Delivered by Ingenta to: Meiske Irawan IP: 116.206.14.88 On: Thu, 01 Feb 2018 09:50:45 Copyright: American Scientific Publishers Copyright © 2016 American Scientific Publishers All rights reserved Printed in the United States of America RESEARCH ARTICLE Advanced Science Letters Vol. 22, 4326–4329, 2016 Does Corporate Governance Affect the Financial Distress of Indonesian Company? A Survival Analysis Using Cox Hazard Model with Time-Dependent Covariates Farida Titik Kristanti 1 * , Nury Effendi 2 , Aldrin Herwany 2 , and Erie Febrian 2 Department of Accounting, Faculty of Economics and Business, Telkom University, Bandung, West Java, Indonesia Department of Management and Business, Faculty of Economics and Business, Universitas Padjadjaran, Bandung, West Java, Indonesia Financial distress is a condition in which a company is potential unable to fulfill its obligations. The survivability of a company is determined by many factors. This study investigated several of those factors i.e., corporate governance and financial ratios from the companies listed in capital market. The study utilizes purposive random sampling coverage the year 2002–2014. Estimation method using Cox proportional hazards regressions showed that board size, board independence, leverage, size, liquidity and return on asset had a impact on the survival likelihood of the financial distress. This findings was, therefore, in line with the Agency Theory. Keywords: Corporate Governance, COX Model, Financial Distress. 1. INTRODUCTION The economic costs and the emergence of social impacts caused by the bankrupt companies lead to the need of a proper identifi- cation before the companies go bankrupt. An initial identification of the potential failure of the companies will be able to help the company in providing an early indication of the problems that exist within. Thus, the corrective action can be performed in the corporate decision. The researches about the prediction model of financial dis- tress in Indonesia have been widely done. Nikitin 23 used logit model to analyze surviving manufacture companies in economic crisis in 1998 in Indonesia. Pranowo, Achsani, Manurung and Nuryantono 26 in their study in Indonesia used corporate gov- ernance variables, financial ratio, and macro economy with pooled data model. Ahmad 3 with his logit model predicted the bankruptcy by using the variable of finance and management capability. The result showed the consistency with the existing. The literature on bankruptcy prediction illustrates that the vari- ables, which are frequently used as the predictors of bankruptcy, are the financial ratios and corporate governance. The application of corporate governance in Indonesia has been discussed a lot since the economic crisis in 1998. According to Claessens and Yurtoglu (2012) in their survey on emerging * Author to whom correspondence should be addressed. market, the index average of the emerging market (including Malaysia, India, Hongkong, China, Korea, etc.) is 9.5, while the index of corporate governance in Indonesia is 9, the same as the index in Malaysia, Singapore and the Philippines. Besides that, according to the report of Asean Corporate Governance-Country Report and Assessment 2013–1014 from Asean Development Bank (ADB), it showed that the index of corporate governance in Indonesia was getting better from 2012 to 2013, which was from 43.29 to 54.55. This has not been as good as Thailand, Malaysia and Singapore, but is better than Philippines and Viet- nam. This condition showed that the implementation of corporate governance in Indonesia was still weaker than other countries in Asean. The application of corporate governance in Indonesia which is still not good enough will of course affect the com- pany’s operation. The company’s activity with good management is expected to bring about good company’s working performance in order to avoid the financial distress. Corporate governance mechanism has been accepted exten- sively by researchers in relation to the prediction of financial distress since several companies experienced financial difficulties in the late 1990s. 8 Corporate governance can potentially affect the bankruptcy because corporate governance affects the accu- racy of the financial data and the accounting disclosures that describe the condition of the company (Claessens and Yurtoglu, 2012). Some corporate governance variables commonly used are board size, board diversity, board activity, board independence, 4326 Adv. Sci. Lett. Vol. 22, No. 12, 2016 1936-6612/2016/22/4326/004 doi:10.1166/asl.2016.8138