Prior Research Literature Review

572 One of the prior research which examine real activities manipulation is research from Roychowdhury 2006 which examine the impact of earnings management through real activities manipulation on operating cash flows. Firms that reports low earnings is categorized as suspect firms, that is firms inclined of doing earnings management, because firms with low earnings tend to do earnings management by increasing earnings. The model used by Roychowdhury 2006 is Dechow, Kothari, and Watts 1998 model to estimate normal operating cash flows or expected operating cash flows. After estimating the normal operating cash flows, the deviation between actual and normal operating cash flows is calculated which be called abnormal operating cash flows. Roychowhury 2006 finds that real activities manipulation has impact on operating cash flows, that is firms doing real activities manipulation report abnormal operating cash flows compared to firms which is not detected of doing real activities manipulation. Prior research which examine real activities manipulation and future operating performance is Gunny‘s β005 research. Gunny β005 investigates the consequences of real activities manipulation on operating performance in future period. The result indicates that firms doing real activities manipulation will find earnings and operating cash flows decreasing significantly in future period. In her research, Gunny 2005 uses performance-matching approach which the performance of each firms inclined of doing real activities manipulation compared to firms inclined of not doing real activities manipulation compared firms in the same year. Research in Indonesia that examine real activities manipulation in relation to future performance were done by Rahman 2007 and Oktorina 2008. Rahman 2007 identifies real activities manipulation and accrual manipulation and also its impact on market and operating performance of IPO firms. The result shows that the motivation of earnings management when IPO is using discretionary accrual proxy, but not using real activities manipulation proxy. Oktorina β008 identifies the firm‘s tendency to execute real activities manipulation through cash flow and its impact to market performance. The result shows that firm tend to execute real activities manipulation through operating cash flowbut not through investing and financing cash flow. Moreover, the impact of real activities manipulation on 573 market performance shows that firms are more likely executing real activities manipulation have higher market performance than their counterparts.

2.6 Hypotheses Development

Based on literature review, known that the four ways of how management doing real activities manipulation, that is by; manipulating sales through price discount and more lenient credit terms, reducing discretionary expense, overproduction, and timing of asset sales, will affect the amount of selling, general, and administrative expense, production cost, and gain on asset sales reported. This indicates that these three indicators could be used to examine whether firms doing real activities manipulation or not. The examination is done by using the abnormal value of three manipulation indicators. The abnormal value is the difference between normal value and actual value. Gunny 2005 and Roychowdhury 2006 focus on earnings management pattern which increases the amount of earnings reported, whereas our paper focus on the absolute value of real activities manipulation. Because the real activities manipulation in recent period to increase earnings causing negative impact on future cash flows, this manipulation is inclined could decrease the firm‘s future operating performance. Referring to the result of Gunny‘s β005 research, the abnormal value of selling, general, and administrative expense, production cost, and gain on asset sales will have a significant negative relationship with future operating performance which the abnormal value of selling, general, and administrative expense, production cost, and gain on asset sales are real activities manipulation proxies. However, Hillier, McColgan, dan Werema 2005 finds that the asset sales activities directs on firm‘s future operating performance increasing significantly. In this paper, the dependent variable is future operating performance and the independent variables are; 1 real activities manipulation through selling, general, and administrative expense, 2 real activities manipulation through production cost, and 3 real activities manipulation through gain on asset sales. Roychowdhury 2006 finds that firms inclined of doing real activities manipulation reports low abnormal discretionary expense. Beside that, firms 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.