Abnormal Discretionary Expenses Earnings Management
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EMPIRICAL RESULTS AND DISCUSSIONS
This research aims to analyze the role of corporate governance mechanisms in reducing earnings management with various approaches. The initial step analysis is to calculate the average
value of each proxy of earnings management in each sample group. The mean values of earnings management with various models can be seen in the following table.
Table 1 Earnings Management Value.
No. Model
Jakarta Islamic Index LQ-45 Index
1. LTDA
0,233685 0,604901
2. STDA
-0,589799 -0,404240
3. ACCRUAL
-0,356114 0,200661
4. Abn-CFO
-0,012055 0,005118
5. Abn-PROD
0,006644 -0,002420
6. Abn-DSCR
-0,004292 0,002336
7. REAL
-0,009703 0,005033
8. INTEGRATED
-0,075419 0,040803
Sources: Secondary data, processed. The table 1 shows that during the period 2004-2010, the manufacturing companies listed
the in JII index had a negative mean value of accrual earnings management, real earnings management, and integrated earnings management. It means companies tend to perform with the
pattern of decrease profit numbers. While the company is listed in the LQ45 had a positive mean value of earnings management. It means companies tend to perform earnings management with
the pattern to increase profit numbers.
By using an accrual earnings management approach, a company incorporated in the JII index have the higher value in short term approach -0,589799 rather than in the long term
approach 0,233685. Most companies tend to decrease earnings numbers. This pattern gives an indication, that the earnings numbers performed with the selection of accounting methods for
recording and recognition inventory, accounts receivable, current assets, accounts payable and taxes payable, While the companies incorporated in LQ-45 index have the higher value in long
term approach 0,604901 rather than a short term earnings numbers -0,404240. This strategy is to raise the value of fixed assets by selecting the depreciation method. Moreover, it can also
conducted by recognizing the long-term debt into current liabilities. However, the companies in the index JII and LQ-45 used the same approach to increase earnings numbers long term
approach and to reduce the earnings numbers short term approach.
With the real earnings management approach, the numbers of earnings management is higher in companies which incorporated in JII index -0,009703 compared with in the LQ-45
index 0,005033. The patterns tend to reduce earnings number conducted by discretionary costs DISC with raising the advertising and research costs. Based on the data analysis, the value of
the highest real earnings management proxy is mostly done by manipulating cash flow Abn- CFO because it has the highest mean value compared to other proxies.
Furthermore, through an integrated earnings management approach AGGR, the pattern of earnings management in the index JII is decreasing earnings numbers. While in the LQ-45
index companies tend to use pattern increasing earnings numbers. The integrated measurement of earnings management clearly gives more accurate results. The results of multiple regression
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analysis related to describe the implementation of corporate governance mechanisms on earnings management in LQ 45 and JII can be described by the following table.
Table 2. The result of multiple regression analysis
VARIABLE ACCRUAL
STDA LTDA
REAL INTEGRATED
CONSTANT 0,055
-0,479 0,534 -0,028 -0,006
MGROWN 0,209
-0,065 0,274
0,100 0,073
INSTOWN -0,083
-0,140 0,057
0,052 -0,012
BOARSIZE 0,040
0,001 0,039
0,001 0,009
BOARDINDP -1,416
-0,062 -1,354
-0,088 -0,282
AUDITCOM -0,301
-0,028 -0,273
0,016 -0,055
TYPE IND 0,535
0,180 0,356
0,017 0,112
F test 5,647
29,538 4,016
0,012 5,442
R square 0,114
0,402 0,084
0,513 0,110
Sources: Secondary data, processed. significant with 1
significant with 5 significant with 10
1.
Hyphotesis 1
Managerial ownership describes the large number of shares owned by management of the total shares outstanding. In terms of economic value, it has incentives to align the interests of
managers with the company. The result of hypothesis testing for managerial ownership variable indicates that stock ownership by management has no effect on earnings management with
various models. This suggests that managerial ownership had no effect on earnings management with accruals, real and integrated approach in the LQ-45 index and the JII index.
The result is in contrast with some studies that high managerial ownership will reduce earnings management practices Gabrielsen, et al. 2002; Midiastuty and Masud Mahfoedz
2003. The reason for this is in the study, the percentage of managerial ownership is very low 10. Thus, these results have not addressed that managerial ownership reduce the misalignment
of interests between management by the owners or shareholders.
2. Hyphotesis 2
Hypothesis testing is intended to test the impact of institutional ownership on earnings management. The analysis shows that institutional ownership has no effect on the earnings
management, except in the short term discretionary accrual approach STDA. In STDA approach has ß value of -0,140 with a probability value level of 0,001 0,05. It means institutional
ownership negatively affect on earnings management with STDA models.
These results support the research of Jensen and Meckling 1976, Warfield et.al., 1995, Dhaliwal et.al., 1982, Morck et al., 1988, Pranata and Masud 2003 and Cornertt et.al., 2006
which found a significant negative effect institutional ownership on earnings management. These results are also consistent with reason that institutional owners are more focused on current
earnings Porter, 1992; Pranata and Masud 2003. As a result, managers are forced to take earning management in short-term period or focused on current asset.
The result also supported by Cornett et.al., 2006, if institutional ownership will make the managers feel bound to meet profit targets of the investors, so they will tend to engage in
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earnings manipulation. The monitoring by institutional investors may encourage managers to focus more attention on the companies performance and can reduce their behavior for its own
interest.
3. Hyphotesis 3
Based on the analysis, board size has no effect on earnings management significantly with various models. It means the amount of the companys board size can not reduce the
earnings management. These results contrast with the research Xie, Davidson, Dadalt 2003, Yu 2006, Zhou and Chen 2004, and Chtourou, Bedard and Courteau 2001 which showed that a
larger board size will reduce the earnings management. This variable is not significant because the placement or additional board members is made on the formal regulation not for monitoring
enterprises. While the majority shareholder controllers or founders still plays an important role, so the performance of the board is useful Gideon, 2005 . In addition, the size of the board size is
not a key determinant of the effectiveness supervision of management on the company. However, the effectiveness of the control mechanism depends on values, norms and beliefs are accepted
within an organization Jennings 2004a; 2004b; 2005a; Oliver, 2004. 4. Hyphotesis 4
The analysis showed that the proportion of independent board significant effect on earnings management with various earnings management models except for STDA models and
real earnings management model. It means, the more proportion of independent board within the company reduce the earnings management. Thus, the proportion of independent board
BOARDINP negatively affect earnings management practices with an integrated approach This study supports research Chashmi and Roodposhti 2011 about the impact of corporate
governance mechanisms on earnings management. Research findings showed board independence is negatively related to earnings management. This results also supported by
Dechow et al. 1995, Chtourou et al. 2001, Midiastuty and Mahfoedz 2003, and Xie et al. 2003. The results explain that companies with the compositions by commissioners who come
from outside the company may affect the earnings management. Through its role in oversight, the composition of the board of commissioners from outside the company may affect the
management in preparing the financial statements in order to obtain a qualified profit.