The Effect of Financial Performance, Interest Rates, Inflation, and Exchange Rates on Financial Distress

Abstract

Background: A persistent deterioration in corporate financial performance may signal the emergence of financial distress. Identifying the factors associated with this condition is therefore important to enable appropriate preventive measures.
Purpose: This study investigates if financial hardship among manufacturing companies in the different industrial sectors listed on the Indonesia Stock Exchange between 2017 and 2022 is influenced by Return on Assets (ROA), interest rates, inflation, and exchange rates.
Design/methodology/approach: Panel regression analysis and a quantitative research approach are used in the study. Purposive sampling was used to choose the 75 observations that make up the sample. Descriptive analysis, panel regression, classical assumption testing, model selection, hypothesis testing, and the coefficient of determination were all used in the EViews 12 data processing.
Findings/Results: According to the empirical data, financial distress is significantly positively correlated with ROA and interest rates, but not with inflation or exchange rates. Numerous theoretical stances can be used to interpret the results. Trade-off Theory suggests that rising financing and interest costs may increase bankruptcy risk. ROA may also signal weaknesses in asset efficiency or liquidity when profitability is insufficient to offset financial obligations. Signaling Theory explains how changes in ROA can convey information about corporate financial conditions to investors and creditors. In addition, Pecking Order Theory suggests that changes in financing costs may alter firms' funding choices and, consequently, affect financial distress risk. The coefficient of determination is 0.874477, equivalent to 87.44%. Thus, ROA, interest rates, inflation, and exchange rates collectively explain 87.44% of the variation in financial distress among the sampled companies, with the remaining proportion attributable to factors outside the model.
Conclusion: The results may assist managers of manufacturing companies in identifying early warning indicators and taking corrective measures before financial difficulties develop into more severe financial distress or potential bankruptcy.
Originality/value (State of the art): A decline in a company's financial situation that may occur when the business finds it difficult to fulfilll its immediate obligations is referred to as financial distress.

Keywords: ROA, interest rate, inflation, exchange rate, financial distress