Bond Business School Bond university,

-=ffig

BOND
UNIVERSIry

Asian-Pacific conference on
rnternational Accounting rssues

27th

PROCEEDING

November l-4r Zlls
Gold Coasto Australia
Co-hosted by
Bond Business School
Bond university, Gord coast, Australia
and

Craig School of Business
california state university, Fresno, fJ.s.A.

zTrH

ASIAN-pACIFIC coNFEREf{cE

ON INTERNATIONAL ACCOUI\TING ISSUES
CONFERENCE ADVISORS
Mark FIirst' Dean, Bo'd Business School, Bond university,
Austraria
Roberl Hatper, Dean, craig School of Business, california
State University, Fresno, u.s.A.
CONFERENCE EXECATIVE COXIMITTEE MEMBERS
Keith Duncan, llead of Department. Accounting, Boncl
Business School, Bond university, A'stralia
Ali Peyvandi, chairman, Asian-Pacific conference on Intemational
Accounting Issues, u.s.A.
Ke itha Dunstan, Pro

Vice-chancellor (Learning and Teaching), Bond university,
Australia

A S IA ]V- PA C I F I C C O N F E R E N CE

AD VIS O RY C O MX4 I TTE E ME MB E RS
Peyvandi (Chair.), Califbrnia State University, Fresno,
U.S.A.
Benjarnin Tai, California State University, Fresno,
U.S.A.
Marie-Jose Albert-Ilatt, Burgundy School of Business,
Dijon, France
Dhia,\l Flashirn, car ifbrnia State University, Nortrrridge.
u. s.A.
Bhabatosh Banerjee, Ur-riversity of Calcutta, India
CS Agnes Cheng, FIong Kong polytechnic University,
Flong Kong

Ali

Devi. UNITAR International University, Malaysia
Rong-Ruev Duh, National Tairvan [Juiversity, Taiwan

Alan Dunk, University of Canbema, ALrstralia
Keitha Dunstan, Bond University, Ar-rstralia
Alvaro Gasca Nen. Ey. Mexiccr
Sidney Gray, University of Syclney, Australia
i Siti Nurrvahyuningsiri Flarahap, universitas Indonesia,
Indonesia
Barron H. Flarvoy, Howard University. U.S.A.
Mostafa K. Hassan, Universitv of Sharjah, LJ.A.E.
.Ioanna IIo, Unrversity of Calitbrnia, Irvine,
U.S.A.
Simon llo, I-lang Seng Managelnent College, Hong
Kong SAR
In Ki .loo, Yonsei University, Korea
Peter Kajiiter. Unrversity ol Mtinster, Germany
DanLrja Kunpanitchakit, Chulalonghorn
University, Thailand
Rayrnonci Leung, Univcrsity tif the Fraser Valley,
Canada
Xing LiLr, Chongqing University, China
Malc Massouci, Claremont McKenna College, U.S.A.

Shirley Polejer,vski, Unrversity of St. Thornas, U.S.A.
Behnaz Quigley. Marymount University, U.S.A.
Edson LLriz Riccio, University of Sao paulo, Brazil
Kathcrine Schipper, Duke University, U.S.A.
Cindy Yoshiko Shirata, Ilosei University, Japan
Sylvia Veronica Siregar, Universitat Indonesia, Incronesia
Tom Smith, l-he University of eueensland, Ar-rstralia
Tony van Zijl, Victoria Unive rsity of Wellington, New
Zealand
Sr-rsela

Page I I

SAR

BOND

{t

ASIAN.PACIFIC COAIFERENCE tsEST PAPER AWARDS COMMITTEE

Lin (Chair), California State University, Fresno, U.S.A.
Keith Dtincan, Bond University, Australia
Ellie (Larelle) Chapple, Queensland University ol Technology, Atrstralia
Shu

C OI{ F E TtE NC E ASS ISTAI{TS

Crystal Cui, California State University, Fresno, U.S.A.
Adrian Gepp, Bond University, Ar-istralia
Vesna Bragagnolo, Bond University, Australia
Debbie Koehler, California State University, Fresno' U.S.A.

AS IA N -PA C I F I C C O I\TF E RE AI C E RE VI E TYER^S FOR PA P E RS
Bliabatosh Banerjee, University of CalcLrtta, India
K.C. Ciren. Calilornia State University, Fresno, U'S.A.
CS Agnes Cheng, Hong Kong Polytechnic University, Flong Kong SAR

Jacqueline Christensen, Bc'nd Univcrsity, Australia
Susela Devi,

UNITAR International Utliversity, Malaysia

Rong-Ruey Duh, National Tairvan University, Taiwan
Keith Duncan, Bond University, Australia
Siti Nurwahyuningsih Llarahap, Universitas Indonesia, Indonesia
Vlostala K. Hassan, University of Shaijah' United Arab Ernirates
Lizhong Hao, Califomia State University, Fresno, U.S.A'
Joanna Ho, University of Calilbrnia, Irvine, U.S.A.
.lanice Hollindale, Bond University, Australia
Patricia Huif-, California State University, Frestto, U.S.A.
Peter Kaiiiter, University of Miinster, Germany
Simone Kelly, Bond University, Australia
Danuja Kunpanitchakit, Chulalongkorn University, Thailand
Raymond Leuug, University of the Fraser Valley, Canada
Shu Lin, California State University, Fresno, U.S.A'
Ray MacNamara, James Cook University, Australia
Gary Monroe, University of New South Wales, ALrstralia
Martin Nienhaus, University of' Mr.inster, Gennany
Denise Patterson, California State University, Fresno, U.S.A.
Ali Peyvandi, California State University, Fresno, U.S.A.

Shirley Polejewski, University of St. Thornas, U.S.A.
Behnaz Quigley, Marymount University, U.S.A.
Cindy Yoshiko Shirata, Hosei University, Japan
Sylvia Veronica Siregar, Universitas Indonesia, Indonesia
Timothy Sterns, California State Untversity, Fresno, U.S'A'
Benjamin Tai, California State University, Fresno, U.S'A.
Tony van Zi.jl, Victoria University of Wellington, New Zealand
Tamara Zunker, Bond University, Australia

ffip.pJsP^-r,F\I

-l

INSTITUTIONAL OWNERSHIP AND EARNINGS OPACITY
T,uhrohtun
Retno Yulianti
Indra Kusumawardani
Lita Yulita Fitriani
universitas Pembangunan Nasional "veteran" Yogyakarta Indonesia

Abstract
The level of earnings opacity in Indonesia is very high. One cause of the high eamings opacity
of a country is concentrated ownership (Anderson et a1. 2006; Arderson et al. 2009)- Most of
single majority shareholders in Indonesia are institutions, including govemment, bank, insurance,
pen"sion, and mutual fund, thus, it is assumed that each kind of single majority shareholders has
different motivation towards corporate eamings opacity level. Therefore, the purpose of this
study is to test the effect of institutional ownership on eamings opacity. Sarnple of this study
of all firms listed on Indonesia Stock Exchange in 2009-2013. Regression analysis test
"orrrirt,
hypothesis is used in this study. This study builds an index to nreasure eanriugs opacity. The
nndings suggest that: (1) the higher concentrated ownership by govenm-rent tends to have greater
ea.nin-gs op*ity (2) the higher concentrated or,vnership by bank tends to have greater eamings
opacit| (:j firms with conientrated ownership by pension fund teuds to have liigher earnings
n.-r with concentrated ownership by mutual fund tends to have higher eamings
opacity

i+j

opacity.
Keywords'. eatnings opacity, ittstittttional oy,nership, governn'LenL banli, instrrctnce, pensionftmd,

mutualfuncl

Introduction

In open economic era and free trading like now, foreign investors who will be investing in public
will consider the risk of information faced by them. One of the information risks is the
"o*puny
in public company in a country. Opaque eaming is the earning that is not
highearnings opacity
-it
might increase the information risks bome by investors. Higher eamings
transparent, so
opu"ity index of companies in a country may detain the flow of investn-rent and foreign funding
that may affect on social welfare of the country.

it shows that the level of company eamings opacity in Indonesia
is very high, which is on the 32nd place from 34 countries (Bhattacharya et a1., 2003),
Thereiore, it is important to conduct a study about factors affecting eamings opacity on public
companies in Indonesia, which one of them is the high ownership concentration in Indonesia.

Based on the previous research,

gasea on the previous research (Anderson et al. 2006; Anderson et al. 2009), family ownership
affects on eamings opacity in public companies in America, so this study may broaden
researches about the reLtionship of ownership structure and eamings opacity. Different with the
previous research (Anderson et al. 2006; Anderson et al. 2009) this study tests the affect of

I

of companies in lndonesia
opacity' It is because the majority
institutional ownership on eamings
The previous studies ibout concentrated
has single majority ,:rr"r"rr"ii".'i#
of all companies listed
(il
S;;fu
{JO!S.) usea sample
rdorr".la-""r""g

t
i.
level of public
1r^":
ownership
"ttr"rr zoo+,
witi"Jrrt ot right cutoff of sox. The
iooo
(2)
Stock
on rndonesia
hiefr, which was 680/o of the sample'
r,rdor";;;-;;;
i,'
(in exception
company ownership
usted"on Indonesia Stock Index
prabowo (2010) ,rr"a-tlt" ,u*ple of all "o-p-u""i"'
shareholders
controlling
evidenlJ'ffi ""^p""i", thut had
sample of
the
of bank and finance).-It;;Jthe
used
(2011)
sample. f:iru""rur"h and.Lucyanda
majority
more rhan 50zo was ioi" "rrn
dengan
Index in 200b' with

i. i"r*"ii"".

il;il
;;;;;;,*i"r,

manufacturing

**p#", fti"a

on f,'Ooit"tiu'Sto"tt
*"]!OX or more' It found the evidence of ownership
directf'
tirJttua share

shareholder
"otof
65 '8%'
concentration average that was

on earnings opacity of
from (201 1) that tests factors affecting
research
advanced
an
is
study
tends to have
This
r*at shorvs that a small company tries
result
The
i"
to cover
company
public
"rirrir
that the small company
lurg"
a
than
opacity
because it
higher earnings
"o-pu;;.order'ho*,
to avoid unprotltable competrtion
a
corporate informatio'i'i;The research result also shows that
competrti;";;"-ent'
in
position
its
usually maxmizes
ievel' It shows that
tenAs to have low eamings opacity
of cotporate
company with conclnltrur"d o*n"rship
function
in the compay ,-I1uy udd the
increase
also
the existence of majority shareholders.
may
of c1ua1ified auditor

il;;;il.

;;;ip"-;il;

I

thai the existencl
repotls'
in the transparency of corporate llnancial
governance
corporate
of
2006
in
eff'ectivity
al'
the
result of Anclerson et
irt"
ln"ott'iti""i
is
result
research
the
'"s"u'"'
Therefore,
'"i'rt
concentration is' t1-re higher eamings
200;;, *rri"r, i, that the high", o*rr"rrhip
(Anclerson
earnings opacity
shareholders will use colporate
"t "i.
opacity level will be.'llis because "o""oif'a
the existence of
that
t1''" opposiie'
2"l.t''Jffi6;i?
governance. rrr"n,

to get persottut

tii, ,;"i;;"gg"rts

proii. rt'r"""*rtn"'

tt*"d

singlemajority,r'","r'oro",sactuallyreducesearningsopacity.becauseitwiilconduct
transparen^cy' Based on
the iunction of hnancial t"p31
opacity by
monitoring function, so it can replace
effect of share o*'t"'i'ip on eamings
,"t"'i-itt"
to
wants
study
this
groups
matters,
rrve
those
are insriturions incruded in
shareh"ra"^'in"i-mostly
oi'ilJ1oritf
typ".
of
j:
type
identifying
u"J*"tual funds' L 9::-Tse each it is
p""*il"'
i"""u""o
bank'
goverrlment,
which are
' reporti'g policy' so
a different motivation on financial
emprrical
single rnajority ,rtui"noiJ"rr'rt",
Therefore' it is necessary to have
public
on
predicted -uy uti"i-"*ing. opu"itv-ltt'"r'
revel
.rr"."n"ro"rs will affect eamings opacity
by
evidence whether types of institutional
ownership
of co-ncentrated
th9.
lrisher the level of eamings opacity'
company in naoiJsia. The finding il;,ha,
fund will increase
government, bank, pension T:d, ur* -ii.*r
on earnings
effect of insurance company olvnership
the
evirlence
find
couldn't
(FSA)
str,rdy
This
give input to Financial Seivices Authority
is
study
this
of
result
minority
opacity. The
"rp"",J1o
mp.rt*"? or "ur,'i,'gs transparency to protect
trr"
about the regulations regarding
shareholder.

Opacity
accountancy
Concentrated Ownership and Earnings
ownership concentration affects
p,ot'L-iftut
shares in a
Some previous researcGs have
most
prorr"n that
":lli:y's
"f
q"^rirv.-ciu"rr"rr.
't'u.r".to* investor protection level (such as
information
"t "t.'iitooi*hu,
io
,t.''itii69
br";:J;;';
country
by family' According to
"ur"go.,J3J
phillipines, Korea, l"pj", uia rr*un),are owned
Indonesia, The
p;;r can facilitate in preventing opaque infomation
Arping and sautner (2010), cEo

indicates how much the power of decision
environment for personal interest. CEO domination
(lggz) identifred four sources of cEo
maker concentrated on the hand of cEo. Finkelstein
expert power' and perestige power'
powef, which are: structural power, ownership powef,
cieate-corporate opacity or still in the company
Anderson et al. (20061;;t**A that family may
io ptod""" private profit on cost of majority
because they are able to exploit the opacity
investors.

opacity on public companies in Indonesia'
Zuhrohtun (2011) tested factors affecting earnings
i-pu"y iends to have higher eamings opacity
The result of this research has proven that smail
tries to cover corporate information
small
compared to larger;il""y, tliat shows-that
"o*putty
it usually tries to maximize its
from extemal par-tiesio-u,roiO nnprofitable competitio;because
result also shows that a company with
position in competitivl environment. The research
opacity., It shows that the existence of
concentrated o*rr"rrt if ilrro. ,o have low eamings
Lf corporate govemance' especially
majority shareholders in the company may add the"funciion
This research then shows that the
in increasing "orpo*,. financiai reporting transparency^'
the effectiveness of corporate govemance in
existence of clualified auditor is also ubl" tJirl"..ase

cotporatefinancialreporlingtransparency.policy.Sinele.l-ajlritysharelroldersinlndonesiaare
pension, and mutual funds' Therefore' this
institutions, i,-r"frOing gou"L-"ni t unt, insurance,
,nu."hoid"r, has diff-erent 'rotivation on the ievel of
research predicts tna? Jach single n-'u.lority
ccrporate eamings oPacitY'

institutional investor size on management
Cheng and Reitenga (2001) tested the effect of
institutional investors and
performance. The 1."r"ur.h differentiated betr'veen large/small
that small institutt:ltit-:l""ttors are
active/passive institutional investors. They estimated
and encourage managers to increase curent
encouraged to maximize shoft-tenn perlonnance
arrange important resources' collect
earnings. on the .onr*ry, large institutional investors
in the future' The power of disciplinary
information, and try to maximize cotporate performance
to resist managcr's decision' The
able.
from the investors can be reached u, long they are
1u.g" active institutional investors in a company
research result implies that the existenc" of
when there is imporlant difference between
might limit manipulation of discretionary u""*u-i'
they boost the increase of management
expected earnings and resulted ea,nings. Other-wise,
pressure on shofi-tetm eamings'
profit with discretionary acctuals when the company is under
pressure on result is low'
Institutional investors *itt t neutral rvhen the initial
"
Share Orvnerhip by Government and Earnings Opacity
to monitor company to achieve public
Government u, u ,ligt" n*.1ority shareholder is"motivated
Eng&Mak, 2003) and add the function
purpose, which is soJial *"tfur" (Shleiver &Visny, i999;
existence of goverrtment can
of corporate governance (Blanciiard &Shleiver, 2000), so the
to increase earrrings opacity' on the
replace extensive ;;1or";" in the company in order
can sacrihce coryorate r'vealth for political
contrary, the existence of govemment in the company
potiicut pulposes at the expense of social welfare
benefit (Wang asr."ii"r, iooal, and achieve
opacity to cover its politicion's
(Bennedsen, 1999), so the company tenils to use earnings
in-Indonesia is stil1 low' it is predicted
relationship and interests. Because the legal enforcement
shareholders will increase earnings opacity'
that the existence of government as ,irtgi" majority
so the second hypothesis is as the following:
"govemment
will increase the level of earnings opacity
H1: The highe^nui" o*n"rship by the

Share Ownership by Bank and Earnings Opacity
from accountant' Based on this fact'
Bank will take credit O""lrion based onlhe information

manage.'".'lYP."'l"AT:: "T:3::*:,,i:^*::i^1
ffiil;#;;g"' *'ri u" Lr,"o.',ug"d.to su.ulJ*i,
(2004 states that companv having financial
:i#iffffi*?i" *"itir,;;;'d';;'k. financial'performan""t
^ q^*^L^.',
",hcn hcnL iq
i:?fi;, ;ffi;;#;;;;;; "",porate
::T:1"-y..y::j*"':,.y:
source
information
wilr be more piofitable to get relevant
the

ffi;;;?,h";;d;;;6i;fih"n,itso that the managers will conduct eamings management as
situation,
;;;;
'
^.^-7 +L^r +L^ ^-.i.+anna n{
";;;;;?;cial
capaciiy towards bank. rileret"*: ll L: l:"0'_:,:1.^,li l5:f :::::: ::
r'vu
vr
Dr6'or
ffi
L'e il;i#,n#;;";ate
-"-1;^";;;';ra.t
earungs opaclity, so the third hlpothesis is as
*111 increase
ir
shareholder will
1

,r

^^-..^i.^^^

*^-^nomonl

qc

,1:

bank as singie majority

the following:
will increase eanlrng s opacity level'
hv bank
H2: The higher share
'"o ownership
^r'nershin by bank

Earnings Opacity
Share Olvnership by Insurance Company and
relation with
to teep Uottr existing busi'ess relation and potentiai
Insurance company *tgh;;
are
1o resist management clecrsion' Insurance companies
a cotnpany, so it is l"fs
"ncorrruged
deal rvith high uronitoring expenses because
usually named as grey instritutional investors. They
and lose business potential (Bricley et
they may ruin the relationship with corporate management
clJnot limit manageurent discretion' so it will
a1., 1988). Theretbre, it is suspected tirat they
rncrease earnings opacity.
,r- eamings
.^
-, - r^-.^r ol
H3: The higher share o*n"rship by insurance company \vili increase the level
opacitY

Opacity
Share Orvnership by Pension Fund and Earnings
manager lnaneuver to. protect their
corporate
controls
fuird
p"nrion
i1ruf
eiu (200a) suggests'
'qqO)
investor
states that pension fund is the most active institutional
share ownership. Black (f
with
relationship
its
independence towarcis
because of its imporlance oi containm",tt u"d
maximizing
in
is oriented to the efforls
corporate managef. Contrary to investment fund that
in marimizing long-tenn eamings' Del
interested
short-tenn earnings, pension fund is more
paid in its respo'sibility to be able to ensure
Guercio and Tkac tzO'OOj stated that pension fund is
manager to limit discretionary accruals
the pension payment, so they try to encourage coryorate
or state agellcy' and mutual fuird'
management. Pension fundis affected Uy ,io,ttoi companies
it can be said that pension fr"rnd is
they do not want to offend their clicnts'compTnies, so
product and hnancial serwices (such
controlled by corporate management. An institution selling
a company that will be its potential client
as bank and insurance) has u"rge to inactively resist
as single
Theiefore, it i, pr"dicted that the existence of pension fund

(cox and rhomas, iooal
majority shareholders will increase eanrings opacity'
H4: The higher share ownership by pen"sion funi will

increase the level of eamings opacity

Share orvnership by Mutual Fund and Earnings Opacity
fund among rejections on pressures
Ramaswamy and ieliyath (2002) classified investment
with corporate manager' and because of
because this institution does not have business relation
will lirnit manager discretion' Badrinath
fiduciary responsibility to its customer, investment fund
more interested in investment in shorland Wahal (2002) staied that investment fund is usually
fund is remunerated by manager based on
term project. tsaysinger et al. (1991) stated that the
is related to the fund cancellation
quarlerly p"rfor'r11u.t"e] so the decrease of present perfotmance

/

by administrator. The involvement of investment fund in corporate capital will encourage the
action of earnings management. Thus, it is predicted that the existence of mutual fund as single
majority shareholders will increase earnings opacity.
H5: The higher share ownership by mutual fund will increase the level of earnings opacity
Research Method
Thc research sample are 548 firms listed on the lndonesian Stock Exchange from2009-2013 that issued
yearly financial reports per 31 December. This research uses data pooling wlth the total observations are
2,j46.lhis study omitted 367 hence the final observations arc2,313. The yearly financial reports were
obtained from the Indonesian Stock Exchange. Meanwhile, trading volume and bid ask spread data were
collected from Bloomberg.
Independent variables in this study are govemment ownership (GovOwn), bank ownership (BankOwn),
insuiance comphany ownership (InsuranceOwn), pension fund otvnership (PensionOlvn)' mutual fund
ownership itr.lutualOwn) and firm size (Size). Hence the dependent variable is earnings opacity index
(lndex_Op). The ownership is measured using the highest percentage of companies share that owned by
instituiional shareholder. Single majority Ownership is measured using dummy variable, 1 if , 0 otherrvise
(DsingleOwn). Firm size is proxied with natural log of total asset.
Earnings opacity is the earnings reporle