SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
The Effect of Market Share and Leverage Interaction Toward
Earnings Management Practices
By
Dian Anita Nuswantara
State University of Surabaya
ABSTRACT
The purpose of the study is to investigate whether market share, institutional
ownership and leverage affect the existence of earnings management and whether the
interaction between market share and leverage will affect the existence of earnings
management. To conduct this research we use regression and regression with
interaction method as statistical tools. Total observation are 81 they are 27 companies
that listed on Bursa Efek Jakarta (BEJ) by 1998 to 2000. This study supports the first
and fourth hypothesis but could not accept the second and third hypothesis. The
results show the evidence that market share effect the existence of earnings
management and the interaction between market share and leverage also effect the
earnings management.
Keywords: earnings management, market share, leverage, and institutional ownership
1. INTRODUCTION
Earnings is a measurement of the company performance summary that is
accomplished under accrual-based accounting. It becomes important because it is also
considered by the users as the measurement of the company performance summary,
for instance it determines the executives compensation and investor or creditor
decision making. Accrual background is underlain the problem solving of the
company performance measure when the company is in the continued operation.
Income recognition and matching principles are expected to be able to overcome the
time and verification problems attached in the treasury flow so that the earnings can
reflect the company performance (Dechow, 1994). However, the use of accrual is still
problematic, due to the discretion management that is related. A management
authority can be used to inform the private matters or to manipulate earnings for
personal benefit.
Many earnings management researches are carried on, and it is find out that
many companies employs the earnings management for several purposes; like, for
example: it is used to fill in the expectation of analysts (Burghstahler and Eames,
1998), to fill in the investor expectation (Bushee, 1998), to fill in the company budget
(Kasznik, 1999), to fill in the debt binding (Healy and Palepu, 1990) and others.
Numbers resulted from accounting process are used by regulator in making a
decision, but there is no research showing that regulators consider earnings
management practice in their political decision (Healy and Wahlen, 1999). This
condition triggers companies that are sensitive toward the political decision to employ
earnings management practices (Jones, 1991; Cahan, 1992; Key, 1997).
Earnings management practices is also occurred in Indonesia, for example
Saiful and Hartono (2002) find out that the management withdraw the future earnings
to raise the current earnings around their first offering to public. This is aimed to
maximize their own utility. Investors and other market participants cannot detect this
condition, it might be due to the developing market characteristic that is its
170
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
participants are less capable. Some researches also show that corporate governance
mechanism can be counted on as one of the factors which can control the
opportunistic manager’s action (Ching et al., 2002). Shleifer and Vishny (1997) cited
that corporate governance is related to the way how an investor feels sure that they
will obtain their investment back, how an investor push a management to give the half
of their earnings to them, how they can feel sure that the management will not
embassle the money they supplied for or how the management does not invest in bad
project, how they control the company. External control is one of the instruments to
reach the corporate governance. Therefore, this research is expected to be able to test
the effect of leverage, institution owner and market authority toward earnings
management practice and interaction influences between leverage and market
authority toward earnings management practice.
Based on the above explanation, this article attempts to test if the market
authority of a company influences positively toward a company earnings
management, if degree of leverage influences negatively toward a company earnings
management, and if the relationship between market authority and earnings
management practice are influenced by the degree of leverage.
The organization of the article is as the following: part one is the introduction
containing the background, problems, and objective of the study, part two contains the
review to related literature that presents some theories on earnings management,
political costs, agency relationship, and corporate governance, then continued to
hypothesis formulation; part three describes the research method; part four presents
the data analysis and findings; and the last is conclusion and findings of hypothesis
test, and the last is conclusion and the limitation of the research.
2. THEORETICAL FRAMEWORKS AND HYPOTHESIS FORMULATION
Many studies on earnings management had been carried on different background.
McNichols and Wilson (1988) and Perry and Wiliams (1994) tested several
measurement for earnings management in companies practice which will only
produce the description of the company pseudo performance, therefore the investors
who make use of the information to make a decision, they will buy the company
shares which have counterfit shares.
Jones (1991) investigated if companies manage earnings during the
investigation of import liberation, and this study showed that a company would
decrease its earnings when he need an import protection through tariffs, quotas, and
marketing agreements. Cahan (1992) and Key (1997)also support Jones study.
Keating and Zimmerman (2000) support hypothesis that company manage its
earnings to avoid violation of debt covenant, to increase executives compensation,
and/or to reduce the possibility of executive change. The study show that manager
who choose to change its accounting policy that increase earnings have bad
performance and high degree of leverage.
Ching et al (2002) try to relating earnings management with corporate
governance issues. Regulator is in charge to identify possible situations to encourage
earnings management. Therefore, the regulator and investor need to consider
corporate governance in making a decision (Ching et al., 2002) because the possibility
of earnings management is connected to a specific environment where the company
runs its operations. A study done by Ching in Hongkong agrees with the idea that
earnings management which is around seasoned equity offerings depends on the
structure of corporate governance. A company which employs seasoned equity
171
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
offerings has a greater motivation to manage its earnings when they have greater
number of board of directors in compare with those who have smaller. This indicates
that the smaller number of board of directors will give a better control function than
the greater number.
2.1. Political Cost Hypothesis
Positive theory is a theory that used to predict what happen in this real life and
what the consequences should be taken into account. Positive accounting theory states
that company management is carried out in the most efficient way so that the
company existence can be maintained maximally. The freedom to choose the
accounting policies enable the manager to be opportunist one. Positive accounting
theory assumes that both the manager and investors are rational and able to do
whatever they want to do on their own interest. Although, there is a mechanism used
to anticipate the opportunist manager, like for example: through determining the
remuneration plan.
Political costs can be proxied by several measurements like company size,
risk, capital intensity, and industrial concentration ratio (Watts & Zimmerman, 1986).
Political costs hypothesis predicts that manager will refuse the possibility of political
impact of welfare transfer by choosing the accounting strategy that decrease earnings
(Watts and Zimmerman, 1978 in Watts and Zimmerman, 1986). Zmijewski and
Hagerman (1981) suspect that political costs are in variation with firms risks and that
high risks company tend to choose accounting procedure portfolio that decrease
earnings. The motivation is high risks company tend to have high variance of earnings
changes so that the company tends to report high earnings and because information
costs, boards, politicians, and bureaucrats may not adjust risk when considering profit
reported. Manager of company whom subjects to political costs tends to take
investment with lower risks to avoid high profit (Peltzman, 1976 in Watts and
Zimmerman, 1986)
Zmijewski and Hagerman (1981) argue that costs information, boards,
politicians, and bureaucrats do not adjust earnings reported for capital opportunity
costs therefore capital intensive companies tend to be subject of political costs so that
they will choose accounting procedure that decrease earnings.
Anti–trust division uses industrial concentration ratio to justify the competency
level in an industry. One of the factors that is found out significantly influences the
accounting procedure selection is the industrial concentration ratio (Utama 2000).
This ratio is the percentage of the total sales in an industry which is attained by
several big companies in industry. Industry with concentration ratio which is high will
be curricul on laws, like anti–trust policy, to avoid the law implementation, the
company with high industrial concentration tend to choose the accounting policy
which decreases the comings.
Industrial concentration ratio is reversed with the competition level. The closer
the ratio to 1 means the less the competitors. In live with this point of view Shleifer &
Vishny (1997) state that product market competition will decrease company
profitability. If a company is not efficient so it will decrease the earnings. Therefore, a
manager of a company who owns low profitability will manipulate the earnings so
that an investor will be willing to trust their capital in the company. If the company
172
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
market segment is small so that the company does not have strong position in the
competition, this triggers the company to manipulate the earning so it look good.
Contrary to the above fact, there are many advantage for the companies which
have large market segment, one of them is that the company become a price–
determiner – it is caused by the power of big companies that enable to compete with
other companies without hesitation (Brinkley, 1999). This makes the company
profitability higher than companies which have small market segment. The excess of
the advantage, the companies become sensitive toward every government policy. This
is caused by the government hesitation that the company will commit illegal
monopoly, transfer of wealth, subsidy abandoning, and government investigation.
Therefore, the companies tend to admit share management. Based on that illustration,
the hypothesis are formulate as follows.
Hypothesis 1: The power of market reflected by company market share
positively influences earnings management practice.
2.3. Agency Theory
Agency relationships defined as a contract taken by principal party and agent, in
which in agent work on the behalf of principal name and given to an authority to
make a decision. If both parties are the ultimate utility so there are reasons for the
agent to rely on not only to do thing for the sake of the principal advantages. Principal
can limit the distortion by determining the right incentive for the agent and provide
supervision cost that is designed for watching the agent’s work that might distort the
rule. One of the action of manager’s distortion is earnings management. The existence
of this management is probably the function from specific environment where the
company work. For instance, the corporate governance mechanism which can
influence the earnings management level and how important the factors influence the
earnings management. These are influenced by domestic jurisdiction factor of a
country (Ching et al, 2002).
Corporate governance can be defined as system that adopted by company in
the mean of conducting and controlling the company (Cadbury, 1992 in Ching et al,
2002). Corporate governance focus on process for which designed to assure the
accountability of the company directors and manager jobs. They must perform their
job in high integrity and must be a subject to check and balances to avoid using power
inappropriately. External supervision is one of the important components from
corporate governance mechanism, and ownership of an institution and loan – use are
another from of external supervision.
2.4. The Institution Ownerships
The institution ownership is important for there is an interest conflict between a
manager & shareholders (Jensen & Meckling, 1976). It is because of the institutional
investor who has information more than the individual investor, consequently the
announcement for company which has great institutional ownerships contains less
information (Szewczyk, 1992 in Filbeck and Hatfield, 1999). This is caused by:
1. Institutional investor has more resources than individual investor to allocate
information.
173
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
2. Beside that, institutional investor has professionalism in information analysis so
that information quality can be detected.
3. Institutional Investor, generally, has business relation so that an information
access is large them individual investor.
4. Institutional investor has motivation for monitoring more tightly the company
activities them individual investor.
5. Institutional investor’s trade is more active than individual investor so it can raise
the probability for new information instantly that is reflected from the price.
Gillian and Starks (2000) state that institutional ownership is useful for it can
push the manager to think for the company long-term performance. However, not all
institutional investor give an advantage for management, for instance, pension
insurance, because this cannot give an in put for the management (Murphy and Vans
Nuys, 1994 in Wilopo and Mayangsari, 2002). Lins (2002) finds out that a separation
between owner & management influences positively forward the company values
forward countries which have law protection for share holder. In other side,
concentration influence of ownership in the company external party has positive
influence for company values. Filbeck and Hatfield (1999) find out that there is a
direct relationship between level of institutional ownership and member of respond of
share price. They hypothesized that this relationship is not significant for the company
public utility as for as the regulator role takes place of the institutional investor role in
decreasing the assymetrics information on the contrary, if the ownership is
concentrated on small number of investor with high percentage of ownership for
every investor, the collective action of the investor will be easier, for instance through
voting (Shleifer & Vishny, 1997). Although, the distortion forward voting right
mostly happened in developing countries which have unstable law system. Therefore,
it is hypothesized:
Hypothesis 2: The institutional ownership influences negatively toward earnings
management
2.5. The Leverage
Debt could reflects the ability of creditor to have a control beyond his debtor.
Specifically, we can say that debt is a contract where the debtor raise funds from the
creditor and promise to give a flow of payment predetermined to the creditor. Besides,
the debtor usually make a statement that he won’t break the covenant (Smith and
Warner, 1979). If the debtor broke the covenant, especially when he cannot fulfill the
payment, the creditor may take over the collateral or the possibility of bankruptcy.
Those above show that company will try to obey the covenants in the contracts
to avoid the creditors’ use of his right. Those rights, at the end, are one of substance of
external monitoring. Thus, we hypothesized:
Hypothesis 3: the leverage influences negatively toward earnings management
As discussed above, the company which have market power is more possible to
conduct earnings management. But the magnitude of those opportunistic behavior will
be declined when there is sufficient corporate governance mechanism. Therefore, the
degree of leverage that reflects external monitoring, that is creditor, is hypothesized
174
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
could be influence the relationship of company market power with its possibility to
practice earnings management. Thus, we hypothesized:
Hypothesis 4: The bigger the market power, the greater the possibility of
earnings management practice, especially if there is less external
monitoring (low leverage).
2.6. The Size of Company
The size of company could be reflects by the magnitude of company’s assets. Big
company has a higher exposure than the smaller company so that it will be an object
of high quality auditor investigation. This condition push the reporting become more
conservative and tend to manipulate earnings downward.
3. RESEARCH METHODOLOGY
3.1. The Sample
The population is public company that listed in Jakarta Stock Exchange, except those
are in financial sector because they are high regulated, high risks, and public entrust
sector (Samlawi and Sudibyo, 2000). The sample is conducted with purposive
sampling to obtain sample which represents the criteria. The sample are those have:
1. three years financial reporting from 1998-2000, and the years must be ended at
31 December
2. not in banking and financial industry as classification by Indonesian Capital
Market Directory
3. have data needed; those are discretionary accruals, market share, and leverage
4. has in accordance with classification of Biro Pusat Statistik 1998
5. sales can be group based on industry of parents
DATA COLLECTION METHODS
Data used in this research are:
1. Secondary data, annual financial statements with the notes to financial statements
from Jakarta Stock Exchange 1998 to 2000 to get discretionary accruals,
institutional ownership, and leverage
2. Market share taken from Biro Pusat Statistik 1998-2000 to get market share.
3.3.VARIABLE MEASUREMENT
3.3.1. DEPENDENT VARIABLE
Dependent variable used in this research is discretionary accruals counted by
modified Jones model, because this measurement less bias (Dechow, 1995). The
procedure to count are as follows:
First, determine the total accruals by the formulas:
TAt=(CAt-CLt-Casht+STDt-Dept)/(At-1)
Where,
TAt is total accruals firm t at time t
CAt is the change in liquid assets at time t
CLt is the change in short-term debt at time t
Casht is the change in cash and equivalent cash at time t
STDt is the change in long-term debt mature in current year at time t
Dept is depreciation and amortization costs at time t
At-1 is total assets at time t-1
175
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Second, regress this formula to get coefficient for nondiscretionary accruals
TAt= a1(1/At-1)+ a2(REVt)+ a3 (PPEt)+ t
Where,
REVt is the change in revenue in year t divided by assets in year t-1
PPEt is gross assets in year t divided by assets in year t-1.
Third, determine nondiscretionary accruals by substitute a1, a2, a3 into formulas
below:
NDAt=1(1/At-1)+ 2(REVt)+3(PPEt)
Where,
NDAt is nondiscretionary accruals at time t
3.3.2. Independent Variable
Independent variable used in this research are:
1. Market share is the firm sales in year t divided by industry sales in the same
year
2. leverage is debt divided by assets
3. institutional ownership is proportion of shares owned by institutional investor,
whose institutional investor defined as Jones, 1991.
3.3.3. Moderating Variable
Moderating variable is leverage with the same explanation as above
3.3.4. Control Variable
Control variable is assets which measure as natural log of company assets. This
measurement used to minimize variance between sample
Analysis Techniques
To test hypothesis 1, 2, and 3 we use multiple regression as follows:
ABSDACC = (MARKET SHARE, LEVERAGE, INSTITUTIONAL
OWNERSHIP)
ABSDACC is the absolute of company’s discretionary accruals. The company’s
discretionary accruals must be absolute first because we do not consider whether the
earnings management are earnings increasing or earnings decreasing but we regard to
the degree of company’s discretionary accruals.
To test hypothesis 4 we use multiple regression with leverage as moderating variable
as follows:
ABSDACC = (MARKET SHARE, LEVERAGE, INSTITUTIONAL
OWNERSHIP, MARKET SHARE*LEVERAGE)
As discussed above, leverage is argued as proxy of external monitoring thus market
power will be multiplied by leverage.
Before testing the hypothesis we have to fulfill classic assumptions. To test the
heteroscedasticity assumption we conduct Glejser test. To test the multicolinearity we
see the variance inflation factor and tolerance. To see whether there is an
autocorrelation we use Durbin-Watson d statistic.
176
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
4. EMPIRICAL RESULTS
4.1. Descriptive Statistics
Table 2 is the summary of descriptive statistics on the research sample
Table 2
Descriptive Statistics of The Research Sample
N Minimum
Maximum
Mean Std. Deviation
DISCRETIONARY
81
.01
23.04
.4868
2.5419
ACCRUALS
ASSETS
81 34359.00 129684726.00 5207570.6543 19499718.8955
MARKET SHARE
81
.06
41.28
3.3924
7.7126
INSTITUTIONAL
81
.11
.95
.6458
.2143
OWNERSHIP
LEVERAGE
81
.10
1.84
.6825
.3517
Valid N (listwise)
81
The summary of descriptive statistics shows that the dependent variable,
discretionary accruals, has minimum result 0.01 with maximum result 23.04, mean
value 0.4868, and 2.5419 standard deviation. Assets have minimum result 10.44 with
maximum result 18.68, mean value 13.2466, and 1.7856 standard deviation.
Market share variable has the highest variability compared to other variable, it
can be seen from its 7,7126 standard deviation with the minimum result 0.06 and the
maximum result 41,28. Institution ownership has minimum result 0.11 with
maximum result 0.95, mean value 0.6458, and 0.2143 standard deviation. Degree of
Leverage has minimum result 0.10 with maximum result 1.84, mean value 0.6825,
and 0.3517 standard deviation.
4.2. Classical Assumption Test Results
Classical assumption test on the relationship between dependent variable and
independent variable is important because of the two characteristics in multivariate
analysis (Hair, et al, 1998).
First, relationship complexity, the more variables used into the equation, the
larger the distortion and bias that might have been happened if the assumption has
been ignored. Second, analysis and result complexity might covered the sign of
assumption ignorance that has shown in a more simple analysis, univariate analysis.
Homoscedasticity
This assumption suggest that based on the independent variable value, the variation in
the error term is equal to all observation thus, it can be said that the variation in the
error term for each independent variable is the same constant positive value with its
standard deviation (Hair et al, 1998). In short, it be said that Y population connected
with several X value will have the same variation. Variation around the regression
line (upper and lower) wil be the same for every X value. This assumption is
connected especially on the relationship between variables. This condition suggest
that dependent variable shows the same variation degree along predictor variable
continuum. Glejser test results is shown in the following table:
177
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Table 3
The Result of Residual Variable Regression on Weighted Independent Variables
(Assets, Market Share, Institution Ownership, and leverage)
Unstandardized
Coefficients
B
(Constant)
-.276
LNASSETS
-2.544E-04
MARKET SHARE
.230
INSTITUTIONAL
.365
OWNERSHIP
LEVERAGE
-7.020E-02
a Dependent Variable: RESIDUAL
Std.
Error
.874
.063
.015
.495
.302
Standardized
Coefficients
Beta
t
p-value
.000
.890
.039
-.315
-.004
15.703
.738
.753
.997
.000
.463
-.012
-.232
.817
Table 3 shows that there is independent variable which is significant with its residual,
that is market share variable. This problem is overcome by weighted least squares
method (Gujarati, 1995). The test result after weighing with the residual from original
regression is presented on table 4. Table 4 shows that the significant of independent
variable on its residual is no longer exist. Thus, it can be concluded that
heteroscedasticity is not happening.
Table 4
The Result of Residual Variable Regression on Weighted Independent Variables
(Assets, Market Share, Institution Ownership, and leverage)
Unstandardized
Coefficients
B
(Constant)
.308
LNASSETS
-2.098E-03
MARKET SHARE
-3.943E-04
INSTITUTIONAL
-.149
OWNERSHIP
LEVERAGE
.171
a Dependent Variable: RESIDUAL
Std.
Error
.402
.030
.008
.242
.149
Standardized
Coefficients
Beta
t
p-value
-.012
-.008
-.104
.767
-.071
-.048
-.615
.448
.944
.962
.542
.188
1.145
.259
178
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Table 5
The Result of Residual Variable Regression on Independent Variables (Assets,
Market Share, Institution Ownership, and leverage) and The Interaction
between Leverage and Market Share
Unstandardize
d Coefficients
B
(Constant)
-1.041
LNASSETS
6.404E-02
MARKET SHARE
7.773E-02
INSTITUTIONAL
.449
OWNERSHIP
LEVERAGE
-5.218E-02
LEVERAGE*MARKET
.307
SHARE
a Dependent Variable: RESIDUAL
Standardize T
p-value
d
Coefficients
Std.
Beta
Error
.908
-1.147
.255
.068
.062
.948
.346
.043
.324 1.819
.073
.503
.052
.893
.375
.313
.106
-.010
.534
-.166
2.890
.868
.005
Glejser test for the second regression equation shows that heteroscedasticity is
happened as shown in table 5. As the first regression, the second one is also done by
residual weighting from the regression equation to overcome the problem. The result
is shown in the following table:
Table 6
The Result of Residual Variable Regression on Independent Variables (Assets,
Market Share, Institution Ownership, and leverage) and The Interaction
between Weighted Leverage and Market Share
Unstandardized
Coefficients
B
(Constant)
.651
LNASSETS
-1.986E-02
MARKET SHARE
-7.060E-03
INSTITUTIONAL
-.110
OWNERSHIP
LEVERAGE
-.136
LEVERAGE*MARKET
1.209E-02
SHARE
a Dependent Variable: RESIDUAL
Standardized
Coefficients
Std.
Beta
Error
.303
.024
-.142
.070
-.168
.178
-.104
.113
.158
T
Pvalue
2.149
-.842
-.101
-.619
.037
.404
.920
.539
-.220 -1.209
.127
.076
.233
.940
Heteroscedasticity problem can be overcame by weighting, as showed in table 6 that
variables which have significant value less than 5% is no longer exist. Therefore, it
can be said that the second regression equation is also free from heteroscedasticity
problem
179
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
4.2.2. Multicolinearity
This assumption suggest that multicolinearity is not existed among the independent
variables. Multicolinearity means that there isn’t perfect linear correlation or near
perferct linear correlation between independent variables. This research is using
variance inflation factor (VIF) and tolerance to detect multicolinearity. The result
shows that the entire independent variable have VIF value far below 10 (the lowest
one is 1,101 and the highest one is 1,255) and TOL value closed to 1 (the lowest one
is 0,797 and the highest one is 0,908). It can be concluded that this assumption is
fulfilled, that is no multicolinearity.
Table 7
The Diagnosis Result of Multicolinearity of The First Regression
Collinearity Statistics
(Constant)
LNASSETS
LEVERAGE
INSTITUTIONAL
OWNERSHIP
MARKET SHARE
Tolerance
VIF
.651
.820
.635
1.536
1.220
1.575
.848
1.180
a Dependent Variable: ABDACC
b Weighted Least Squares Regression – Weighted by Unstandardized
Residual
There is multicolinearity problem in the second regression because VIF and TOL
value of market share variable and the interaction between leverage market share
variable are more than 10 as shown in table 8.
Table 8
The Diagnosis Result of Multicolinearity of The Second Regression
Collinearity Statistics
(Constant)
LNASSETS
LEVERAGE
INSTITUTIONAL
OWNERSHIP
MARKET SHARE
LEVERAGE*MARKET
SHARE
Tolerance
VIF
.687
.092
.860
1.456
10.877
1.163
.822
.086
1.216
11.649
a Dependent Variable: ABDACC
b Weighted Least Squares Regression – Weighted by Unstandardized
Residual
180
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
4.2.3. Auto correlation
Auto correlation is defined as the correlation between time series observation
or cross section observation (Gujarati, 1995). This assumption suggest that there must
be no auto correlation, it means that every predicted value is independent
Based on Durbin-Watson table, it can be found that for 81 observation and
four independent variables the is dL equal to 1,534 and dU is equal to 1,743 on 5%
degree. The result of calculation shows that the d is equal to 2,188 on the null
hypothesis acceptance zone, it means that there is no correlation. The second
regression is also shows d equal to 2,123, it means that there is no autocorrelation.
4.3. Hypothesis Test
After the assumption test has been done, the next step is conducting a test on
hypothesis. A test on all of the hypothesis as have been explained in chapter 3 using
multiple regression and interacted multiple regression. The result of the first
regression is presented in the following table:
Table 9
The results of Discretionary Accruals Regression on Independent Variables
(Assets, Market Share, Intitution Ownership, and Leverage)
Expected Unstandardized
Sign
Coefficients
B
(Constant)
LNASET
PANGSA PASAR
KEPEMILIKAN
INSTITUSI
LEVERAGE
+
-
-.331
-2.078E-03
.558
.447
-
9.518E-02
T
Std.
Error
.321 -1.030
.022 -.093
.002 312.589
.328 1.361
.163
.585
p-value
.310
.927
.000
.181
.562
aDependent Variable: ABUDACC
b Weighted Least Squares Regression – Weighted by Unstandardized Residual
Table 9 shows that constant coefficient is 0.331 with the negative sign –0,002;
0,558; 0,447; and 0,09 in order for assets, market share, institution ownership, and
leverage variables. Regression result shows the acceptance of the first hypothesis that
market share has a positive correlation with profit management on 1 % significance
degree. It means that the bigger the marker share is, the bigger the possibility of
company conducting profit management. Positive accounting hypothesis stated that a
company which bear a bigger politics burden will tends to conduct earnings
management which decrease earnings. This research do not make the differences
whether company conducting earnings management which decreasing or increasing
earnings because the number of sample is insufficient if considering the problem.
Besides this research do not focus on positive accounting hypothesis but emphasize
more on market share which represent market power of the company.
Based on table 9, it is known that institution ownership and leverage variable
is insignificance on earnings management so that the second hypothesis and the third
one do not proved. These insignificance of the two variables may caused by the
181
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
financial institution are not professional so that they cannot detect whether there is
earnings management or not. Murphy and Van Nuys (in Wilopo and Sekar, 2002)
supporting this findings, they found that not all institutional ownership affect
positively on earnings management, but its depend on the kind of institution, such as
pension funds. This study also not considering the size of institution, while the size of
institution might be the caused of the insignificance of this variable because small
institution are less active in pressure the management activities than the bigger one.
Besides, the investor probably are short-term oriented investors. Thus, the investors
do not consider the prospect of company in the long-term. They do not also consider
the process of creating the numbers in the financial report because the only thing they
consider is the magnitude of current profits. The Free-rider also could lead to the
insignificance of this variable, because if the majority of ownership is held by one
institution so that the other investor are just free-rider.
The third hypothesis also do not supporting. May be because the creditor
monitor its financial performance of the debtor loosely. This loose monitoring will
motivate earnings management, in other words we can say that this monitoring
mechanism could not prevent company from earnings management. The pooled debt,
short-term debt and long-term debt, could lead to inappropriate proxy because this
mislead the function of external monitoring that do not held by shot-term debt. Assets
variable also found insignificance to earnings management.
The results of the second regression are as follows::
Table 10
The Results of Regression of Discretionary Accruals to Independent Variables:
Assets, Market Share, Institutional Ownership, Leverage, and Interaction
between Leverage with Market Share
Variables
Assets
Market share
Institutional ownership
Leverage
Market share*leverage
Expected Koefisien Standard
Sign
Regresi
Error
T
p-value
-0,002
0,018 -0,129 0,898
+
0,907
0,083 10,885 0,000
0,586
0,216 2,711 0,010
0,429
0,115 3,723 0,001
-0,795
0,190 -4,190 0,000
The second regression also weighted by its residual to overcome heteroscedasticity
problems. All coefficient of independent variables are now become -0,002; 0,907;
0,586; 0,429 and –0,795 in order for assets, market share, institutional ownership,
leverage and interaction between leverage with market share. All independent
variables, except assets, are significant at 1%. Market share has positive sign as
predicted and significant at 1%, it means that market share influence earnings
management of company.
Institutional ownership has positive sign not like the prediction and ignificat at
1%. It means that this study not supporting the statement that the institutional
ownership influence earnings management but in the different sign. These may be
because the size of institution that ignored, the investor orientation, and also the
existence of free-rider.
Leverage also in different sign but significant at 1%. This may be because the
monitor of creditor are weak, thus the use of debt as external funding do not affect
company earnings management. The fourth hypothesis that leverage interact with
182
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
market share in affect the earnings management supported and in the same direction
(as predicted). We can say that bigger market share company if accompanied by
sufficient external monitoring (proxied by high leverage) hence the possibility of
earnings management will decline.
5. CONCLUSION AND LIMITATION
5.1. Conclusion
This research is aim at testing the effect of market power (represented by
market share) and external control (represented by institution ownership and leverage)
on profit management. The first regression results only support the first hypothesis
that market share variable which reflecting market share power on influencing profit
management are in the positive direction on the degree of significancy 1%. The
second and the third hypothesis did not supported.
The results of the second regression support upon the fourth hypothesis that
market power in influencing profit management interacts with leverage in the positive
direction. It means that the magnitude of earnings management of company with
sufficiently large market share will decline when there are an appropriate control from
external parties, that is creditor. This condition indicate that the control from creditor
on company can decrease profit management even when company has a big market
share.
5.2. Research Constraint
There are several research limitation that should be considered when we will make an
inferences about this study. They are:
1. The number of observation are only 81 which is came from 27 manufacturer
in 1998-2000 period. This is done because this research needs to identify
company market share based on the group of parent company. In addition, the
use of industry sales from BPS has made the author to constrain the research
period because there are any differences in the industrial classification before
1998 and after ward. Therefore the next researcher is expected to expand the
test by adding the number of observation, such as including non-manufacture
sector.
2. The interaction between market share and leverage might have made the
emergence of multicolinearity problem that the readers should be careful in
interpreting the result of this research. The problem is that with the increase of
correlation degree between variables, OLS predictor can still be acquired but
the standard deviation tends to grow. Therefore the probability of the type II
error will increase, the predictions of OLS parameter and its standard
deviation will be very sensitive to the change in the sample data even the
smallest one, if the multicolinearity is high, maybe R2 can be high but the
prediction of regression coefficient which is significant in statistic term is only
a few.
3. Institution ownership variable is not supporting the hypothesis because
institution ownership include small institution or incompetent in the field of
capital market. The next researcher is expected to be able to sort the size of
institution so that the effect can be seen in the big or competent institution
only.
183
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
4. Leverage is also not supporting the hypothesis because it include short term
account payable which is not reflecting external control. The next research is
expected to be able to overcome this problem, for example by expanding the
sample .
References
Cahan, Steven F. 1992. The effect of Antitrust Investigations on Discretionary
Accruals: A Refined Test of The Political-Cost Hypothesis. The Accounting
Review Vol.67, No. 1.
DeAngelo, L., 1988, Managerial competition, information costs and corporate
governance: the use of accounting performance measures in proxy contests,
Journal of Accounting and Economics 10.)
Erickson, Merle dan Shiing-wu Wang, 1999, Earnings Management by Acquiring
Firms in Stock for Stock Mergers, Journal of Accounting and Economics 27.
Jain, Bharat A. dan Omesh Kini, 1994, The post-issue operating performance initial
public offerings, Journal of Finance 49 (5).
Jones, Jennifer J., 1991, Earnings management during import relief investigation,
Journal of Accounting Research 29.
Kasznik, Ron, 1999, On the association between voluntary disclosure and earnings
management, journal of accounting research 37.
Key, Kimberly Galligan, 1997, Political incentives for earnings management in the
cable television industry, Journal of Accounting and Economics 23.
Keating, A Scott dan Jerold L. Zimmerman, 2000, Depreciation-policy changes: tax,
earnings management, and investment opportunity incentives, Journal of
Accounting and Economics 28.
Koch, Timothy W. dan Larry D. Wall, 2000, The use of accruals to manage reported
earnings: theory and evidence.
Loughran, Tim dan Jay R. Ritter, 1997, The Operating Performance of Firms
Conducting Seasoned Equity Offerings, The Journal of Finance, vol. 52, no.5.
McNichols, M dan G.P. Wilson, 1988, Evidence of earnings management from the
provision for bad debts, Journal Accounting Research (supl.)
Michelson, S.E., J.J. Wagner dan C.W. Wotton, 1995, A market based analysis of
income smoothing, Journal of Business, Finance, and Accounting (des).
Penman, Stephen H. dan Xiao-Jun Zhang. 2002. Accounting Conservatism, the
Quality of Earnings, and Stock Returns. The Accounting Review Vol. 77 No. 2.
Perry, Susan E. dan Thomas H. Williams, 1994, Earnings management preceeding
management buyout offers, Journal of Accounting and Economics 18.
184
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Saiful dan Jogiyanto HM, 2002, Hubungan manajemen laba dengan kinerja
operasi dan retur saham di sekitar IPO, Simposium Nasional Akuntnasi 5.
Salno, Hanna Meilani dan Zaki Baridwan, 2000, Analisis perataan penghasilan,
factor-faktor yang mempengaruhi dan kaitannya dengan kinerja saham
perusahaan curric di Indonesia, Jurnal Riset Akuntansi Indonesia 3(1).
Samlawi dan Bambang Sudibyo, 2000, Analisis perataan laba didasarkan pada kinerja
perusahaan di pasar, Simposium Nasional Akuntansi 3.
Scott, William R., 1997, Fianacial Accounting Theory, Prentice Hall, Inc.
Siregar, Sylvia, 2002, Pengaruh pertumbuhan utang dan asimetri informasi terhadap
penilaian pasar atas discretionary accruals, Simposium Nasional Akuntnasi 5.
Shivakumar, Laksmanan, 2000, Do firms mislead investor by overstating earnings
before seasoned equity offerings, Journal of Accounting and Economics (29).
Teoh, Siew Hong,Ivo Welch dan T.J.Wong, 1998, Earnings management and the
post-issue-performance of seasoned equity offerings, Journal of Financial
Economics (okt).
Teoh, Siew Hong, T.J. Wong dan Rao, 1998, Earnings management and the long term
market performance of initial public offerings, Journal of Finance (des).
Utama, Siddharta. 2000. Teori dan Riset Akuntansi Positif: Suatu Tinjauan Literatur.
Jurnal Ekonomi dan Bisnis Indonesia. Vol. 15 No. 1.
Watts, Ross L. dan Jerold L. Zimmerman. 1986. Positive Accounting Theory.
Prentice/Hall International, Inc.
Wolks, Harry I., Michael G. Tearney, dan James L. Dodd, 2001, Accounting Theory:
A Conceptual and Istitutional Approach, South-Western College Publishing.
Zimmerman, J.L., 1983, Taxes and firm size, Journal of Accounting and Economics
185