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 INDONESIA1

Novrys Suhardiantoa, Iman Harymawan

b

a Corresponding author, Airlangga University, Indonesia

Email: [email protected] 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 Akuntansi 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.


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) between-

variable 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) between-

variable 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 data3.

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 R2 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.

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(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


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-linear-

unidirectional), 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


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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APPENDICES

Table 1. EM Papers in National Accounting Symposium

Period EM MBAR Financial Acc. Total Papers

Papers ∑ % ∑ % ∑ %

1999 2 9 22% 18 11% 34 6%

2000 2 15 13% 28 7% 41 5%

2001 2 18 11% 30 7% 52 4%

2002 2 10 20% 23 9% 53 4%

2003 8 18 44% 41 20% 91 9%

2004 11 18 61% 42 26% 76 14%

2005 7 9 78% 37 19% 69 10%

2006 4 12 33% 39 10% 84 5%

2007 6 3 200% 20 30% 80 8%

2008 6 9 67% 32 19% 78 8%

2009 9 9 100% 25 36% 64 14%

Total 59 130 45% 335 18% 722 8% Sources: SNA Proceedings 1999 – 2009

Table 2. Between-Variable Relationship Models

No Simple Model Based on X1

Condition

Based on

Linearity

Based on Independent

Variable Interaction

1. Additive Unidirectional Linier Ordinal

2. Intervening Bidirectional Curvilinear Dis-ordinal

3. Independent variable

interaction − − −

4. Moderating variable

interaction − − −

5. Cyclical recursive − − − 6. Reciprocal non-recursive − − −

Table 3. Selected Journals List

Panel A

No Name ISSN Institution

1 Jurnal Akuntansi dan Auditing Indonesia

(JAAI).

1410-2420 Indonesia Islamic University

2 Jurnal Akuntansi (JA) 1410-3591 Tarumanegara University

3 Jurnal Riset Akuntansi Indonesia (JRAI) 1410-6817 Indonesian Institute of Accountant

and Gadjah Mada University

4 Akuntabilitas (AK) 1412-0240 Pancasila University

5 Jurnal Akuntansi dan Keuangan

Indonesia (JAKI)

1829-8494 University of Indonesia


Panel B

Year JRAI JAKI JA AK JAAI

2000 Vol. 3 No. 1-2 � NA � Vol.4 No.1-2

2001 Vol. 4 No.1-3 � NA Vol.1 No.1-2 Vol.5 No.1-2

2002 Vol. 5 No.1-3 � Vol.6 No.1-2 Vol.2 No.1-2 Vol.6 No.1-2

2003 Vol. 6 No.1-3 � NA Vol.3 No.1-2 Vol.7 No.1-2

2004 Vol. 7 No.1-3 Vol.1 No.1-2 Vol.8 No.1-2 Vol.4 No.1-2 Vol.8 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 JRAI JAKI JA AK JAAI Total Panel A EM 21 8 6 6 5 46 Financial Accounting (incl. EM) 108 37 53 51 47 296 Other theme 72 31 112 73 69 357 Total 180 68 165 124 116 653 Panel B EM Market Share 11,7% 11,8% 3,6% 4,8% 4,3% 7,0% EM Journal Share 45,7% 17,4% 13,0% 13,0% 10,9% 100%

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 Frequency

JRAI JAKI JA AK JAAI Total Panel A: Research Model Additive (Add) 13 7 4 5 3 32 Intervening Variable (IV) − − − − − 0

Independent Variable Interaction (IVI) − − − − − 0

Moderator Variable Interaction (MVI) 3 1 − − − 4

Cyclical Recursive − − − − − 0

Reciprocal Non-recursive − − − − − 0

Distributed-Lag − − − − − 0

Autoregressive − − − − − 0 Construct-Variable Relationship 10 3 3 3 4 23

Panel B: Classification of Model Unidirectional 16 8 4 5 3 36 Bidirectional − − − − − 0 Linear 16 8 4 5 3 36 Curvilinear (Nonlinear) − − − − − 0 Ordinal (monotonic) 3 1 − − − 4 Dis-ordinal (non-monotonic) − − − − − 0 Construct-Variable Relationship 10 3 3 3 4 23

Panel C: Research Method Association study 16 8 4 5 3 36 Event Study 2 2 1 1 − 6 Difference study 8 1 2 2 4 17


Table 6. Earnings Management Measures

No Measures Earnings

Management Income

Smoothing 1 Working capital accrual scaled by sales 1

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

2000) 1

3 DA and NDA Model Rangan (1998) 1

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

(1995), and Dechow et al. (2003) Model 1

5 Instrumental Variable Model (Kang and Sivaramakrishnan

1995) 1

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

(2005) 1

7 Loan Losses Provision 1

8 The significant difference between operating cash flow and its

mean 1

9 Modified Aharony et al. (1993) Model by DeAngelo (1986) 1

10 Modified Healy (1985) and Jones (1991) Models to capture

special features of bank 1

11 Jones (1991) Model 3

12 Modified Jones (1991) Model in Dechow et al. (1995) 10 13 Modified Jones (1991) Model in Dechow et al. (1995)

and Teoh et al. (1998) 1

14 Modified Jones (1991) Model in Kasznik (1999) 3 15 Sankar (1994) Model in Chan et al. (2001) 1 16 Modified Healy and Jones (1991) model in Dechow et al.

(1995) 1

17 Accounting Method Choice 1 18 Scaled Earning Changes (Phillip et al. (2003), Burgstahler et al.

(2002), Yulianti (2004)) 1

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

(1985) and DeAngelo (1986) 1

20 Not specified 2 21 Eckel Index (1981) 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:

2. Intervening model, for example:

3. Interaction Model,

a. Ordinal (monotonic) model with general sign:

i. IV2 or MV strengthen positive relationship of IV1 – DV

IV1

IV2

DV

IV DV

MV

ii. IV2 or MV strengthen negative relationship of IV1 – DV

b. Ordinal Model with mixed-sign:

i. IV2 or MV negatively influence the positive relationship of IV1 – DV

ii. IV2 or MV positively influence the negative relationship IV1 – DV

4. Nonlinear unidirectional relationship:

a. U relation:

b. Inverted U relation:

Construct-Variable relationship

1. Construct: informative event, sample divider factor (immeasurable)

2. Variable (measurable)

3. The relationship between construct and variable

IV DV Not Specific:

IV DV Negative:

IV DV Not Related

IV DV Positive:

IV ITV DV

IV DV

IV DV

X

Y

Positive: Y X

Negative: Y X

Unspecific: Y X

Not related: Y X


Appendix 2. Earnings Management and Market Reaction

VolumeEarning

surprise

Own

Sign.

Depreciation

Method

Inventory

Method

Underp

ricingIPO

Unit of Analysis: Organization

Underwriter

Rep.AUDTR

8

8

8

8 8

STDRET

SIZE

INDBO

IOwn

LEV

BIDASK

CAR

21

212129 21

21

21

42

21

29

DA

29,

42

42

21

21

CFO

AUDCO

M

BMR

EPR

21

21

21

21

21

21

Industry

29

21

NDA21

21

21 21

MgOwn

29

Return

3232

32

32

32

ROA 32

CR

AUDTR

16

16

1616

Income

Smoothing 25,1

6

2

2525

25

1

21

44

Unit of Analysis: Beyond Organization

DCA

DLA

NDCA

NDLA

LogAGE

IPO

IR

OFF

LogMV

D_BCP

D_ACP

CARt+1th

CARt+2th

CARt+3th

BHRt+1th

BHRt+2th

BHRt+3th

∆ROA

36

3636 36

3636

3636

36

3636

36

12

12 12

36

3636

363636

363636

3636

36

36

36 36

36

3636

3636

36

3636

36

3636

36

IR

OFF

LogMV

D_BCP

D_ACP

36

3636 36

3636

36

36

36

3636

363636

363636

36

12

21


Unit of Analysis: Subunit of organization

−

Constructs:

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

five)

2. Earning surprise: Sample dividing factor, based on the difference between expected

earnings with actual earnings (positive and negative)

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

Eckel (1981) index.

4. IPO: An event, Initial public offering.

Dependent variables:

1. BHRt+n: Buy and hold return after IPO

2. BIDASK: Bid-ask spread, the difference of maximum price that buyer asks and

minimum price that seller offer.

3. CAR: Cumulative abnormal return

4. CARt+n: Cumulative abnormal return after IPO

5. CR: 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: Dummy the existence of audit committee

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

4. BMR: Book-to-market ratio

5. CFO: Operating cash flow

6. D_BCP: Dummy IPO after Indonesian monetary crisis

7. D_ACP: Dummy IPO before Indonesian monetary crisis

8. DA: Discretionary accrual

9. DCA: Current discretionary accrual

10. DLA: Long-term discretionary accrual

11. EPR: Earning-to-price ratio

12. INDBO: Independent BOD proportion

13. Industry: Dummy for industry

14. IOwn: Institutional ownership

15. IR: Initial return

16. LEV: Leverage

17. LogAGE: Natural logarithm of companies’ age

18. LogMV: Natural logarithmcompanies’ market value.

19. Depreciation

Method:

Fixed asset depreciation method, measured using dummy between

conservative method and others.


20. Inventory

Method:

Inventory valuation method, measured using dummy between

conservative method and others.

21. MgOwn: Managerial ownership

22. NDA: Non-discretionary accrual

23. NDCA: Current non-discretionary accrual

24. NDLA: Long-term non-discretionary accrual

25. OFF: Offer price in primary market

26. Underwriter

Rep.:

Underwriter reputation, usually measured using Johnson-Miller model.

27. ROA: Return on asset

28. Own Sign.: Ownership Signal measured using natural logarithm of percentage of

share retained by company.

29. SIZE: Firm size

30. STDRET: Standard deviation ofdaily stock returnduring the test period

31. VOLUME Stock trading volume

Moderating variables:

1. DA: Discretionary behavior

Sources:

Code Authors Code Author

1 Assih and Gudono (2000) 25 Juniar, Meiden, and Sitinjak (2006)

2 Salno and Baridwan (2000) 29 Sukartha (2007)

6 Prasetio, Astuti, and Wirawan

(2002)

32 Widyastuti (2007)

8 Ali and Hartono (2003) 36 Rahman and Hutagaol (2008)

12 Saiful (2004) 42 Joni and Hartono (2009)

16 Ardiati (2005) 44 Oktorina and Hutagaol (2009)

21 Siregar and Bachtiar (2005)


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 Corporate Social Responsibility Disclosure

3 DA Discretionary accrual

4 Value Firm value

5 LLP 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 Bonus schememeasured by dummy(accounting based or not)

5 SYB Dummy forSyariah bankorSyariah unit link

6 Cap.AR Capital Adequacy Ratio

7 DTA Deferred tax asset

8 CFO Operating cash flow

9 CFVar The varianceof operating cash flow data

10 CGI Corporate Governance Index

11 CHLOAN The changes ofbanking loanscaled by beginning balance of loan

12 CHNPL The changes of nonperforming loan

13 Cscore Accounting conservatism score

14 DA discretionary accrual

15 DCP Dummy Cost politic

16 DEBT Interest bearing debt to total asset ratio

17 DFAM Dummy forfamily ownership(high or low)

18 GRWTH Growth

19 HFLG Dummy for high cash flow and low growth

20 IOS Investment Opportunity Set

21 IOwn Institutional ownership

22 AUDCOM Audit committee

23 INDBO Independent BOD proportion

24 LDR Loan to Deposit Ratio

25 LEV Leverage

26 LOWMON Dummy for corporate monitoring (low or high)

27 MgOwn Managerial ownership

28 MTB Market To Book value

29 NDA Non Discretional Accrual

30 NPL Nonperforming loan

31 NPM Net Profit Margin

32 RGLASS Realized gain or loss from held for sale securities


33 ROA Return on Asset Ratio

34 RORA return on Risk Asset

35 SDRET Daily Return

36 SIZE Firm size

37 TAS Total Asset

38 BOD Board of director size

Independent variables – Unit of analysis: beyond organization

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

2 Quotes Average bid ask spread in closing date

3 VOLUME Stock trading volume

Moderating variables:

1 DEBT Debt level


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


Sources:

Code Authors Code Authors

5 Mayangsari and Wilopo (2002) 32 Widyastuti (2007)

18 Boediono (2005) 33 Bangun and Vincent (2008)

20 Permatasari (2005) 37 Sugiartha (2008)

21 Siregar and Bachtiar (2005) 38 Tresnaningsih (2008)

22 Wasilah (2005)

40 Handajani, Sutrisno, and Chandrarin

(2009)

23 Yulianti (2005) 41 Herusetya (2009)

26 Siregar and Utama (2006) 43 Nazir and Herwiyanti (2009)

29 Sukartha (2007) 45 Tobing and Ika (2009)

30 Suparno and Qomariyah (2007) 46 Zahara and Siregar (2009)

31 Suranggane (2007)


Appendix 4. Income Smoothing Detectors



1 ERC Earnings response coefficient,the slope of regression function

ofcumulative abnormal return(CAR) and Unexpected Earnings (UE).

2 FERC Future ERC, coefficient regression of CARt+1andUEt

3 CWC Cost of working capital

4 IS Dummy for Income Smoothing.

Independent variables – Unit of analysis: organization

1 OpLev Operating Leverage


3 NPS Market value of share

4 OPM Operating Profit Margin


6 SIZE Firm size

7 Beta Beta of stock (risk)

8 ErnPrd Earnings predictability

9 ErnPrt Earnings persistence

10 IOwn Institutional ownership

11 BOD Board of director size


13 DEBT Ratio interest bearing Debt to total asset

14 LEV Leverage

15 St.Invest Investor Status (dummy)

16 Profit Corporate profits

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

2 Industry Dummy industry

3 DWLS Dummy for Winner/Loser Stock

Sources:


2 Salno and Baridwan (2002) 24 Budhijono (2006)

6 Prasetio, Astuti, and Wiryawan (2002) 27 Utami (2006)

11 Bonny, Meiden, and Sitinjak (2004) 34 Dewi and Carina (2008)

15 Yusuf and Soraya (2004) 35 Kustono (2008)


Appendix 5. Construct-Variable Relationshipin Income Smoothing Research


Constructs:

1 AUDTR Sample dividing factor based on audit quality (big-five and

nonbig-five)

2 EM (Operating

method/Accounting)

Sample dividing factor based on earnings management case

given: earnings management through operating or

accounting method

3 EM (EOQ/EOY) Sample dividing factor based on earnings management case

given: earnings management in end of quarter or end of year

4 EM (company /individual

interest)


given: earnings management for company interest or

individual interest.

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

given: earnings management considered material or not.

6 EM (income

increasing/decreasing)


given: income increasing or decreasing

7 EM (GAAP/not) Sample dividing factor based on earnings management case

given: use GAAP or not

8 Income Smoothing Sample dividing factor: Smoother and Not-smoother

9 IPO An event: IPO

10 AUDCOM Sample dividing factor: the existence of audit committee

11 Publication delay Sample dividing factor: delay or not

12 Perform (+/-) Sample dividing factor: positive or negative income

13 Merger and acquisition An event: Merger and acquisition

14 SIZE Sample dividing factor based on firm size: small or large

15 TAX Sample dividing factorbasedontax rate reform (1994)


1 CFO Operating cash flow


3 DTE Deferred tax Expense

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

5 OE Operating Earnings


7 TAC Total accrual

8 Value Value of firm

Independent variables – unit of analysis: organization

1 Beta Beta of stock (risk)

2 DCA Current discretionary accrual

3 DEBT Interest bearing debt to total asset ratio

4 DLA Long-term discretionary accrual

5 EAc Expected Accrual

6 EthichJudgment Ethical Judgment

7 GRWTH Growth

8 IOS Investment Opportunity Set


9 LEV Leverage


11 OpLev Operating Leverage

12 Profit Corporate profits

13 RAMCFO Real activity manipulation throughOperating Cash Flow

14 RAMCOGS Real activity manipulationthrough cost of goods sold

15 SIZE Firm size

16 TCF Total cash flow

Independent variables – unit of analysis: beyond organization

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

2 Industry Dummy industry

Sources


2 Salno and Baridwan (2000) 17 Assih, Hastuti, and Parawiyati (2005)

3 Gumanti (2001) 20 Permatasari (2005)

4 Surifah (2001) 23 Yulianti (2005)

6 Prasetio and Wirawan

(2002)

28 Bangun and Rita (2007)

7 Setyowati (2002) 34 Dewi and Carina (2008)

9 Kuntanto (2003) 36 Rahman and Hutagaol (2008)

10 Kusuma andSari (2003) 37 Sugiartha (2008)

12 Saiful (2004) 39 Yudhanti and Rachmawati (2008)

13

Saputra and Setiawati

(2004)

41 Herusetya (2009)

14 Sholihin and Naim (2004) 42 Joni and Hartono (2009)

15 Yusuf and Soraya (2004)

Appendix 6. Sample List

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):

235-249.

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

Pengumuman Informasi Laba Perusahaan yang Terdaftar di BEJ. Jurnal Riset

Akuntansi Indonesia 3 (1): 35-53.

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-

120.

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

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

Handajani, L., Sutrisno, and G. Chandrarin. 2009. The Effect of Earnings Management and

Corporate Governance Mechanism on Corporate Social Responsibility Disclosure: An

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


Herusetya, A. 2009.Efektifitas Pelaksanaan Corporate Governance dan Audit Eksternal-

Auditor dengan Spesialisasi Industry dalam Menghambat Manajemen Laba. Jurnal

Akuntansi dan Auditing Indonesia 13 (2): 167-188.

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

Riset Akuntansi Indonesia 5 (3): 291-310.

Nazir, F., and E. Herwiyanti. 2009. Pengaruh Mekanisme Corporate Governance, Investment

Opportunity Set (IOS), dan Kualitas Auditor terhadap Earnings Management danNilai

Perusahaan. Jurnal Akuntansi 13 (3): 309-319.


Oktorina, M., and Y. Hutagaol. 2009. Analisis Arus Kas Kegiatan Operasi dalam Mendeteksi

Manipulasi Aktivitas Riil dan Dampaknya terhadap Kinerja Pasar. Jurnal Riset


Permatasari, I. 2005. Manajemen Laba dan Status Keterlambatan Perusahaan dalam

Menyampaikan Laporan KeuanganTahunan. Jurnal Akuntansi dan Keuangan

Indonesia 2 (2): 49-72.

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

Perusahaan Publik di Indonesia.Jurnal Akuntansi dan Auditing Indonesia 6 (2): 45-64.

R.I.Tobing, W., and N. Ika. 2009. Perataan Laba Melalui Penyisihan Penghapusan Aktiva

Produktif (PPAP) Sektor Perbankan. Akuntabilitas 9 (1): 50-62.

Rahman, A., and Y. Hutagaol. 2008. Manajemen Laba Melalui Akrual dan Aktual Real pada

Penawaran Perdana dan Hubungannya dengan Kinerja Jangka Panjang (Studi Empiris

pada BEJ). Jurnal Akuntansi dan Keuangan Indonesia 5 (1): 1-29.

Rahmawati, Y. Suparno, and N. Qomariyah. 2007. Pengaruh Asimetri Informasi terhadap

Praktik Manajemen Laba pada Perusahaan Perbankan Publik yang Terdaftar di BEJ.


Saiful. 2004. Hubungan Manajemen Laba (Earnings Management) dengan Kinerja Operasi

dan Return Saham di Sekitar IPO. Jurnal Riset Akuntansi Indonesia 7 (3): 316-332.

Salno, H. M., and Z. Baridwan. 2000. Analisis Perataan Penghasilan (Income Smoothing):

Faktor-Faktor yang Mempengaruhi dan Kaitannya dengan Kinerja Saham Perusahaan

Publik di Indonesia. Jurnal Riset Akuntansi Indonesia 3 (1): 17-34.

Saputro, J. A., and L. Setiawati. 2004. Kesempatan Bertumbuh dan ManajemenLaba: Uji

Hipotesis Political Cost. Jurnal Riset Akuntansi Indonesia 7 (2): 251-282.

Setyowati, L. 2002. Rekayasa Akrual untuk Meminimalkan Pajak. Jurnal Riset Akuntansi

Indonesia 5 (3): 325-340.

Sholihin, M., and A. Na'im.2004. Ethical Judgment Manajer terhadap Praktik Earnings

Management. Jurnal Riset Akuntansi Indonesia 7 (2): 179-191.

Siregar, S. V., and Y. S. Bachtiar. 2005. Corporate Governace, Information Asymmetry, and

Earnings Management. Jurnal Akuntansi dan Keuangan Indonesia 2 (1): 77-106.

Siregar, S. V., and S. Utama. 2006. Pengaruh Struktur Kepemilikan, Ukuran Perusahaan, dan

Praktek Corporate Governance terhadapPengelolaan Laba (Earnings Management).


Sugiartha, I. P. 2008. Auditor Eksternal, Komite Audit, dan ManajemenLaba. Jurnal Riset


Sukartha, M. 2007. Pengaruh Manajemen Laba, Kepemilikan Manajerial, dan Ukuran

Perusahaan pada Kesejahteraan Pemegang Saham Perusahaan Target Akuisisi. Jurnal

Riset Akuntansi Indonesia 10 (3): 243-267.

Suranggane, Z. 2007. Analisis Aktiva Pajak Tangguhan dan Akrual sebagai Prediktor

Manajemen Laba: Kajian Empiris pada Perusahaan Manufaktur yang Terdaftar di

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