14
parties Sanjaya and Young, 2012. This condition will result in the magnitude of the opportunity manager, to do things that are beneficial to their interests Palguna
Putra, 2013. There are two major types of information asymmetry Scott, 2009. First
is adverse selection. Adverse selection is a type of information asymmetry whereby one or more parties to a business transaction, or potential transaction,
have an information advantage over other parties. The second is moral hazard. Moral hazard is a type of information asymmetry whereby one or more parties to
a business transaction, or potential transaction, can observe their actions in fulfillment of the transaction but other parties cannot.
2.5 Earnings Quality
Earnings quality is an indicator of the quality of financial information. High quality financial information is derived from the high quality of financial
reporting Surifah, 2010. Earnings quality refers to the ability of reported earnings to reflect the companys true earnings, as well as the usefulness of
reported earnings to predict future earnings. Earnings quality also refers to the stability, persistence and lack of variability in reported earnings. The evaluation of
earnings quality is often difficult, because companies highlight a variety of earnings figures: revenues, operating earnings, net income, and pro forma
earnings Bellovary et al, 2005. Barragato and Markelevick 2008, states that earnings quality is of interest to users of financial statements because earnings are
utilized in making contracting and investment decisions. Earnings quality means different things to different users of financial statements.
There are two majo jo
r r
t types of informa
ti ti
on on
asymmetry Scott, 2009. First is adverse selecti
ti o
on. Adverse selection is a type of f
i i
nf n
ormation asymmetry whereby on
n e
e or more parties to to
a a
b b
us us
in in
es es
s s
tr r
an an
sa s
ction, or pote tent
n ial transaction,
have a an inform
m ation ad
ad va
vantage over other parties s
. Th
The seco co
nd is mo moral hazard.
M Moral haza
zard rd i
i s a ty
y pe
pe o
f information
as ymmetry
wh her
er eby one
e or
or m m
ore pa a
rt r
ies to a bu
u si
sine ness
s tra
a n
ns action
, or potential
t ransaction, ca
n ob
se e
rv rv
e th h
ei e
r r
a actions
s in fu
u lf
lfi illment
t of the transac
ti on
but other p
arties can no
t.
2. 2.
5 5
Ear rn
ings Q
ua lity
Earnings quali ty
is an
i nd
ic ator of
th e
qual it
y of financial i
informati tion
n .
Hi High
gh q
q uality fin
anci al
i nf
orma ti
on is derive d fr
om t
he h
igh quality of
f f
i inanci
c al
al reporting Sur
if if
h ah, 2010
. Ea
Ea rn
rnin in
gs q q
ua uali
li ty
ty r f
efers to
t t
h he ability of repo
o rt
rt ed
ed ea
ea rn
rn ings to reflect the companys true earnings, as well as the useful
ul ne
ne ss
ss o
of re
re po
port rt
ed ed
e e
ar ar
ni ni
ng ng
s s
to to
p p
re re
di di
ct ct
f f
ut ut
ur ur
e e
earn n
in in
gs gs
. Ea
Ea rn
rn in
in gs
gs q
q ua
ua li
li ty
ty a
a ls
ls o
o re refe
fe rs
rs t
to o the
stab abil
l it
it y,
y, p p
er er
si si
st sten
ence a
a nd
nd lack of of varia
bi bility i
i n
n reported ed
e e
arni ning
ng s.
s. T
T he
he e e
v valu
lu at
ion of earnings quality is often difficu
ult, becau use companies highlight a variety of
earnings figures: revenues, op e
erating ea r
rnings, net income, and pro forma earnings Bellovary et al, 2005.
Ba B
rrag g
a ato and Markelevick 2008, states that
earnings quality is of interest to users s
o of financial statements because earnings are
15
So far, no definitive measure or appropriate to measure the quality of earnings of a financial statement, only an approach that is being used to proxy the
quality of earnings. Therefore, earnings quality measure used by the researchers could be different with other researchers Surifah, 2010. This research will use
earnings management through discretionary accruals as the proxy of earnings quality.
2.6 Positive Accounting Theory
