The Effect of Cost Structure, Liquidity, and Leverage on Financial Distress with Mediating Profitability and Firm Size Control
DOI:
https://doi.org/10.62872/8dcfx972Keywords:
cost structure, liquidity, leverage, profitability, financial distress, company sizeAbstract
This study examines the relationship between cost structure, liquidity, leverage, profitability, and financial distress in textile and garment companies listed on the Indonesia Stock Exchange. The main focus of the study is directed at two things: assessing the direct influence of cost structure, liquidity, and leverage on financial distress, and examining whether profitability can explain the indirect influence pathways of these financial variables. The study uses a quantitative approach with secondary data sourced from the companies' annual financial reports for the period 2019-2023. Testing is conducted through panel data regression and path analysis, while company size is used as a control variable to ensure that model estimation is not solely influenced by differences in business scale. Conceptually, a rigid cost structure and high leverage are expected to increase financial distress, while liquidity and profitability are expected to weaken the likelihood of financial distress. This study is expected to contribute to the financial distress literature by positioning profitability as a mediating mechanism, particularly in the context of the Indonesian textile industry facing cost pressures, import competition, and weakening financial performance. From a practical perspective, this model can be used as a basis for initial evaluation for management in controlling financial risk through cost efficiency, strengthening cash flow, debt management, and increasing profit-generating ability.
Downloads
References
Ahemed, A.M., Iqbal, U., & Atif, M.M. (2024). Asymmetric cost behavior and financial distress. Economics Letters, 247, 112121. https://doi.org/10.1016/j.econlet.2024.112121
Alifiah, MN (2014). Prediction of financial distress companies in the trading and services sector in Malaysia using macroeconomic variables. Procedia - Social and Behavioral Sciences, 129, 90-98. https://doi.org/10.1016/j.sbspro.2014.03.652
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Amendola, A., Restaino, M., & Sensini, L. (2014). An analysis of the determinants of financial distress in Italy: A competing risks approach. International Review of Economics & Finance, 37, 33-41. https://doi.org/10.1016/j.iref.2014.10.012
Anderson, M.C., Banker, R.D., & Janakiraman, S.N. (2003). Are selling, general, and administrative costs sticky? Journal of Accounting Research, 41(1), 47-63. https://doi.org/10.1111/1475-679x.00095
Banker, R.D., Byzalov, D., & Plehn-Dujowich, J.M. (2013). Demand uncertainty and cost behavior. The Accounting Review, 89(3), 839-865. https://doi.org/10.2308/accr-50661
Bhunia, A., & Sarkar, R. (2011). A study of financial distress based on MDA. Journal of Management Research, 3(2). https://doi.org/10.5296/jmr.v3i2.549
Central Statistics Agency. (2024). Indonesian manufacturing industry statistics 2023. BPS. https://www.bps.go.id
Indonesia Stock Exchange. (2024). IDX statistics 2023. https://www.idx.co.id
Indonesia Stock Exchange. (2023). Financial report of PT Sri Rejeki Isman Tbk. https://www.idx.co.id
Chauhan, G.S. (2023). Mediating role of profitability relating financial leverage and stock returns. International Journal of Emerging Markets, 19(10), 3459-3482. https://doi.org/10.1108/ijoem-04-2022-0557
Farooq, U., & Jibran, A. Q. (2017). Scope, measurement, impact size and determinants of indirect costs of financial distress. Qualitative Research in Financial Markets, 10(1), 111-129. https://doi.org/10.1108/qrfm-08-2017-0080
Ferri, M. G., & Jones, W. H. (1979). Determinants of financial structure: A new methodological approach. The Journal of Finance, 34(3), 631-644. https://doi.org/10.1111/j.1540-6261.1979.tb02130.x
Habib, A., Costa, M.D., Huang, H.J., Bhuiyan, MBU, & Sun, L. (2018). Determinants and consequences of financial distress: Review of the empirical literature. Accounting and Finance, 60(S1), 1023-1075. https://doi.org/10.1111/acfi.12400
Inrawan, A., & Lie, D. (2024). The role of profitability in mediating determinants of firm value. Jurnal Akuntansi Syariah, 8(2), 389-413. https://doi.org/10.46367/jas.v8i2.2180
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405x(76)90026-x
Ministry of Industry of the Republic of Indonesia. (2024). Performance of the national textile and textile product industry. https://kemenperin.go.id
Kristanti, FT, Rahayu, S., & Huda, AN (2016). The determinants of financial distress on Indonesian family firms. Procedia - Social and Behavioral Sciences, 219, 440-447. https://doi.org/10.1016/j.sbspro.2016.05.018
Liang, D., Lu, C., Tsai, C., & Shih, G. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572. https://doi.org/10.1016/j.ejor.2016.01.012
Liu, W., Lan, X., Xia, M., Zou, Y., Pang, C., & Song, G. (2026). Confidence-scaled margin adaptation boosting for interpretable financial distress prediction. International Journal of Forecasting. https://doi.org/10.1016/j.ijforecast.2026.01.003
Nguyen, T.C., Phan, H.T., & Nguyen, H.K. (2021). An empirical investigation of liquidity and stock returns relationship in the emerging market during the COVID-19 outbreak: Evidence from Vietnam. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3958970
Ohlson, J. A. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research, 18(1), 109. https://doi.org/10.2307/2490395
Oreshile, SA, Zainudin, R., & Mahdzan, NS (2026). Enterprise risk management quality and financial distress in African firms: Insights from firm heterogeneity. Journal of Accounting in Emerging Economies, 16(2), 233-261. https://doi.org/10.1108/jaee-03-2025-0118
PT Sri Rejeki Isman Tbk. (2022). Annual report 2022. https://www.sritex.co.id
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Ridwan, M., & Alghifari, ES (2025). Evaluating the impact of ESG on financial risk: The moderating effects of operational capability and profitability in Indonesian infrastructure firms. Journal of Accounting & Organizational Change, 21(6), 992-1015. https://doi.org/10.1108/jaoc-08-2024-0281
Salim, M., & Yadav, R. (2012). Capital structure and firm performance: Evidence from Malaysian listed companies. Procedia - Social and Behavioral Sciences, 65, 156-166. https://doi.org/10.1016/j.sbspro.2012.11.105
Sehgal, S., Mishra, R. K., Deisting, F., & Vashisht, R. (2021). On the determinants and predictions of corporate financial distress in India. Managerial Finance, 47(10), 1428-1447. https://doi.org/10.1108/mf-06-2020-0332
Slater, P. J., Greenfield, A., Godfrey, E., & Policastro, F. (2024). Losing altitude: The impact of new leasing standards on the liquidity, leverage, profitability and valuation of US and European airlines. Journal of Air Transport Management, 117, 102594. https://doi.org/10.1016/j.jairtraman.2024.102594
Suu, ND, Nhan, DTT, Chung, CY, Choi, JH, & Choi, PMS (2026). Financial distress and firm performance: Evidence from Vietnam. International Review of Economics & Finance, 106, 105006. https://doi.org/10.1016/j.iref.2026.105006
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x
Weiss, D. (2010). Cost behavior and earnings forecasts. The Accounting Review, 85(4), 1441-1471. https://doi.org/10.2308/accr.2010.85.4.1441
Wu, W., Zhang, S., Fan, Y., & Shi, Y. (2024). Financial flexibility, firm performance, and financial distress: A comparative study of China and the US during pandemics. International Review of Financial Analysis, 96, 103706. https://doi.org/10.1016/j.irfa.2024.103706
Yazdanfar, D., & Öhman, P. (2020). Financial distress determinants among SMEs: Empirical evidence from Sweden. Journal of Economic Studies, 47(3), 547-560. https://doi.org/10.1108/jes-01-2019-0030
Zaki, E., Bah, R., & Rao, A. (2011). Assessing the probability of financial distress of banks in the UAE. International Journal of Managerial Finance, 7(3), 304-320. https://doi.org/10.1108/17439131111144487
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Priska Putri Parungky, Baldric Siregar, Miswanto, Frasto Biyanto (Author)
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
