Managing Financial Distress in Jakarta Islamic Index Firms: Liquidity, Leverage and the Mediating Role of Profitability

Hadi Purnomo; Nicko Albart Nicko; Mahelan Prabantarikso Mahelan

doi:10.54471/iqtishoduna.v15i2.3868

Authors

Hadi Purnomo Universitas Mitra Bangsa
Nicko Albart Nicko Universitas Paramadina
Mahelan Prabantarikso Mahelan Indonesia Banking School

DOI:

https://doi.org/10.54471/iqtishoduna.v15i2.3868

Keywords:

financial distress, leverage, profitability mediation, sharia-compliant firms, jakarta islamic index 30

Abstract

Background and research gap - The direct and indirect determinants of financial distress remain underexplored among Sharia-compliant firms, particularly regarding profitability's mediating role in emerging capital markets.

Purpose - This study examines the effects of liquidity, leverage and sales growth on financial distress, with profitability as a mediating variable, among firms listed on the Jakarta Islamic Index 30 (JII30).

Design/methodology/approach - Using 105 firm-year observations from 21 firms during 2019-2023, this study employs fixed-effects panel regression, path analysis and Sobel tests using EViews 12. Financial distress is assessed using the Altman Z-score, while profitability is measured by return on assets (ROA).

Key Findings - Liquidity and profitability positively influence the Z-score (p < 0.01), indicating reduced financial distress risk, whereas leverage negatively influences it (p < 0.01). Sales growth has no significant effect. Profitability significantly mediates the leverage-distress relationship (indirect effect = −0.042; p = 0.013), but not the liquidity or sales growth relationships (p = 0.231 and p = 0.325, respectively).

Research limitations/implications - The JII30-specific sample limits generalisability, while Sobel-based mediation testing may insufficiently capture firm-level heterogeneity. Managers should prioritise liquidity, prudent leverage and asset profitability.

Originality/value - This study distinguishes direct and profitability-mediated financial distress mechanisms in Sharia-compliant firms, providing emerging-market evidence that leverage affects financial resilience both directly and indirectly through profitability.

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Author Biographies

Hadi Purnomo, Universitas Mitra Bangsa

Master of Management, Faculty of Management and Business, Universitas Mitra Bangsa, Indonesia

Nicko Albart Nicko , Universitas Paramadina

Master of Management, Faculty of Economics and Business, Universitas Paramadina, Indonesia

Mahelan Prabantarikso Mahelan , Indonesia Banking School

Master of Management, Indonesia Banking School, Indonesia

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