The moderating role of corporate governance on the relationship between firm size and financial distress in Indonesian manufacturing firms

This study examined how corporate governance mechanisms moderate the relationship between firm size and financial distress in Indonesia. Departing from prior research that dichotomizes firms, we employ a continuous moderation framework to capture how governance effectiveness varies across the firm size spectrum. Using panel data regression on 480 firm-year observations from Indonesian manufacturing firms (2019–2023), we test the moderating effects of managerial ownership, institutional ownership, audit committee size and independent commissioner proportion on the size-distress relationship. Firm size significantly increases financial distress risk, challenging the ‘too-big-to-fail’ assumption. Managerial ownership (β = 0.300, p < 0.01) and institutional ownership (β = 0.229, p < 0.01) significantly weaken the positive size-distress relationship, consistent with agency theory. However, audit committee size strengthens this relationship (β=-0.088, p < 0.05), suggesting that larger committees may impose compliance costs without commensurate monitoring benefits. Independent commissioners show no significant moderating effect (β=-0.105, p > 0.10), indicating symbolic rather than substantive independence. Governance quality, not merely quantity, determines financial resilience. Ownership-based mechanisms prove more effective than board-based mechanisms in mitigating distress risk. Regulators should prioritize ownership structure disclosure over quantitative board composition requirements; investors should incorporate governance-quality assessments into risk evaluation; managers should recognize that ‘more governance’ does not necessarily mean ‘better governance’.