The Dynamics of Corporate Financial Distress in Emerging Market Economy: Empirical Evidence from the Indonesian Stock Exchange 2004-2008

Koes Pranowo
Graduate School of Management and Business, Bogor Agricultural University, Indonesia
Magister of Management Post Graduate Program, ABFII Institute of Perbanas, Indonesia
E-mail: kpranowo@gmail.com (preferred) or koes@sism.co.id

Noer Azam Achsani
Department of Economics and Graduate School of Management and Business
Bogor Agricultural University, Indonesia
E-mail: achsani@yahoo.com (preferred) or achsani@mb.ipb.ac.id

Adler H.Manurung
Graduate School of Management and Business, Bogor Agricultural University, Indonesia
Magister of Management Post Graduate Program, ABFII Institute of Perbanas, Indonesia
E-mail: manurung_adler@yahoo.com

Nunung Nuryartono
Department of Economics and Graduate School of Management and Business
Bogor Agricultural University, Indonesia
E-mail: nuryartono@yahoo.com

Abstract

This paper empirically examines the dynamics of financial distress among non-financial companies listed on the Indonesian Stock Exchange (IDX) during the period of 2004-2008. Two different events affected the performance of public companies being financial distress. In 2005, there was an oil price shock when the government cut off subsidy for local oil price. Another event in 2007-2008 is the impact of sub-prime mortgage in the USA, where US Dollar repatriation makes global financial crisis included Indonesia.

Mostly, financial burden of public companies in Indonesia are cost of money, mainly due to having bank loan and issuing corporate bond. Therefore, the analysis uses Debt Service Coverage (DSC) as a proxy financial distress. DSC becomes one of the most important indicators for commercial bank to see financial condition prior to lending as well as underwriting of bond issuance. This paper would also analyze corporate financial distress by mapping companies in to the steps of process integral financial distress in declining financial performance from good companies, early impairment, deterioration and cashflow problem. Furthermore, mapping will also been done for five different industrial sectors, i.e. agricultural business, mining, manufacture, contruction/properties and services/trade.

The results show that oil price shock and sub-prime mortgage crisis have different impacts on the financial performance of the companies listed on the IDX. The impacts seem also varies across different industrial sectors. The evidence indicated that the mining companies are the most affected companies by global financial crisis in 2008, whereas manufacturing companies are the most affected companies by oil price shock in 2005.

Keywords: Debt Service Coverage (DSC), Corporate Financial Distress, Indonesia Stock Exchange (IDX).

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