A DECADE OF EARNINGS MANAGEMENT RESEARCHES IN

Suhardianto, Harymawan, A Decade Of Earnings Management Researches In Indonesia 90

Asia Pacific Journal of Accounting and Finance

Volume 2 (1), December 2011

A DECADE OF EARNINGS MANAGEMENT RESEARCHES

IN INDONESIA

1

Novrys Suhardianto

a

, Iman Harymawan

b a

Corresponding author, Airlangga University, Indonesia

Email: novrys.suhardianto@gmail.com b

Airlangga University, Indonesia

Abstract

In Indonesia, researches on Earnings Management (EM) are considered to be significant since they contribute18% of all financial accounting papers submitted to annual National

Accounting Symposium (called as Simposium Nasional Akuntans i or SNA ) between 2000 and 2009 that held by the Indonesian Institute of Accountant (called as Ikatan Akuntan

Indonesia or IAI ). These 54 EM papers (representing 18% of financial accounting articles) have been published in the Indonesian top five accounting journals within the same period.

However, almost none of the previous studies have portrayed the development of EM researches. This study attempts to explain research methods used, variables observed, between-variable relationship formed, research instruments, as well as units of analysis employed in EM research in Indonesia in order to transfer data to be more meaningful, indicate the potential research field in EM, and to provide the discussion basis of particular problem in EM. This study uses descriptive modeling method (see Abdel-Khalik and Ajinkya

1979: 21) and mapping framework of Luftand Shields (2003) in order to map the findings of

EM articles published in Indonesian accounting scientific journals with (at least) B ranking

(ranked by the Indonesian Higher Degree Education Directorate or DIKTI) during 10 consecutive years. In total there are 653 article titles collected from 96 hardcopies of 5 selected journals. 14 keywords (either in English or in Indonesian) related to earnings management were used. 54 EM articles were found, while 8 of the articles have to be omitted as the studies are not based on empirical studies. Content analyses of 46 EM articles show several findings of EM researches: (1) Good Corporate Governance becomes more important in EM researches although its description power remains controversial, (2) Positive accounting hypotheses are not consistently supported and none has been done in investigating the reasons for inconsistency, (3) Discussions on inefficiency of the capital market or moral hazard were not explored optimally, (4) However, Initial Public Offering (IPO) is conclusively proven as an event that leads to income-increasing behavior, (5) Investors do not take the existence of EM in making investment decision, and this indicates the existence of market inefficiency in the Indonesian capital market, confirm with previous study conducted by Healy and Wahlen (1999).

Keywords: earnings management, descriptive modeling, research map, GCG, meta-analysis research, and positive accounting theory.

1

The authors would like to thank Dr. Elvia Shauki and Ron Mclver as the seminar participants at Centre of

Applied Finance Studies University of South Australia for their helpful comments. The financial support from

IMHERE B2C Airlanga University is gratefully acknowledged.


1.

INTRODUCTION

Healy and Wahlen (1999) describe earnings management (EM) as an action of managers to adjust financial reports using their judgment in order to influence contractual outcomes that based upon reported accounting data or to mislead stakeholder about firm’s performance. Since EM plays crucial role in capital market (Dechow and Skinner 2000), the research on it is significant in Indonesia. Table 1 provides the data of EM papers presented in

National Accounting Symposium (known as Simposium Nasional Akuntansi/SNA) in the period between 1999 and 2009. It is shown that EM papers take 18% of the total financial accounting papers and 45% out of 130 papers in market based accounting research (MBAR)

2

.

The development of EM researches become subject of several questions for instance what stages of EM researches Indonesia has? What are the conflicting (inconclusive) findings that should be investigated or are there conclusive issues that have been saturated (i.e. over investigated)? Therefore, this research is conducted to answer those questions by describing

(1) research method used in EM, (2) variables observed, (3) between-variables relationship formed, and (4) unit of analysis used.

Two contributions are expected from this research. Firstly, this research will be a pedagogically valuable document (as also raised by Kothari, 2001) which gives guidance for future researchers in avoiding ‘ reinventing the wheel ’ by providing research map that shows the findings of EM research in Indonesia. Secondly, this research provides a comprehensive evidence for meta-analysis research that aims to synthesize conflicting findings in quantitative research (Ahmed and Courtis 1999).

By analyzing 46 EM articles from five Indonesian leading journals, the content analyses show two different areas of EM research: (1) researches which determine EM predictors, and (2) researches which investigate the economic consequences of EM. Firstly, researches that investigate EM predictors show that Good Corporate Governance (GCG) becomes more important in EM researches though description power of GCG remains controversial. The maps also indicate that positive accounting hypotheses are not consistently supported and no studies so far have been conducted in investigating the reasons for the inconsistency results. Discussions on inefficiency of the capital market or moral hazard were not explored optimally. However, Initial Public Offering (IPO) is conclusively proven as an event that leads to income-increasing behavior. Secondly, findings on economic consequences of EM also varied. Investors do not take the existence of EM in making investment decision, and this indicates the existence of market inefficiency in the Indonesian capital market.

2.

LITERATURE REVIEW

2.1. Issues in EM research

Beaver (2002) said thatearnings is managedtorespondpressuressuch asavoiding lossor income decreasing. However, researcher could not yet to determine the main motivation of accrual management whether opportunistics or efficiency behavior. Instead, researcher

2

We use criteria established by the SNA committee to find financial papers and Lev and Ohlson (1982) and

Meek and Thomas (2004) definition to search market based accounting papers in the SNA proceedings.

Suhardianto, Harymawan, A Decade Of Earnings Management Researches In Indonesia 92 seriously investigate the relationship between earnings management and firm’s characteristics. The main issue of EM research is the measurementof EM that cantrace the discretionary and nondiscretionary components of accrual (Beaver 2002). The other issue is the achievement of EM when it is connected with its initial motivation (Kothari 2001).

Capital market response toward EM is also interesting issue in future according to Kothari

(2001).

EM in emerging markets is also interesting to be examined. By using Summon search engine in University of South Australia library, we found 1164 articles in EM from a dozens of business journal databases. There are 58 articles published in various journals that focus on

EM in South-East Asia and China. Those articles could be clustered into several topics, they are:

1.

Research on the predictors of EM, these researches investigate variables or timing that can be used to detect accrual behavior or variables that might describe the variety of EM practices such as corporate governance and culture (see Poitras et al. 2002; Kimbro 2005;

Liming et al. 2005)

2.

Research on the market consequences of EM, they identify the consequences of EM on capital market (for instance Chen and Yuan 2004; Haw et al. 2005)

3.

EM for regulations incentives, these researches indicate the relationship between regulations, such as tax and capital market regulations, and discretionary behavior

(Adhikari et al. 2005; Yu et al. 2006)

4.

EM and auditing, these articles discuss the evidence of the effect of EM on auditing and vice-versa such as EM and audit opinion (Shireenjit et al. 2007), auditor choosing (Yew et al. 2007), and audit quality and EM (Chen et al. 2011).

5.

EM and adoption of IFRS/IAS, this issue is becoming important as IFRS has been adopted by more countries in emerging market (Haiyyan et al. 2009; Titas and Dipanjan

2011)

It is really important to compare Indonesian EM research with those in emerging countries in order to evaluate the development academia issues. Moreover, regulator and investor will be benefited through describing market consequences of EM in Indonesia.

2.2. Mapping EM Research

The development of a research field should be mapped to provide guidance for future researcher in avoiding research repetition and redundancies. There are two approaches in mapping research. First, researcher review and discuss the seminal researches, observe their development, criticize them, and try to predict the direction of future research. This approach is used by Lev and Ohlson (1982), Kothari (2001), Beaver (2002), and Dumontier and

Raffournier (2002). Second, researcher develops a graphic model that represent descriptive structure of between-variables formed that derived from reviewed research papers. Luft and

Shield (2003) or Hesford et al. (2007) are the best example of this approach. However, none of researcher in Indonesia has mapped the development of EM research.

2.3.

The Mapping Framework

Luft and Shields (2003) mapped management accounting research by drawing maps graphically through these steps:


1.

Identifying variable observed as Luft and Shields (2003) indicated i.e.: independent variable, dependent variable, intervening variable, and moderating variable.

2.

Identifying between-variable relationships formed into six models, according Luft and

Shields (2003), then classifying them based on three categories as indicated in Table 2.

3.

Identifying unit of analysis into four i.e.: individual, sub unit organization, organization, and beyond organization.

4.

Creating guidelines of depictions between-variables relationship into a map.

Based on the gap between descriptive modeling research in Indonesia and overseas, this research will provide an EM research map. To develop the map, this research employ

Luft and Shields’ (2003) framework as seen in Figure 1. The outputs of this research is a descriptive model (map) which represents (i) observed variable in EM field, (ii) betweenvariable relationship formed, (iii) research methods used, and (iv) unit of analysis.

3.

RESEARCH METHOD

This research is considered as explorative study since it discusses EM research findings which have not been explored before. Therefore, descriptive method is employed to explain EM research characteristics, discuss issues related to EM researches, andprovidefuture EM research ideas (Sekaran 2003: 122).

3.1. Subjects

This research analyze EM articles published in Indonesia in a decade time held between 2000 and 2009 as we assumed that the development of a research field could be observed during within this period of time. Moreover, the issue of EM during the Asia

Regional Economic Crisis (1998) and Global Financial Crisis (2008) could be captured and published within this research period of time. The subjects of this research are EM research articles published in Indonesian accounting journals, which could be described as follows

1.

Have been accredited by government and received minimum B ranking for two consecutive periods to control the quality of papers.

2.

Focus on accounting only in order to have similar quality of review process.

In order to have similar and original sample from Indonesia, we do not take into account EM articles published in conferences or international reviewed journals. The selected journals shown in Table 3.

3.2.

Data Analysis

This research uses qualitative procedure to analyze the data since it aims to describe general conclusion of EM research. The procedures are:

1.

Developing data-base from 96 hardcopies of the journals and 653 article titles.

2.

Sorting the data-base to find EM articles using 14 keywords either in English or Indonesia such as earnings management (manajemen laba/pengelolaan laba), income smoothing

(perataan laba/penghasilan), income increasing, income decreasing, accruals (akrual), earnings manipulation (manipulasi laba), earnings quality, earnings persistence. We found

52 EM articles after sorting however, 8 of them have to be eliminated as these are not empirical studies (literature studies).


3.

Analyzing descriptive statistics of EM market share and EM journal share.

4.

Analyzing the content of article, to identify (i) research variable observed, (ii) betweenvariable relationship formed, (iii) research method employed, (iv) EM measurements, (v) unit of analysis used, and (vi) the summary of research conclusion/findings, limitations, and potential issues.

5.

Presentingt he data using text, tables, or charts.

3.3. Descriptive Framework

The output of this research is a descriptive model representing research variable observed, between-variable relationship formed, research method employed, and unit of analysis used. To develop this model, this research uses Luft and Shields’ (2003) framework that they created to map the development of management accounting research (see Figure 2).

4. RESULTS

There are 46 selected EM articles out of 653 article titles published in selected journals. Table 4 shows that EM articles take 16% of all financial accounting research that mainly done in capital market setting. Moreover, EM articles are 7% of total article published in five Indonesia leading accounting journals in 10 years period. JRAI as the ‘leader journal’ that published by the Indonesian Institute of Accountant (IAI) and Gadjah Mada University provide majority portion of EM articles in Indonesia as it provides 45% of EM articles.

However, in term of market share, JAKI that is published by University of Indonesia has the biggest EM publications compare to all of its published articles.

4.1. Research Methods and Models In EM

The profile of research methods and models used by EM researchers is shown in

Table 5. In panel A, it is shown that additive model is the most popular model. It confirms with the number of linear-unidirectional relationship that has been tested by researchers

(panel B). In the other word, EM researchers tend to use association study in EM field (panel

C). It implies that there is no non-linear model in predictors-EM-market consequences relationship in Indonesia regardless the finding of Koh (2003) in the non-linear association between institutional ownership and EM.

We use the term ‘construct’ to describe events or factors that are used to explain the variety of discretionary behavior such as company actions (IPO or merger and acquisition) and company characteristics (e.g. firm’s size). The relationship between construct and variable consider popular in Indonesia. This model is used by event study and difference study to test the relationship between an event with EM or to find a factor that can identify the actor of EM.

Moderator variable interaction model mainly used by researcher to test the moderating effect of good corporate governance in the relationship between corporate attributes and EM. The effect of moderating variables on the independent-dependent variables relationship always monotonic or ordinal. This implies that corporate governance, for instance, could only strengthen or weaken the effect of independent variables (firm’s attributes) on the dependent (EM).


4.2. EM Measurements

There are two types of EM measurement they are the measure of earnings management through accruals, which may indicate income increasing and decreasing, and income smoothing measurement (Table 6). To identify income smoother, almost all

Indonesian researchers use Eckel model(1981) although there are several proxies of income smoothing such as Leuz et al. (2003) or Myers et al. (2007). Eckel model (1981) is easier to use and the data needed to calculate this index are available in Indonesia because it only needs income and sales data

3

.

EM researchers use accrual discretionary to be the proxy of EM as managers could use their judgment and estimation in reporting this accrual for instance bad debt allowance or contingent liability. There are 19 proxies of EM that is used by Indonesian researchers.

However, modified Jones model is the most popular measure especially Modified Jones in

Dechow et al. (1995). This is confirmed with Noguer and Munoz (2004) who said that modified Jones model is by far more popular than standard Jones model.

4.3.

EM Research Purposes, Methods, and Variables

The use of research method depends in its purpose and variables observed. In general,

EM research in Indonesia can be divided into two major themes they are research that investigate the predictors of EM and such that search the economic consequences of EM.

There are three research methods used in these areas:

1.

Association study is usually used to investigate the relationship between firm’s attribute and EM. Therefore, financial ratios or firm’s characteristics are the independent variables and discretionary accruals, or other proxy of EM, as the dependent. However, many EM researchers use corporate governance as the moderating variables. On the other hand, researchers who want to find the corporate governance effect on EM will use financial ratios as the moderator. Researchers who try to find the value relevance of specific accrual also employ association study. To achieve their purposes, they use value of stock

(price or return) as the dependent variable and discretionary accruals as the independent by controlling the firm’s character. A common mistake done by Indonesian researchers is to interpret the relationship between accruals and stock value from cause and effect view by analyzing the regression coefficient. Indeed, the value relevance of accruals should be concluded from the value of adjusted R

2

or coefficient of determination (Dumontier and

Raffournier 2002).

2.

Event study is applied when the researchers demonstrate the relationship of an informative event and the management intention to disguise earnings. Moreover, researchers can also take the advantage of this study when they test the market reaction to

EM information publication such as the investor reaction to the unusual positive income surprise.

3.

Difference test study broadly used to find the factors that can differentiate who manage earnings or not or to show the different level of EM by comparing the level of particular factor, for instance, the difference of big and small companies in manage their income.

3 ∆

∆

(Eckel, 1981)


4.4. EM Predictors

Researches on EM apply the three hypothesis introduced by Watts and Zimmerman

(1978) in describing the discretionary behavior of the company. Therefore, we use these hypotheses to organize the discussion:

1.

Debt covenant hypothesis propose that the bigger the debt the bigger the management intention to manage earnings because management is liable to keep particular ratios in certain range to avoid breaching debt covenants. However, EM research in Indonesia shows conflicting findings. Only a few of researchers who find supporting evidence. Most researchers do not find conclusive results or, instead, negative relationship between EM and debt ratio (see LEV, OpLev, and DEBT variables in Appendix 3, 4, and 5 ).

2.

Political cost hypothesis argue that companies that are exposed in public interest (politic) tend to manage earnings to avoid public (politic) pressure. Generally, firm size is used as the proxy of firm’s scrutiny. The maps show that more findings support the hypothesis rather than reject it (see SIZE variable in Appendix 3, 4, and 5 ). However, none of EM research in Indonesia exclusively tests political hypothesis like Godfrey and Jones (1999),

Han and Shing-Wu (1998), or Key (1997). Nevertheless, Indonesian researchers always use firm’s scrutiny in most research to control political influence in business.

3.

Bonus scheme hypothesis suggest that accounting based bonus will lead managers to manage the output of accounting. There is only one research test this hypothesis in

Indonesia. Mayangsari and Wilopo (2002) show that discretionary accruals that are related with accounting based bonus negatively affect firm’s value. It is difficult to get bonus data in Indonesia because companies are not compulsory to disclose it in financial reports. Therefore, Mayangsari and Wilopo (2002) use dummy variable to indicate whether the bonus scheme is based on accounting performance or not (see Appendix 3 line code 5 ). Other form of incentives such as stock option have not been explored.

4.

Good corporate governance implementation (GCG) becomes alternative hypothesis to control discretionary behavior. However, the maps show that some GCG variables do not consistently control EM. For instance audit quality (AUDTR) is proven can mitigate EM by four researchers however seven articles do not support the hypothesis (see AUDTR variable in Appendix 3, 4, and 5 ). The composition of board of director is also mapped cannot consistently reduce EM (see BOD, AUDCOM, INDBO variable in Appendix 3 and 4 ) even a lot of international studies show that GCG might control EM effectively.

Indonesian researchers might face classic problems in measuring GCG implementation such as the availability of data (e.g.: BOD tenure, independent executives, GCG Index) and the comprehensiveness of measurement. GCG implementation could not be measured by the composition of organization structure only but also the implementation of the structure and organization system.

5.

Some corporate actions have been researched in order to find the timing of EM. IPO is conclusively found as the best time to detect EM (see Appendix 5 ). It confirms many international studies (see Li 2011; DuCharme 2001) that managers tend to increase firm’s earnings before IPO to induce positive market reaction but it will be corrected by market after IPO.

These results imply that meta-analysis is needed to find the best predictor of EM due to a substantial number of conflicting results. Meta-analysis is a systematic approach in

Suhardianto, Harymawan, A Decade Of Earnings Management Researches In Indonesia 97 identifying, appraising, synthesizing and (if appropriate) combining the results of relevant studies to arrive at conclusions about a body of research (Wild 2002). Moreover, disclosures related to GCG implementation should be enhanced to enable assessment process of GCG implementation in reducing opportunistic behavior.

4.5. Economic Consequences Of EM

To test market reaction on EM, researchers might employ either event study, difference study or value relevance study. In Appendix 2 we see that capital market (CAR) does not consistently respond the income smoothing, as a sample divider factor (see line code

1, 2, 6, 25, and 44 ). It means that income smoothing is not consistently priced by investors or

Indonesia capital market players are less sophisticated or the market itself is not efficient.

Further research is needed to answer these propositions.

The value relevance of accruals information remains questionable in Indonesia.

Appendix 2 line code 29 and 12, Appendix 4 line code 11, and Appendix 5 line 17 show that discretionary accruals related with positive value of stock. EM also might increase cost of capital. Appendix 4 line code 27 confirms this hypothesis. EM also found positively increase earnings response coefficient. In the other word, EM might increase information content of unexpected earnings. Again, it indicates the inefficiency of Indonesia capital market.

However, many researchers justify their conflicting findings as the result of dualism of EM

(opportunistic or efficiency). All the findings of EM research in Indonesia confirm Healy and

Wahlen (1999).

Overpricing of accruals is generally called accrual anomaly. This phenomenon has been documented by Sloan (1996) and explored by many researchers thereafter. Several hypothesis are developed and tested such as law system (Pincus et al. 2007), investment growth (Zhang 2007), accounting standard (Kaserer and Klingler 2008), and transaction cost

(Mashruwala et al. 2006). However, this research does not find any paper that investigate accrual anomaly in Indonesia.

5. CONCLUSION, IMPLICATION AND LIMITATION

The purpose of this research is to describe the development of EM in Indonesia including the variables observed, between-variables relationship, research method employed, and unit of analysis used. EM research variables consisted of several groups: the characteristics of company, corporate governance, and investor reaction. The relationship between EM with these variables generally studied using association studies (additive-linearunidirectional), construct-variables relationship model (events study and difference test), as well as moderating variable interaction models (especially the relationship between corporate governance with the reaction of investors to EM).The relationship is examined with data taken from the company and beyond the company. In addition, researchers often use Eckel

(1981) model to detect income smoothing and modified Jones model of Dechow et al. (1995) to indicate EM practices.

The economic consequences of EM are still not consistently proven due to ambiguous motivations of EM (opportunistic or efficiency) and the contingent effects of other variables

(accrual anomaly predictors). Nevertheless, none of the researches uses qualitative and

Suhardianto, Harymawan, A Decade Of Earnings Management Researches In Indonesia 98 behavioral approaches to uncover EM motivation. The relationships between GCG and EM show that the ability of GCG to mitigate EM is still volatile. Moreover, researchers have not consistently validated the hypothesis of positive accounting theory.

Due to a substantial number of inconclusive and conflicting results, a meta-analysis is needed to find the best predictor of EM. Meta-analysis is a systematic approach in identifying, appraising, synthesizing and (if appropriate) combining the results of relevant studies to arrive at conclusions about a body of research (Wild 2002). Moreover, managers’ background becomes more important to be included in EM research such as religion and culture (see Callen et al. 2011) and national culture (Nabar and Bonlert-U-Thai 2007), however none of EM researches in Indonesia address this issue yet. This study has several limitations: (1)The analysis was done manually and subject to human error. Using analysis software such as NVIVO will empower the results, (2) The maps were not drawn by considering timeline to demonstrate the development of EM research by year, sample, and other research design issues.

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Table 1. EM Papers in National Accounting Symposium

Period EM MBAR

Papers ∑ %

1999 2 9 22%

2000

2001

2002

2

2

2

15

18

10

13%

11%

20%

2003

2004

2005

2006

2007

2008

2009

8

11

7

4

6

6

9

18

18

9

12

3

9

9

44%

61%

78%

41

42

37

33% 39

200% 20

67% 32

100% 25

Financial Acc. Total Papers

∑ % ∑ %

18

28

30

23

11%

7%

7%

9%

34

41

52

53

6%

5%

4%

4%

20%

26%

19%

10%

30%

19%

36%

91

76

69

84

80

78

9%

14%

10%

5%

8%

8%

64 14%

Total 59 130 45% 335

Sources: SNA Proceedings 1999 – 2009

18% 722 8%

Table 2. Between-Variable Relationship Models

No

1.

Simple Model

Additive

2. Intervening

3. Independent variable interaction

Based on X

Condition

Unidirectional Linier

Bidirectional Curvilinear

−

1

Based on

Linearity

−

4. Moderating variable interaction

5. Cyclical recursive

6. Reciprocal non-recursive

−

−

−

−

−

−

Based on Independent

Variable Interaction

Ordinal

Dis-ordinal

−

−

−

−

Table 3. Selected Journals List

Panel A

No Name

1 Jurnal Akuntansi dan Auditing Indonesia

ISSN

1410-2420

(JAAI).

2 Jurnal Akuntansi (JA) 1410-3591

3 Jurnal Riset Akuntansi Indonesia (JRAI) 1410-6817

4

5

Akuntabilitas (AK)

Jurnal Akuntansi dan Keuangan

Indonesia (JAKI)

APPENDICES

1412-0240

1829-8494

Institution

University of Indonesia

Indonesia Islamic University

Tarumanegara University and Gadjah Mada University

Pancasila University

Indonesian Institute of Accountant


Year

Panel B

JRAI

2000 Vol. 3 No. 1-2

JAKI JA

2001 Vol. 4 No.1-3

2002 Vol. 5 No.1-3

2003 Vol. 6 No.1-3

NA

NA

Vol.6 No.1-2

NA

2004 Vol. 7 No.1-3 Vol.1 No.1-2 Vol.8 No.1-2

AK

Vol.1 No.1-2 Vol.5 No.1-2

Vol.2 No.1-2

Vol.3 No.1-2

JAAI

Vol.4 No.1-2

Vol.6 No.1-2

Vol.7 No.1-2

Vol.4 No.1-2 Vol.8 No.1-2

2005 Vol. 8 No.1-3 Vol.2 No.1-2 Vol.9 No.1-3 Vol.5 No.1-2 Vol.9 No.1-2




2009 Vol. 12 No.1-3 Vol.6 No.1

Vol.13 No.1-3 Vol.9 No.1

Vol.13 No.1-2

Table 4. EM in Number

Category

Panel A

EM

Financial Accounting (incl. EM)

Other theme

Total

JRAI

21

108

72

180

JAKI

8

37

31

68

JA

6

53

112

165

AK

6

51

73

124

JAAI

5

47

69

116

Panel B

EM Market Share

EM Journal Share

11,7% 11,8% 3,6% 4,8% 4,3%

45,7% 17,4% 13,0% 13,0% 10,9%

Market share of EM = ( ∑ EM article in journal i) ÷ (Total publication in journal i)

Journal share of EM = ( ∑ EM article in journal i) ÷ (Total EM publication)

Table 5. EM Research Methods and Models

Description

Panel A: Research Model

Additive (Add)

Intervening Variable (IV)

Independent Variable Interaction (IVI)

Moderator Variable Interaction (MVI)

Cyclical Recursive

Reciprocal Non-recursive

Distributed-Lag

Autoregressive

Construct-Variable Relationship

Panel B: Classification of Model

Unidirectional

Bidirectional

Linear

Curvilinear (Nonlinear)

Ordinal (monotonic)

Dis-ordinal (non-monotonic)

Construct-Variable Relationship

Panel C: Research Method

Association study

Event Study

Difference study

Total

46

296

357

653

7,0%

100%

16

−

16

−

3

−

10

Frequency

JRAI JAKI JA AK JAAI Total

13

−

−

3

−

−

−

−

10

7

−

−

1

−

−

−

−

3

4 5

−

−

−

−

−

−

−

−

− −

3 3

−

−

−

−

3

−

−

−

−

−

−

−

4

32

0

0

4

0

0

0

0

23

16

2

8

8

−

8

−

1

−

3

8

2

1

4

−

5

−

4 5

−

−

−

−

− −

3 3

4 5

1 1

2 2

3

−

3

−

−

−

4

3

−

4

36

0

36

0

4

0

23

36

6

17


Table 6. Earnings Management Measures

Earnings

Management

1

1

Income

Smoothing No Measures

1 Working capital accrual scaled by sales

2 Current Accrual Model (Teoh et al. 1998; DuCharme et al.

2000)

3 DA and NDA Model Rangan (1998)

4 Healy (1985), Modified Jones Model (1991) in Dechow et al.

(1995), and Dechow et al. (2003) Model

5 Instrumental Variable Model (Kang and Sivaramakrishnan

1995)

6 Linear Performance-Matching Jones Model by Kothari et al.

(2005)

7 Loan Losses Provision

8 The significant difference between operating cash flow and its mean

9 Modified Aharony et al. (1993) Model by DeAngelo (1986)

1

1

1

1

1

1

1

1 10 Modified Healy (1985) and Jones (1991) Models to capture special features of bank

11 Jones (1991) Model

12 Modified Jones (1991) Model in Dechow et al. (1995)

13 Modified Jones (1991) Model in Dechow et al. (1995) and Teoh et al. (1998)

14 Modified Jones (1991) Model in Kasznik (1999)

15 Sankar (1994) Model in Chan et al .

(2001)

16 Modified Healy and Jones (1991) model in Dechow et al.

(1995)

17 Accounting Method Choice

18 Scaled Earning Changes (Phillip et al. (2003), Burgstahler et al .

(2002), Yulianti (2004))

19 Total accrual in Aharony et al. (1993), and DAC by Healy

(1985) and DeAngelo (1986)

20 Not specified

21 Eckel Index (1981)

3

10

1

3

1

1

1

1

1

2

11


Figure 1. Research Framework

Figure 2. Descriptive Modeling Framework

Sources: Luft & Shields (2003)


Appendix 1. Map Notation

The map notation used by this research is adopted from Luft and Shields (2003).

Association study

1.

Additive, linear, and unidirectional:

Positive:

Not Specific:

IV DV

IV DV

2.

Intervening model, for example:

Negative:

Not Related

IV ITV DV

3.

Interaction Model, a.

Ordinal (monotonic) model with general sign: i.

IV

2

or MV strengthen positive relationship of IV

1

– DV

IV DV

IV

1

IV DV

IV DV

DV

IV

2

MV ii.

IV

2

or MV strengthen negative relationship of IV

1

– DV b.

Ordinal Model with mixed-sign: i.

IV

2

or MV negatively influence the positive relationship of IV

1

– DV ii.

IV

2

or MV positively influence the negative relationship IV

1

– DV

4.

Nonlinear unidirectional relationship: a.

U relation: b.

Inverted U relation:

IV DV

IV DV

Construct-Variable relationship

1.

Construct: informative event, sample divider factor (immeasurable)

2.

Variable (measurable)

Y

3.

The relationship between construct and variable

Positive:

X Y

Negative:

Unspecific:

X

X

Not related:

X

Y

Y

Y

X


Appendix 2. Earnings Management and Market Reaction

Unit of Analysis: Beyond Organization

Underwriter

Rep.

AUDTR

Industry

AUDTR

Unit of Analysis: Organization

8 8

Own

Sign.

8

Depreciation

Method

8

Underp ricing

IPO 21

8

Inventory

Method

21 29

Earning surprise

Volume

25

Income

Smoothing

ROA

25

2

25

1

44

25,1

6

32

STDRET

21

SIZE

21

29

INDBO

21

21

21

21

21

32

IOwn

42

42

29 LEV

32

32

MgOwn

32

32

Return

29

21

21

21 21

BIDASK

21 AUDCO

M

21

CAR

29,

42

21

21

21

21

21

21

21

NDA

CFO

BMR

EPR

DA

12

∆ROA

16

IPO

16

16

16

CR

12

12

12

IR

OFF

36

36

36

36

36

36

36

BHR t+1th

CAR t+1th

36

36 36

36

36

36

LogMV

D_BCP

D_ACP

36

36

3636

36

36

36

36

BHR

BHR t+2th t+3th

36

36

36

36

36

36

36

DCA

DLA

36

36

36

36

36

NDCA

NDLA

36

36 36

LogAGE

36 36

36

36

36

36

36

36

36

36

36

36

CAR

CAR t+2th t+3th

36

IR

OFF

36

36

36

36

36

LogMV

36

36 36

D_BCP

D_ACP


Unit of Analysis: Subunit of organization

−

Constructs:

1. AUDTR: Sample dividing factor based on audit quality (big-five and nonbigfive)

Sample dividing factor, based on the difference between expected 2. Earning surprise: earnings with actual earnings (positive and negative)

3. Income smoothing: Sample dividing factor, smoother and non-smoother classified use

4. IPO:

Dependent variables:

Eckel (1981) index.

An event, Initial public offering.

1. BHR t+n

:

2. BIDASK:

Buy and hold return after IPO

Bid-ask spread, the difference of maximum price that buyer asks and minimum price that seller offer.

3. CAR:

4. CAR t+n

:

5. CR:

Cumulative abnormal return

Cumulative abnormal return after IPO

Cumulative return for several periods.

6. Return: Stock Return

7. VOLUME: Stock trading volume

8. Underpricing: The difference of first closing price in secondary market and opening price in primary market.

Independent variables:

1. ∆ ROA: The difference of return on asset before and after IPO.

2. AUDCOM:

3. AUDTR:

4. BMR:

5. CFO:

6. D_BCP:

Dummy the existence of audit committee

Audit quality, measure usingdummy(big-five/fourandother).

Book-to-market ratio

Operating cash flow

Dummy IPO after Indonesian monetary crisis

7. D_ACP:

8. DA:

9. DCA:

10. DLA:

11. EPR:

12. INDBO:

13. Industry:

14. IOwn:

15. IR:

16. LEV:

17. LogAGE:

18. LogMV:

19. Depreciation

Method:

Dummy IPO before Indonesian monetary crisis

Discretionary accrual

Current discretionary accrual

Long-term discretionary accrual

Earning-to-price ratio

Independent BOD proportion

Dummy for industry

Institutional ownership

Initial return

Leverage

Natural logarithm of companies’ age

Natural logarithmcompanies’ market value.

Fixed asset depreciation method, measured using dummy between conservative method and others.


20. Inventory

Method:

21. MgOwn:

22. NDA:

23. NDCA:

24. NDLA:

25. OFF:

26. Underwriter

Rep.:

27. ROA:

28. Own Sign.:

Inventory valuation method, measured using dummy between conservative method and others.

Managerial ownership

Non-discretionary accrual

Current non-discretionary accrual

Long-term non-discretionary accrual

Offer price in primary market

Underwriter reputation, usually measured using Johnson-Miller model.

29. SIZE:

30. STDRET:

31. VOLUME

Moderating variables:

Return on asset

Ownership Signal measured using natural logarithm of percentage of share retained by company.

Firm size

Standard deviation ofdaily stock returnduring the test period

Stock trading volume

1. DA: Discretionary behavior

Sources:

8

12

16

21

Code Authors

1 Assih and Gudono (2000)

2

6

Salno and Baridwan (2000)

Prasetio, Astuti, and Wirawan

(2002)

Ali and Hartono (2003)

Saiful (2004)

Ardiati (2005)

Siregar and Bachtiar (2005)

Code Author

25

29

32

36

42

44

Juniar, Meiden, and Sitinjak (2006)

Sukartha (2007)

Widyastuti (2007)

Rahman and Hutagaol (2008)

Joni and Hartono (2009)

Oktorina and Hutagaol (2009)


Appendix 3. Earnings Management Predictors


Construct:

1

G/P

Perform Sample dividing factorbased on firm performance


1 LN EM/1-EM Scaled Earning Changes

2 CSRDisc

3 DA

Corporate Social Responsibility Disclosure

Discretionary accrual

4 Value

5 LLP

Firm value

Loan loss provision

Independent variables – unit of analysis: organization

1 AbsNI Net Income (Absolute)

2 AbsTAC Total Accrual (Absolute)

3 ADJSPREAD Adjusted bid-ask spread

4 Bonus

5 SYB

6 Cap.AR

7 DTA

8 CFO

9 CFVar

Bonus schememeasured by dummy(accounting based or not)

Dummy forSyariah bankorSyariah unit link

Capital Adequacy Ratio

Deferred tax asset

Operating cash flow

The varianceof operating cash flow data

10 CGI

11 CHLOAN

12 CHNPL

13 Cscore

14 DA

15 DCP

16 DEBT

17 DFAM

18 GRWTH

Corporate Governance Index

The changes ofbanking loanscaled by beginning balance of loan

The changes of nonperforming loan

Accounting conservatism score discretionary accrual

Dummy Cost politic

Interest bearing debt to total asset ratio

Dummy forfamily ownership(high or low)

Growth

19 HFLG

20 IOS

21 IOwn

22 AUDCOM

23 INDBO

24 LDR

25 LEV

Dummy for high cash flow and low growth

Investment Opportunity Set


Audit committee


Loan to Deposit Ratio

Leverage

26 LOWMON Dummy for corporate monitoring (low or high)

27 MgOwn

28 MTB

Managerial ownership

Market To Book value

29 NDA

30 NPL

31 NPM

32 RGLASS

Non Discretional Accrual

Nonperforming loan

Net Profit Margin

Realized gain or loss from held for sale securities


33 ROA

34 RORA

35 SDRET

36 SIZE

37 TAS

38 BOD

Return on Asset Ratio return on Risk Asset

Daily Return

Firm size

Total Asset

Board of director size

Independent variables – Unit of analysis: beyond organization

1 AUDTR Audit quality, measure usingdummy(big-five/fourandother)

3

2 Quotes

VOLUME

Average bid ask spread in closing date

Stock trading volume

Moderating variables:

1 DEBT Debt level

2 INDBO

3 AUDTR

4 DA


Audit quality, measure usingdummy(big-five/fourandother) discretionary accrual

Sources:

22

23

26

29

Code Authors

5 Mayangsari and Wilopo (2002)

Code Authors

32 Widyastuti (2007)

18

20

21

Boediono (2005)

Permatasari (2005)

Siregar and Bachtiar (2005)

33

37

38

40

Bangun and Vincent (2008)

Sugiartha (2008)

Tresnaningsih (2008)

Handajani, Sutrisno, and Chandrarin

(2009) Wasilah (2005)

Yulianti (2005)

Siregar and Utama (2006)

Sukartha (2007)

41

43

45

Herusetya (2009)

Nazir and Herwiyanti (2009)

Tobing and Ika (2009)

30

31

Suparno and Qomariyah (2007) 46

Suranggane (2007)

Zahara and Siregar (2009)


Appendix 4. Income Smoothing Detectors



1 ERC

2

3

4

FERC

CWC

IS

Earnings response coefficient,the slope of regression function ofcumulative abnormal return(CAR) and Unexpected Earnings (UE).

Future ERC, coefficient regression of CAR t+1 andUE t

Cost of working capital

Dummy for Income Smoothing.

Independent variables – Unit of analysis: organization

1 OpLev Operating Leverage

2 NPM

3 NPS

4 OPM

Net Profit Margin

Market value of share

Operating Profit Margin

5 ROA

6 SIZE

7 Beta

8 ErnPrd

9 ErnPrt

10 IOwn

Return on Asset Ratio

Firm size

Beta of stock (risk)

Earnings predictability

Earnings persistence


11 BOD

12 INDBO

13 DEBT

14 LEV

15 St.Invest

Board of director size


Ratio interest bearing Debt to total asset

Leverage

Investor Status (dummy)

16 Profit

17 Value

Corporate profits

Value of firm

18 AMK/SALE(EM)

Working capital accrual scaled by sales(the proxy of earning management)

Independent variables – Unit of analysis: beyond organization

1

2

3

AUDTR

Industry

DWLS

Sources:

Audit quality, measure usingdummy(big-five/fourandother).

Dummy industry

Dummy for Winner/Loser Stock

Code Authors

2 Salno and Baridwan (2002)

6

11

15

Prasetio, Astuti, and Wiryawan (2002)

Bonny, Meiden, and Sitinjak (2004)

Yusuf and Soraya (2004)

Code Authors

24

27

34

35

Budhijono (2006)

Utami (2006)

Dewi and Carina (2008)

Kustono (2008)


Appendix 5. Construct-Variable Relationshipin Income Smoothing Research


Constructs:

1

2

3

4

AUDTR

EM (Operating method/Accounting)

EM (EOQ/EOY)

EM (company /individual interest)

Sample dividing factor based on audit quality (big-five and nonbig-five)

Sample dividing factor based on earnings management case given: earnings management through operating or accounting method

Sample dividing factor based on earnings management case given: earnings management in end of quarter or end of year

Sample dividing factor based on earnings management case given: earnings management for company interest or individual interest.

5 EM(earnings materiality) Sample dividing factor based on earnings management case

6

7

EM (income increasing/decreasing)

EM (GAAP/not) given: earnings management considered material or not.

Sample dividing factor based on earnings management case given: income increasing or decreasing

Sample dividing factor based on earnings management case

8

9

Income Smoothing

IPO

10 AUDCOM

11 Publication delay given: use GAAP or not

Sample dividing factor: Smoother and Not-smoother

An event: IPO

Sample dividing factor: the existence of audit committee

Sample dividing factor: delay or not

12 Perform (+/-)

13 Merger and acquisition

14 SIZE

15 TAX

Sample dividing factor: positive or negative income

An event: Merger and acquisition

Sample dividing factor based on firm size: small or large

Sample dividing factorbasedontax rate reform (1994)


1 CFO

2 DA

3 DTE

4 EM

5 OE

6 ROA

7 TAC

8 Value

Operating cash flow discretionary accrual

Deferred tax Expense

Dummy for earnings management (a little of loss or a little of income)

Operating Earnings

Return on Asset Ratio

Total accrual

Value of firm

Independent variables – unit of analysis: organization

1 Beta Beta of stock (risk)

2 DCA

3 DEBT

4 DLA

Current discretionary accrual

Interest bearing debt to total asset ratio

Long-term discretionary accrual

5 EAc

6 EthichJudgment

7 GRWTH

8 IOS

Expected Accrual

Ethical Judgment

Growth

Investment Opportunity Set


9 LEV

10 NPM

11 OpLev

12 Profit

13 RAMCFO

14 RAMCOGS

15 SIZE

16 TCF

Leverage

Net Profit Margin

Operating Leverage

Corporate profits

Real activity manipulation throughOperating Cash Flow

Real activity manipulationthrough cost of goods sold

Firm size

Total cash flow

Independent variables – unit of analysis: beyond organization

1 AUDTR Audit quality, measure usingdummy(big-five/fourandother).

2 Industry

Sources

Dummy industry

7

9

10

12

Code Authors

2 Salno and Baridwan (2000)

Code Authors

17 Assih, Hastuti, and Parawiyati (2005)

3

4

6

Gumanti (2001)

Surifah (2001)

Prasetio and Wirawan

(2002)

20

23

28

Permatasari (2005)

Yulianti (2005)

Bangun and Rita (2007)

Setyowati (2002)

Kuntanto (2003)

Kusuma andSari (2003)

Saiful (2004)

Saputra and Setiawati

34

36

37

39

41

Dewi and Carina (2008)

Rahman and Hutagaol (2008)

Sugiartha (2008)

Yudhanti and Rachmawati (2008)

Herusetya (2009)

13

14

(2004)

Sholihin and Naim (2004) 42

15 Yusuf and Soraya (2004)

Appendix 6. Sample List

Joni and Hartono (2009)

Ali, S., and J. Hartono. 2003. Pengaruh Pemilihan Metode Akuntansi terhadap Tingkat

Underpricing Saham Perdana. Jurnal Riset Akuntansi Indonesia 6 (1): 41-53.

Ardiati, A. Y. 2005. Pengaruh Manajemen Laba terhadap Return Saham pada Perusahaan yang Diaudit KAP Big 5 dan KAP Non big 5.

Jurnal Riset Akuntansi Indonesia 8 (3):

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Assih, P., and Gudono. 2000. Hubungan Tindakan Perataan Laba dengan Reaksi Pasar atas

Pengumuman Informasi Laba Perusahaan yang Terdaftar di BEJ. Jurnal Riset

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Assih, P., A. W. Hastuti, and Parawiyati. 2005. Pengaruh Manajemen Laba pada Nilai dan

Kinerja Perusahaan. Jurnal Akuntansi dan Keuangan Indonesia 2 (2): 125-144.

Bangun, N., and Rita. 2007. Analisis Earnings Management dalam Penawaran Saham

Perdana Bursa Efek Jakarta. Jurnal Akuntansi 11 (3): 319-333.

Bangun, N., and Vincent. 2008. Analisis Hubungan Komponen Good Corporate Governance terhadap Manajemen Laba dengan Kinerja Keuangan pada Perusahaan Manufaktur yang Terdaftar di Bursa Efek Indonesia. Jurnal Akuntansi 12 (3): 289-302.


Boediono, G. S. B. 2005. Pengaruh Mekanisme Corporate Governace terhadap Manajemen

Laba dan Dampaknya pada Kualitas Laba. Jurnal Akuntansi 9 (3): 232-247.

Bonny, M., C. Meiden, and T. J. R. Sitinjak.2004. Pengaruh Perataan Laba terhadap Earnings

Response Coefficient pada Perusahaan Manufaktur yang Terdaftar di BEJ Periode

1999-2004. Akuntabilitas 4 (1): 19-27.

Budhijono, F. 2006. Evaluasi Perataan Laba pada Industry Manufaktur dan Lembaga

Keuangan yang Terdaftar di BEJ. Akuntabilitas 6 (1): 70-79.

Dewi, S. P., and Carina. 2008. Faktor-Faktor yang Mempengaruhi Praktik Perataan Laba pada Perusahaan Manufaktur dan Lembaga Keuangan Lainnya yang Terdaftar di BEJ.

Jurnal Akuntansi 12 (2): 117-131.

Febrianto, R. 2005. The Effect of Ownership Concentration on the Earnings Quality:

Evidence from Indonesian Companies. Jurnal Riset Akuntansi Indonesia 8 (2): 105-

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Gumanti, T. A. 2001. Earnings Management dalam Penawaran Saham Perdana di BEJ.

Jurnal Riset Akuntansi Indonesia 4 (2): 165-183.

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Corporate Governance Mechanism on Corporate Social Responsibility Disclosure: An

Empirical Study at Public Companies in Indonesia Stock Exchange. Jurnal Riset


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Auditor dengan Spesialisasi Industry dalam Menghambat Manajemen Laba. Jurnal

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Joni, and J. Hartono.2009. Hubungan Manajemen Laba Sebelum IPO dan Return Saham dengan Kecerdasan Investor sebagai Variabel Pemoderasi. Jurnal Riset Akuntansi

Indonesia 12 (1): 53-70.

Juniar, A., C. Meiden, and T. J. R. Sitinjak. 2006. Perbandingan Reaksi Pasar Perusahaan

Perata dan Non-Perata Laba pada Perusahaan Manufaktur di BEJ. Akuntabilitas 6 (2):

105-113.

Kuntanto. 2003. Pengaruh Profitabilitas dan Ukuran Perataan Laba pada Perusahaan

Manufaktur dan Lembaga Keuangan yang Terdaftar di BEJ. Akuntabilitas 3 (1): 32-

45.

Kustono, A. S. 2008. Motivasi Perataan Penghasilan. Jurnal Riset Akuntansi Indonesia 11

(2): 133-157.

Kusuma, H., and W. A. U. Sari. 2003. Manajemen Laba oleh Perusahaan Pengakusisi

Sebelum Merger dan Akusisi di Indonesia. Jurnal Akuntansi dan Auditing Indonesia 7

(1): 21-36.

Mayangsari, S., and Wilopo. 2002. Konservatisma Akuntansi, Value Relevance dan

Discretionary Accruals : Implikasi Empiris Model Feltham-Ohlson (1996). Jurnal

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Prasetio, J. E., S. Astuti, and A. Wirawan. 2002. Praktik Perataan Laba dan Kinerja Saham

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A DECADE OF EARNINGS MANAGEMENT RESEARCHES IN

A DECADE OF EARNINGS MANAGEMENT RESEARCHES

IN INDONESIA

Novrys Suhardianto

, Iman Harymawan

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, Iman Harymawan

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