Corporate Governance Helps Indonesian Property Firms Avoid Financial Distress, Study Finds
A 2026 study by Indonesian researchers found that strong corporate governance and healthy financial performance significantly reduce the risk of financial distress among property and real estate companies listed on the Indonesia Stock Exchange. The research was conducted by Rakhmat Irwansyah, Indrayono, and Hardiyanto and published in the Indonesian Journal of Economic & Management Sciences (IJEMS) in 2026.
The study examined how profitability, liquidity, leverage, and corporate governance practices affect the financial stability of companies in Indonesia’s property and real estate sector. The findings are important because the industry has faced rising pressure from economic uncertainty, fluctuating interest rates, weakening purchasing power, and post-pandemic financial recovery challenges.
Researchers concluded that companies with stronger governance structures and better financial ratios were more capable of avoiding financial distress, while firms with excessive debt and weak profitability faced higher financial risks.
Property Sector Faces Ongoing Financial Pressure
Indonesia’s property and real estate industry remains one of the country’s most important economic sectors. The industry contributes to infrastructure growth, employment creation, banking activity, and urban development.
However, the sector is also highly vulnerable to economic shocks.
Property companies often depend on:
- Long-term financing
- High capital investment
- Debt-funded expansion
- Consumer purchasing power
- Stable interest rates
When economic conditions weaken, companies can experience declining sales, liquidity problems, and difficulties meeting financial obligations.
The study notes that several Indonesian property firms have faced financial stress in recent years due to slower economic growth, increasing operational costs, and tighter financial conditions.
According to Rakhmat Irwansyah and the research team, corporate governance has become increasingly important in helping firms maintain financial discipline and investor confidence during uncertain market conditions.
Researchers Analyzed Public Property Companies
The study used quantitative analysis on property and real estate companies listed on the Indonesia Stock Exchange (IDX).
Researchers analyzed secondary financial data obtained from:
- Annual financial reports
- Corporate governance disclosures
- Company financial statements
- Indonesia Stock Exchange publications
The research focused on several major financial indicators commonly used to measure company performance and financial health.
Key variables included:
- Profitability
- Liquidity
- Leverage
- Corporate governance
- Financial distress indicators
The researchers applied statistical regression analysis to examine how each factor influenced the probability of financial distress within property and real estate firms.
Profitability Reduced Financial Distress Risk
One of the strongest findings in the study was the relationship between profitability and financial stability.
Companies with higher profitability levels were significantly less likely to experience financial distress.
The research explains that profitable companies generally have:
- Stronger cash flow
- Better operational efficiency
- Greater investor confidence
- More flexibility in managing debt obligations
According to the researchers, profitability provides companies with a financial buffer during periods of economic slowdown.
The study highlights Return on Assets (ROA) as one of the important indicators used to evaluate financial performance.
Higher ROA values indicate that companies are more efficient in generating profits from their assets, reducing the likelihood of financial distress.
High Debt Increased Financial Risk
The study also found that leverage or debt levels had a strong effect on financial distress risk.
Companies with excessive debt were more vulnerable to financial instability, especially when revenues declined or interest costs increased.
Researchers noted that property companies often rely heavily on external financing to fund large-scale projects. While debt can support business expansion, excessive leverage may create long-term financial pressure.
The study found that firms with high debt ratios faced:
- Greater repayment burdens
- Higher financial risk exposure
- Reduced operational flexibility
- Increased vulnerability during market downturns
According to the research, maintaining balanced debt management is critical for long-term sustainability in the property industry.
Corporate Governance Strengthened Financial Stability
Another major finding was the role of corporate governance in reducing financial distress.
The study concluded that companies with stronger governance practices were better equipped to manage financial risks and maintain organizational accountability.
Corporate governance factors examined in the research included:
- Board oversight
- Institutional ownership
- Transparency practices
- Financial supervision mechanisms
Researchers found that good governance helps companies make more disciplined financial decisions and improves investor trust.
According to Indrayono and Hardiyanto, effective governance systems reduce the likelihood of poor financial management and increase corporate resilience during economic uncertainty.
Liquidity Played Important Supporting Role
Liquidity was also identified as an important factor in maintaining financial stability.
Companies with stronger liquidity positions were generally more capable of meeting short-term obligations and maintaining operational continuity.
The study explains that adequate liquidity allows companies to:
- Pay operational expenses on time
- Meet debt obligations
- Maintain project continuity
- Reduce bankruptcy risk
Researchers emphasized that liquidity management became especially important during periods of market slowdown and reduced consumer demand.
Implications for Investors and Policymakers
The findings have broader implications for investors, regulators, and corporate leaders in Indonesia’s capital market.
The study suggests that investors should pay close attention not only to profit growth but also to governance quality and debt management when evaluating property companies.
For policymakers and regulators, the research highlights the importance of strengthening corporate governance standards across publicly listed firms.
The researchers recommend:
- Improving financial transparency
- Strengthening board supervision
- Enhancing risk management systems
- Monitoring corporate debt exposure
- Encouraging sustainable financial practices
The study also supports broader discussions about corporate resilience in emerging markets, where economic volatility can rapidly affect highly leveraged industries such as real estate.
Academic Perspective on Financial Sustainability
According to Rakhmat Irwansyah and colleagues, financial distress is rarely caused by a single factor. Instead, it emerges from the interaction between profitability, debt structure, liquidity management, and governance quality.
The researchers emphasized that companies with adaptive financial strategies and strong governance systems are more likely to survive economic uncertainty and maintain long-term competitiveness.
Author Profiles
- Rakhmat Irwansyah: Researcher specializing in financial management, corporate governance, and business sustainability in Indonesia’s capital market sector.
- Indrayono: Academic researcher focusing on accounting, corporate finance, and financial performance analysis.
- Hardiyanto: Researcher and lecturer specializing in corporate financial strategy, risk management, and governance systems.
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