Hypotheses Development Literature Review

574 inclined of doing manipulation through excessive price discounts have high abnormal production cost. Also, firms inclined of doing manipulation through gain on asset sales have high abnormal gain on asset sales. Hypothese 1a. Firms are engaging in real activities manipulation through selling, general, and administrative expense. Hypothese 1b. Firms are engaging in real activities manipulation through production cost. Hypothese 1c. Firms are engaging in real activities manipulation through gain on asset sales. Firms tend to ignore future cash flows on firms doing real activities manipulation Graham, Harvey, dan Rajgopal, 2005 to increase current earnings, however the future operating performance will decrease Gunny, 2005. We use two operating performance measure: OIROA and CFROA. Hypothese 2a. Real activities manipulation through selling, general, and administrative expense has a significant negative relationship with operating performance OIROA in one, two, and three years later. Hypothese 2b. Real activities manipulation through production cost has a significant negative relationship with operating performance OIROA in one, two, and three years later. Hypothese 2c. Real activities manipulation through gain on asset sales has a significant negative relationship with operating performance OIROA in one, two, and three years later. Hypothese 2d. Real activities manipulation through selling, general, and administrative expense has a significant negative relationship with operating performance CFROA in one, two, and three years later. Hypothese 2e. Real activities manipulation through production cost has a significant negative relationship with operating performance CFROA in one, two, and three years later. Hypothese 2f. Real activities manipulation through gain on asset sales has a significant negative relationship with operating performance CFROA in one, two, and three years later. 575

3. Research Methodology

3.1 Research Model

The focus in this paper is on the existence of real activities manipulation, not the sign increasing or decreasing earnings. That is why we use absolute value of each real activities manipulation. H 1a : μ ABNSGA ≠ 0 H 1b : μ ABNProdCost ≠ 0 H 1c : μ ABNGAIN ≠ 0 To test our second hypotheses, we use following research model: FOP i,t+y = β + β 1 ABNSGA

i,t

+ β 2 ABNProdCost

i,t

+ β 3 ABNGAIN

i,t

+ β 4 LNASSET

i,t

+ β 5 BTM

i,t

+ β 6 OIROA

i,t

+ β 7 D03 i + β 8 D04 i + ε Where : FOP ,t+1 = future operating performance, which measured using : 1 OIROA i,t+y and 2 CFROA i,t+y ABNSGA

i,t

= log abnormal value of selling, general, and administrative expense ABNProdCost

i,t

= abnormal value of production cost ABNGAIN

i,t

= abnormal value of gain on asset sales LNASSET

i,t

= natural logarithm of total asset BTM

i,t

= growth opportunity equity book valueequity market value OIROA

i,t

= rate of operating income return before interest and tax toward assets D03 i = 1 if the observation year is 2003 and 0 if otherwise D04 i = 1 if the observation year is 2004 and 0 if otherwise Control Variables  LNASSET is used as a control variable because it is convinced that the firm‘s size has a relationship with future operating performance. In big firms, as having high total assets, they are able to generate higher operating income compared to small firms which having lower total assets.  BTM is considered as a control variable because this variable is inclined of having relationship with future operating performance. According to McNichols 2000, in Siregar 2005, firms with high growth rate will be more correlated to firm‘s performance. δow BTε ratio shows a high growth opportunity for the firm. An opportunity to grow accomodates the increasing 576 of future operating performance. So that, the lower BTM ratio, the higher the future operating performance.  OIROA variable is considered as a control variable because it is convinced that rate of operating income return on firm‘s total asset in year t affects future operating performance. The better operating performance in this period, the better operating performance in next period.  D03 and D04 variables are dummy variables of observation period to account for the adjusted mean difference of dependent variables between years in research period. 3.2 Variable Definition 3.2.1 Dependent Variable The future operating performance dependent variable is measured by Operating Income Return on Assets OIROA ratio and Cash Flows Return on Assets CFROA ratio. OIROA

i,t

= Operating Income

i,t

TA

i,t

Where: Operating Income

i,t

: operating income before interest and yearly tax on i firms t year CFROA

i,t

= Operating Cash Flows

i,t

TA

i,t

Where: Operating Cash Flows

i,t

: cash flows from operating activities on i firms t year

3.2.2 Independent Variables

a. Real activities manipulation through selling, general, and administrative expense This manipulation is measured by log abnormal value of selling, general, and administrative expense ABNSGA which known by regressing the Gunny‘s β005 estimation model which referring to Anderson et al.‘s