial distress can also occur due to external factors, i.e. the
factors outside the company that are macro-economic influence either directly or indirectly
to the financial distress of the company. These factors can be in the form of financial
factors and non-financial daopat form of a rise in the interest rate of the loan that is also
associated with the internal problems of the company, namely liquidity.

______________________________________________________________
DOI: https://doi.org/10.33258/birci.v4i1.1757 1305
 Budapest International Research and Critics Institute-Journal (BIRCI-Journal)
Volume 4, No. 1, February 2021, Page: 1305-1312
e-ISSN: 2615-3076 (Online), p-ISSN: 2615-1715 (Print)
www.bircu-journal.com/index.php/birci
email: [email protected]
Liquidity is a major factor that's greatly affect the financial distress of the company.
Liquidity is associated with the amount of debt the company because liquidity is the ability
of a company to pay its liabilities-the financial obligations of that soon must be repaid
(short-term). The liquidity ratio is the “Ratio used to determine the ability of the company
to meet its short term obligations in a timely manner.” When the company is in an
unhealthy state can mean the company is in a position illiquid. A company that constantly
be in the condition of the liquid will take the company to a more serious condition that is
financial distress.
In addition to liquidity, profit is also one of the factors that affect the financial
distress of the company. Profit is the difference between revenues and expenses.
Mahasiswa memahami sifat dari Statement defines the accounting profit as the change in
equity of an entity during one particular period resulting from transactions and events or
events that comes not from the owner (Harahap, 2011). If income is greater than the load,
then the company will get profit. Vice versa if the income is less than the cost the company
will incur a loss. The company continues to experience losses will be vulnerable to
financial problems. Financial conditions continue to deteriorate can end up in financial
distress and bankruptcy. Research Elloumie and Gueyie (2001) categorize companies that
experience financial distress is a company that is earning per share negative long-term.
A proper assessment of the achievements of a company should not only pay attention
to the company's ability to generate profits but also pay attention to the company's ability
to generate positive cash flow from its operations. The cash flow statement can help the
wearer to see how the balance of cash and cash equivalents in the balance sheet of the
company changed from the beginning to the end of the accounting period and what it
means to such changes for the company, whether show the achievements of the positive or
negative. If the statement of cash flows continuously demonstrate the achievements of the
negative, it will have an impact on the financial condition of the company. The financial
condition of the continuous decline can make the company experience financial distress.
Research McCue (1991) defines companies that experience financial distress is a company
with negative cash flow.
Asset restructuring and diversification is an effort that can be done by the company
to resolve financial distress. Therefore, for a company that smart so no symptoms and the
condition of financial distress will then quickly do the restructuring of the business that
survived the bankruptcy. The efforts of restructuring will assets and diversify the business
could not be done without the presence of the assets of the company are adequate.
Therefore, the total assets is also one of the factors that affect the financial distress of the
company. The size of the company describes how large the total assets owned by a
company. According to Rajan and Zingales that the Size of a large company would be
better in a diversified and tend to be smaller bankruptcy.” The company's strategy is one of
the factors of financial distress. One strategy of the company is implementation of Good
Corporate Governance. Good Corporate Governance according to Chrisnanda (2018) is
“An ordinance of the corporate governance becomes an important aspect in the operations
of the company to achieve the goal of building a healthy company.” Good Corporate
Governance has four factors therein, namely: audit committee, the proportion of
independent commissioners, institutional ownership, and managerial ownership (Solar and
Yustivandana, 2018).
Institutional ownership is the ownership of the company shares owned by institutions
such as insurance companies, banks, investment companies, and the ownership of other
institutions.” Ownership insititusional produce management that focus on the performance
of the company because of the presence of institutional ownership, the manager will focus

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more attention on the performance of the company, so it can reduce the action of the
managers of the company selfish. Bodroastuti (2019) stated institutional ownership an
increasingly large will increase the utilization of the company's assets so that financial
distress can be minimized.
Independent commissioner according to is the Commissioner who is not a member of
the management, the majority shareholder, officer or in any other way that relates directly
or indirectly with the majority shareholder of a company that oversees the management of
the company.” The independent commissioner is expected to oversee the management of
the company as well. Good corporate governance will affect the financial condition of the
company. Research conducted Nur (2017) states with increasing number of independent
commissioners in a company, then the risk of the occurrence of financial distress will be
smaller.
Financial distress itself can occur in a variety of companies, did not escape the
insurance company. According to (Darmawi, 2014) “In view of the business, insurance is a
company whose main businesses receive or sell services, transfer of risk from another
party, and gained the advantage with a system for risk sharing (sharing of risk) among a
large number of customers.

II. Review of Literatures

2.1 Financial Distress

Financial distress is a condition where a company is in financial difficulties and so
can not provide funds for memenuhihutang smooth.

2.2 Liquidity
Liquidity is the ability of a company to pay its liabilities-the financial obligations of
a company that soon must be repaid (which are short term). According to Afiezan et al
(2020) a liquid company means that the company has large funds to pay all of its
obligations. The more liquid the company is, the more internal funds it will have to meet
its operational needs.

2.3 Cash Flow

Cash flow is a summary of the cash flow for a certain period, this report is sometimes
called sources report the use of the company's operations, investment, and cash flow
financing as well as shows the company's cash and marketable securities during the period.

2.4 Size of the Company

The size of the company assessed through assets owned by the company. The size of
the company that large would be better in a diversified and tend to be smaller bankruptcy.
The size of the company also directly reflect the high and low operating activities of a
company.

2.5 Institutional Ownership

Institutional ownership is the Ownership of shares by the government, institutions,
legal entities, financial institutions, and other institutions. Institutional ownership is the
proportion of shares of common stock owned by the parties institutional.

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2.6 Earnings
Profit is the change in equity of an entity during one particular period resulting from
transactions and events or events that are not coming from the owner.

2.7 Independent Commissioner

Independent commissioner is a “Member of the board of commissioners who are not
affiliated with the management, the members of the board of commissioners and
shareholders, as well as free from the business relationship or other relationships that may
affect the ability to act independently or acting solely for the sake of the interests of the company.

2.8 Conceptual Framework

From a review of the literature that has been described above, it can be seen related
variables in this study can be formulated through a framework of thought is as follows:

Financial Factors :
1. Liquidity Ratio (X1)
2. Cash Flow (X2)
3. Size Of The Company (X3)
4. Profit (X4)
Financial Distress (Y)

Factors Of Non-Financial :
1. Institutional Ownership (X5)
2. Independent Commissioner (X6)

Figure 1. Conceptual Framework

III. Research Methods

This research is included quantitative research because the data used in the form of
numbers. The Data used in this research is secondary. Secondary Data in penetilian this is
the data of financial statements of insurance companies That listed in Indonesia stock
Exchange. The population in this research is all the financial statements of insurance
companies listed in Indonesia stock Exchange from year 2017-2020. The criteria for the
population used is the annual financial statements of insurance companies on the IDX. As
for the sample used in this study are the annual financial statements of insurance
companies from the years 2017-2020. Sampling technique with purposive sampling
technique used is the method of time series for 4 years from 2017-2020.
The type of data used in this research is secondary data. The secondary Data used is
the data obtained based on the results of the publication by the Indonesia stock Exchange
(BEI) is the annual report of the company, the history of the companies, journals, scientific
literature, research earlier, the reports are published and the data obtained from the internet
media. Data Collection method used in this research is the first Stage was conducted

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through a literature study of the collection of supporting data in the form of literature,
previous research, and the reports published to get an overview of this research. The
second stage is conducted through secondary data collection required the form of the
reports published by the Indonesia stock Exchange (BEI) through www.idx.co.id.

IV. Discussion

4.1 The Effect of Liquidity on Financial Distress

Based on the results of the study showed that the significance value of liquidity on
the financial distress of of 0.117 where it is greater than the significance value of 0.05 and
the value of the regression coefficient of 1,075 which means that the variables of liquidity
and no significant positive effect on financial distress. This indicates liquidity does not
affect the financial distress of companies registered insurance Indonesia stock Exchange
Year 2017-2020. So regardless of the massive liquidity of the company will not affect the
likelihood of firms experiencing financial distress. This research is in line with the research
of the Princess and the Merkusiawati (2014) which states that liquidity has no effect on
financial distress. But the research is at odds with research conducted Widhiyari and
Merkusiawati (2015) which states that the liquidity significantly negative effect on
financial distress.

4.2 The Influence of Cash Flow on Financial Distress

Based on the results of the study showed that the significance value of cash flows to
financial distress by 0,259 where it is greater than the significance value of 0.05 and the
value of the regression coefficient of 8,326 which means that the variable cash flow and no
significant positive effect on financial distress. This indicates the cash flow does not affect
the financial distress of companies registered insurance Indonesia stock Exchange Year
2017-2020. This research is in line with research Atmini (2015) which states that the cash
flow has no significant effect on financial distress. But the research is at odds with research
conducted Donker, et al (2009) which states that the cash flow significantly negative effect
on financial distress.

4.3 The Influence of the Size of the Company against Financial Distress
Based on the results of the study showed that the value of the significance of the size
of the company against the financial distress 0.011 where it is smaller than the significance
value of 0.05 and the value of the regression coefficient of -1,896 which means that the
variable size of the company and a significant negative effect on financial distress. This
indicates the size of the company affect the financial distress of companies registered
insurance Indonesia stock Exchange Year 2017-2020. This research is in line with research
Shahwan (2015) which states that the size of the company and the negative effect it
signifikasn against financial distress. But the research is at odds with research conducted
Donker, et al (2009) which states that firm size does not affect the financial distress.

4.4 The Influence of Institutional Ownership on Financial Distress

Based on the results of the study showed that the significance value of institutional
ownership on financial distress by 0,066 where it is greater than the significance value of
0.05 and the value of the regression coefficient of -12,052 which means that the variable
institutional ownership and no significant negative effect on financial distress. This
indicates institutional ownership does not affect the financial distress of companies
registered insurance Indonesia stock Exchange Year 2017-2020. This research is in line

1309
with research Shahwan (2015) which states that institutional ownership has no effect on
financial distress. But the research is at odds with research conducted Helena and Saifi
(2018) which states that the ownership of institusional significantly negative effect on
financial distress.

4.5 The Influence of Income on Financial Distress

Based on the results of the study showed that the significance value of profit to the
financial distress of are 0.008, where it is smaller than the significance value of 0.05 and
the value of the regression coefficient of -114,0155 which means that the variables of
income and a significant negative effect on financial distress. This indicates earnings effect
against the financial distress of companies registered insurance Bursa efek Indonesia (Year
2017-2020). This research is in line with research Atmini (2005) which states that the
income effect is negative in signifikasn against financial distress. But the research is at
odds with research conducted Darmawan and Supriyanto (2018) which states that income
has no effect on financial distress.

4.6 The Influence of the Independent Commissioner against Financial Distress

Based on the results of the study showed that the significance value of the
independent commissioner against financial distress by 0,633 where it is greater than the
significance value of 0.05 and the value of the regression coefficient of -2,367 which
means that the variables are independent commissioner and no significant negative effect
on financial distress. This indicates the independent commissioner has no effect on
financial distress of companies registered insurance Indonesia stock Exchange Year 2017-
2020). This research is in line with the research of the Princess and the Merkusiawati
(2014) which states that the independent commissioner has no effect on financial distress.
But the research is at odds with research conducted Pramudena (2017) which states that the
independent commissioner significantly positive effect on financial distress.

4.7 Simultaneous Influence of Liquidity, Cash Flow, Company Size, Institutional

Ownership, Earnings and the Independent Commissioner against Financial Distress
Based on the results of the study showed that the significance value of liquidity, cash
flow, company size, institutional ownership, earnings and the independent commissioner
against the financial distress of 0.000. The value is greater than the significance value of
0.05, this shows that there is a simultaneous influence of liquidity, cash flow, company
size, institutional ownership, earnings and the independent commissioner against financial
distress.

V. Conclusion

Based on the results of the research can be summed up as follows:

1. Liquidity and no significant positive effect on financial distress. This is indicated by the
regression coefficient of the liquidity of 1.075 and significance value of 0.117, which is
greater than 0.05. It can be concluded that liquidity does not affect the financial distress
of insurance companies that listed in Indonesia stock Exchange.
2. Cash flow and no significant positive effect on financial distress. This is indicated by
the regression coefficient, the cash flow amounted to 8,326 and significance value 0,259
which is greater than 0.05. It can be concluded that cash flow does not affect the
financial distress of insurance companies that listed in Indonesia stock Exchange.

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3. The size of the company and a significant negative effect on financial distress. This is
indicated by the coefficient of regression of the size of the company amounted to -1,896
and significance value 0,011 smaller than 0.05. It can be concluded that the size of the
company affect the financial distress of insurance companies that listed in Indonesia
stock Exchange.
4. Institutional ownership and no significant negative effect on financial distress. This is
indicated by the regression coefficient institutional ownership of -12,052 and
significance value 0,066 smaller than 0.05. It can be concluded that institutional
ownership does not affect the financial distress of insurance companies that listed in
Indonesia stock Exchange.
5. Profit and a significant negative effect on financial distress. This is indicated by the
regression coefficient a profit of -114,015 and significance values are 0.008 which is
less than 0.05. It can be concluded that the earnings effect against the financial distress
of insurance companies that listed in Indonesia stock Exchange.
6. Independent commissioner and no significant negative effect on financial distress. This
is indicated by the regression coefficient of the independent commissioner of -2,367 and
significance value 0,633 which is greater than 0.05. It can be concluded that the
independent commissioner has no effect on financial distress of insurance companies
that listed in Indonesia stock Exchange.
7. Liquidity, cash flow, size of the company, institutional ownership, earnings and the
independent commissioner simultaneously have a significant effect on financial distress.
This is indicated by a significance value of 0.000 is smaller than 0.05. It can be
concluded that the liquidity, cash flow, company size, institutional ownership, earnings
and the independent commissioner simultaneously affect the financial distress of
insurance companies that listed in Indonesia stock Exchange.

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