THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL...
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THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL CONNECTION ON EARNINGS MANAGEMENT (Study at Manufacturing Companies listed on LQ45 Index in Indonesia Stock Exchange Period 2013-2018) UNDERGRADUATE THESIS Submitted in accordance with requirements for the Bachelor‘s Degree in Accounting PUTRA MULIA 11130821000014 ACCOUNTING DEPARTMENT THE FACULTY OF ECONOMICS AND BUSINESS SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA 1440 H/2019
Transcript of THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL...
THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL
CONNECTION ON EARNINGS MANAGEMENT
(Study at Manufacturing Companies listed on LQ45 Index in Indonesia
Stock Exchange Period 2013-2018)
UNDERGRADUATE THESIS
Submitted in accordance with requirements for the Bachelor‘s Degree in
Accounting
PUTRA MULIA
11130821000014
ACCOUNTING DEPARTMENT
THE FACULTY OF ECONOMICS AND BUSINESS
SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY
JAKARTA
1440 H/2019
ii
THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL
CONNECTION ON EARNINGS MANAGEMENT
(Study at Manufacturing Companies listed on LQ45 Index in Indonesia
Stock Exchange Period 2013-2018)
UNDERGRADUATE THESIS
Submitted in accordance with requirements for the Bachelor‘s Degree in
Accounting
By:
Putra Mulia
11130821000014
Under Supervision of:
Hepi Prayudiawan,SE.,MM.,Ak.,CA
ID. 197205162009011006
ACCOUNTING DEPARTMENT
THE FACULTY OF ECONOMICS AND BUSINESS
SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY
JAKARTA
1440 H/2019
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ENDORSEMENT SHEET
COMPREHENSIVE EXAMINATION
Today is Tuesday, 12nd
July 2018 a Comprehensive Examination has been
conducted on student :
Name : Putra Mulia
Student ID : 1113082100014
Department : Accounting
Thesis Title : The Influence of Multiple Directorships and
Political Connection on Earnings Management
(Study at Manufacturing Companies Listed on
LQ45 Index in Indonesia Stock Exchange Period
2013-20018)
After careful observation and attention to appearence and capabilities relevant for
comprehensive examination process, it was decided that the above student passed
and given opportunity to thesis as one of the requirements to obtain a Bachelor of
Economics in the Faculty of Economics and Business Syarif Hidayatullah State
Islamic University Jakarta.
Jakarta, August 30th
2019
1. Zuwesty Eka Putri, M.Ak. (................................................)
ID : 198004162009012006 Examiner I
2. Hepi Prayudiawan, S.E.,M.M.,Ak,CA (................................................)
ID : 197205162009011006 Examiner II
iv
CERTIFICATION OF THESIS EXAMS SHEET
Today, September 25 2019 has been conducted on the student thesis examination:
Name : Putra Mulia
Student Number : 1113082100014
Department : Accounting (International Program)
Thesis Title : The influence of Multiple Directorships and
Political Connection on Earnings Management
(Study at Manufacturing Companies listed on LQ45
Index in Indonesia Stock Exchange Period 2013-
2018)
After careful observation and attention to appearance and capabilities
relevant for thesis exam process, it was decided that above student passed and the
thesis was accepted as one of requirements to obtain Bachelor of Accounting in
the Faculty of Economic and Business Syarif Hidayatullah State Islamic
University Jakarta.
Jakarta, 25 September 2019
1. Fitri Damayanti,SE.,M.Si ( ................ .............. )
NIP: 198107312006042003 Head of Examiner
2. Hepi Prayudiawan, SE.,Ak.,MM,CA ( ............... ............... )
NIP: 197205162009011006 Secretary
3. Atiqah, SE., MS.Ak ( .......... .................... )
NIP: 198201202009122004 Expert Examiner
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SHEET STATEMENT
AUTHENTICITY SCIENTIFIC WORKS
Signature below:
Name : Putra Mulia
Student Number : 1113082100014
Faculty : Economics and Business
Department : Accounting
Hereby declare that in the writing of this mini thesis, I:
1. Do not use other people’s ideas without being able to develop and
accountable
2. Do not use plagiarism of other people’s works
3. Do not use other people’s work without mention the original source or
without the owner’s permission
4. Do not manipulate and falsify the data
5. Own work and able to work responsible for this work
If in the future there is a demand from the other side of my work, and have been
accountably proved, was indeed found that i have violated the above statement,
then I am ready to be sanctioned according to rules applicable in the Faculty of
Economics and Business Syarif Hidayatullah State Islamic University Jakarta.
Thus statement truly made with sincerely.
Jakarta, August 31st 2019
(Putra Mulia)
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CURRICULUM VITAE
PERSONAL DATA
Name : Putra Mulia
Place, date of birth : Jakarta, 31 December 1995
Address : Puri Ganda Asri Townhouse Blok A/2, Pondok Labu
Phone : +6281219726501
Email : [email protected]
Nationality : Indonesia
FORMAL EDUCATION
University of Applied Science Würzburg-Schweinfurt (2014-2016)
Syarif Hidayatullah State Islamic University Jakarta (2013-2019)
MAN 4 Jakarta (2010-2013)
Rafah Islamic Boarding School (2007-2010)
SDIT Miftahul Ulum Depok (2003-2007)
SDN 03 Cinere (2001-2003)
INFORMAL EDUCATION
Brevet Pajak A and B PKN STAN Jakarta (2019)
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LBI Universitas Indonesia, IELTS Preparation (2018)
ILP Cinere, TOEFL Preparation (2014)
ILP Cinere, English Course (2013-2014)
ORGANIZATIONAL EXPERIENCE
Public Relation Manager at AIESEC in South Tangerang (2016)
Vice President of Finance and Legal at AIESEC in South Tangerang (2017)
WORKING EXPERIENCE
Bank DBS Indonesia, Internship (2019)
Dpointgroup Barcelona, Internship (2018)
CONFERENCE AND TRAINING
National Election Conference AIESEC Indonesia (2018)
National Functional Summit AIESEC Indonesia (2017)
Management Board Conference AIESEC Indonesia (2016)
Training and Company Visit by the 16th
ATV Universitas Indonesia (2016)
Summer School at OTH Amberg-Weiden, Germany (2015)
Team Management Training held by FHWS (2015)
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PENGARUH RANGKAP JABATAN DAN HUBUNGAN POLITIK
TERHADAP MANAJEMEN LABA (STUDI PADA PERUSAHAAN
MANUFAKTUR YANG TERDAFTAR DI INDEX LQ45 DI BURSA EFEK
INDONESIA PERIODE 2013-2018)
ABSTRAK
Penelitian ini bertujuan untuk menginvestigasi pengaruh rangkap jabatan
dan hubungan politik terhadap manajemen laba. Penelitian ini menggunakan
sampel perusahaan manufaktur yang terdaftar pada Indeks LQ45 yang terdaftar
di Bursa Efek Indonesia (BEI) periode 2013-2018. Teknik pengambilan sampel
menggunakan purposive sampling dengan sampel sebanyak 7 perusahaan
manufaktur untuk periode 2013 sampai dengan 2018. Pengujian hipotesis yang
digunakan dalam penelitian ini adalah analisis regresi linier berganda dengan
menggunakan SPSS versi 23.
Hasil penelitian ini menunjukan bahwa rangkap jabatan dan hubungan
politik berpengaruh terhadap manajemen laba. Hasil ini konsisten apabila
menggunakan akrual diskresioner dengan model Jones (1995)
Kata Kunci: akrual diskresioner, hubungan politik, manajemen laba, rangkap
jabatan
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THE INFLUENCE OF MULTIPLE DIRECTORSHIPS AND POLITICAL
CONNECTION ON EARNINGS MANAGEMENT (STUDY AT
MANUFACTURING COMPANIES LISTED ON LQ45 INDEX IN
INDONESIA STOCK EXCHANGE PERIOD 2013-2018)
ABSTRACT
This research aims to investigate the influence of multiple directorships
and political connection on earnings management. The sample of this research is
manufacturing companies on LQ45 index in Indonesia Stock Exchange (IDX) in
period 2013-2018. The method used is purposive sampling method with a sample
of 7 manufacturing companies for the period 2013 until 2018. Hypothesis testing
is run with multiple regression estimation method using SPSS version 23.
The result of this research indicates that multiple directorships and
political connection influence earnings management. These results are consistent
when the measurement of discretionary accruals is using modified Jones (1995)
model.
Keywords: discretionary accruals, earnings management, multiple directorships,
political connections
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FOREWORD
Assalamualaikum Wr.Wb
All Praises be to Allah the Almighty for all of His blessings that the writer
has finally completed this undergraduate thesis. In retrospect, the work was not
merely as a result of the writer‘s own efforts, but also due to strong and endless
support of many individuals who have been accompanying him in every step of
the way – from the moment he entered UIN Jakarta back in 2013 up until now. As
such, the writer would love to give the highest gratitude and acknowledged to:
1. Papa, Irwandi, ST and Mama, Yen Mareni, for their unconditional love,
unwavering care, guidance, and prayer throughout the writer‘s life;
2. Adik, Berlianda Abdillah and Qonita Afiyah Putri, for their cheers and
unconditional support to the writer.
3. Prof.Dr.Amilin,SE.,Ak.,M.Si.,CA.,BKP.,QIA.,CRMP as the Dean of
Economics and Business Faculty.
4. Yessi Fitri, SE.,M.Si.,Ak as the Head of Accounting Department in
Faculty of Economics and Business UIN Jakarta.
5. Fitri Damayanti, SE.,M.Si as the Secretary of Accounting Department in
Faculty of Economics and Business UIN Jakarta.
6. Hepi Prayudiawan,SE.,MM.,Ak.,CA as the undergraduate thesis
supervisor who has been helping, guiding and advising me throughout the
research process.
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7. Prof.Dr. Margareth Gferer as mentor, for her motivation and support to
achieve the double degree program.
8. Prof. Manfred Kiesel as the head of International Program in FHWS, for
his assistance during the study process in Wurzburg
9. Prof. Reiner Wehner as the mentor in FHWS, for every assistance during
my college life in Wurzburg
10. Mardani Bonyx S.Far.,Apt as the staff in academic division, for every
help related to administrative and academic stuffs in FEB UIN.
11. Destarani Bella Shabrina, S.Sn as my special supporter, thank you for
your caring and assistance during the writer‘s thesis process.
12. All lecturers and staffs of Accounting Department at UIN Jakarta, for the
knowledge and support during the writer‘s study process in UIN Jakarta.
13. All lecturers and Staffs of Business Administration Department at FHWS,
for the knowledge and support during writer‘s study process in Wurzburg.
14. Ira and Ida as my friend, for every ups and down during our college life in
Wurzburg and Jakarta.
15. All of my Indonesian friends in Wurzburg, for the food and experience
during the writers stay in Wurzburg.
16. All of my Indonesian friends in Barcelona, for the help since day one of
writers life in Barcelona.
17. PPI Barcelona, for the chance to involve in organization.
18. All Spanish, Korean, German, Turkish, Jordan and Thai friends – currently
scattered all over the globe – who have been responding to the writer‘s
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never-ending and sometimes random chats via WhatsApp, Instagram and
other social media these past three years.
19. Diko and Abdul as friend, for sharing their knowledge about SPSS.
20. All of my classmates in International Accounting 2013, Aji, Afri, Panji,
Riski, Ryan, Banan, Melinda, Wulan, Fita, Raisa, Syarah and (Almh)
Indri, thank you for the experience and journey for these past six years.
I‘m glad to know you all.
21. Other individuals whom the writer have met somewhere in these six years.
You have contributed, however small, to the writer‘s journey.
In closing, I realize that this thesis is far from perfection, thus suggestions
and constructive critics from all parties are very welcome. It is hoped that this
thesis is beneficial not only for the writer but also for others, especially those in
academic world.
Wassalamualaikum Wr.Wb
Jakarta, 25 September 2019
Putra Mulia
xiii
TABLE OF CONTENT
COVER ................................................................................................................... i
CERTIFICATION OF SUPERVISOR ............................................................... ii
CERTIFICATION OF COMPREHENSIVE EXAM ...................................... iii
CERTIFICATION OF THESIS EXAMS SHEET ........................................... iv
STATEMENT OF ORIGINALITY .................................................................... v
CURRICULUM VITAE ...................................................................................... vi
ABSTRACT ........................................................................................................ viii
FOREWORD ......................................................................................................... x
TABLE OF CONTENT ..................................................................................... xiii
LIST OF TABLE .............................................................................................. xvii
LIST OF FIGURE ........................................................................................... xviii
LIST OF APPENDIX ........................................................................................ xix
CHAPTER 1 .......................................................................................................... 1
INTRODUCTION ................................................................................................. 1
A. BACKGROUND .............................................................................................. 1
B. PROBLEM FORMULATION ........................................................................... 6
C. PURPOSE AND BENEFIT................................................................................ 7
1. Purposes of Research .............................................................................. 7
2. Benefits of Research ................................................................................ 7
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CHAPTER 2 .......................................................................................................... 9
STUDY LITERATURE ........................................................................................ 9
A. INTRODUCTION ............................................................................................ 9
B. LITERATURE ................................................................................................ 9
1. Agency Theory and Stewardship Theory ................................................ 9
2. Corporate Governance .......................................................................... 12
3. Corporate Structure ............................................................................... 14
4. Multiple Directorship ............................................................................ 15
5. Political Connection .............................................................................. 19
6. Earnings Management .......................................................................... 21
C. PREVIOUS RESEARCH ................................................................................ 30
D. HYPOTHESIS .............................................................................................. 37
1. Multiple Directorships and Earnings Management ............................ 37
2. Political Connection and Earnings Management ................................ 40
3. Conclusion ............................................................................................. 42
CHAPTER 3 ........................................................................................................ 43
RESEARCH METHODOLOGY ...................................................................... 43
A. SCOPE OF RESEARCH................................................................................. 43
B. SAMPLING METHOD .................................................................................. 43
C. COLLECTION DATA METHOD ................................................................... 45
1. Library Research ................................................................................... 45
2. Documentation Research ...................................................................... 45
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D. DATA ANALYSIS METHOD ......................................................................... 46
1. Descriptive Statistic ............................................................................... 46
2. Classical Assumption Test ..................................................................... 46
3. Test of Hypothesis .................................................................................. 49
E. RESEARCH VARIABLES OPERATIONALIZATION ....................................... 50
1. Dependent Variable ............................................................................... 50
2. Independent Variables ........................................................................... 52
CHAPTER 4 ........................................................................................................ 55
FINDING AND ANALYSIS............................................................................... 55
A. GENERAL DESCRIPTION OF RESEARCH OBJECT ...................................... 55
1. Research Object Description .................................................................... 55
B. ANALYSIS AND DISCUSSION ....................................................................... 56
1. Descriptive Statistics Analysis ............................................................... 56
2. Classical Assumption Test ..................................................................... 57
3. Test of Hypothesis .................................................................................. 62
C. HYPOTHESIS EVALUATION ........................................................................ 66
1. The Influence of multiple directorships on earnings management .... 66
2. The Influence of political connection on earnings management ........ 67
CHAPTER 5 ........................................................................................................ 69
CONCLUSION .................................................................................................... 69
A. CONCLUSION .............................................................................................. 69
B. SUGGESTIONS AND RECOMMENDATION ................................................... 69
xvi
1. Suggestion .............................................................................................. 69
2. Recommendation ................................................................................... 70
REFERENCES .................................................................................................... 72
APPENDIX .......................................................................................................... 82
xvii
LIST OF TABLE
NO DESCRIPTION
2.1 Differences between Accrual and Real Earnings Management ............. 27
2.2 Summary of Previous Research on Multiple Directorships ................... 31
2.3 Summary of Previous Research on Political Connection ....................... 34
2.4 Conceptual Framework ............................................................................. 37
3.1 Data Sampling Procedures ........................................................................ 45
3.2 Variable Operationalization ...................................................................... 54
4.1 Detail of Research Sample ......................................................................... 55
4.2 Descriptive Statistics Analysis in Period 2013-2018 ................................ 56
4.3 Klomogrov-Smirnov Test Result .............................................................. 59
4.4 Multicollinearity Test Coefficients ........................................................... 60
4.5 Heteroscedasticity Test with Park Test .................................................... 61
4.6 Autocorrelation Test .................................................................................. 62
4.7 Simultaneous Test (T-test) ......................................................................... 63
4.8 Coefficient Determination Test (R2)
......................................................... 63
4.9 Partial Test (Test) ....................................................................................... 64
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LIST OF FIGURE
NO DESCRIPTION
4.1 Normality Test with Histogram ................................................................ 57
4.2 Normality Test with Probability plot ....................................................... 58
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LIST OF APPENDIX
NO DESCRIPTION
1 Sample Companies List ............................................................................ 82
2 Composite measurement ........................................................................... 82
3 Multiple Directorship measurement ....................................................... 83
4 Political Connection measurement .......................................................... 84
5 SPSS Test result ........................................................................................ 86
1
CHAPTER 1
INTRODUCTION
A. Background
Good Corporate Governance (GCG) is an important goal to be achieved
by a business entity in its aspiration to maintain sustainability of its activities.
Its implementation relies on corporate governance framework, which is defined
as ―a set of relationships between a company‘s management, its board, its
shareholders and other stakeholders‖ (OECD, 1999, p. 11). It is a systematic
framework built to manage and respond to the agency problem where the
divergence of interest of the managers from those of shareholders create an
opportunity for the former to transgress their limited duties for their self-bene
fits. The 1997-1998 Asian Financial Crisis, the Enron and WorldCom cases in
the US at the early 2000s and the recent emission scandal of Volkswagen in
Germany are the few examples of how corporate failure in ensuring the
integration of good corporate governance results in managerial abuses which
cause detrimental effects for the company and, to some extent, the economy in
general.
While corporate governance covers many aspects of the management
of a company, its concept is very relatable to the corporate financial reporting.
In Principle v (five) on Disclosure and Transparency, it calls on companies to
make use of financial reporting standards to deliver high quality financial
information for its users (OECD, 2015). As it is known, financial reports
contains information that will be used for their users to base their economic
2
decisions (IASPlus, 2016). Also, they project how much stewardship functions
have been exercised by company directors and managers who are given the
mandate by the company shareholders to allocate company resources for
business activities effectively and efficiently. Essentially, corporate
governance ensures that the output of business activities, represented in
financial reports, remain relevant, useful and beneficial for everyone –
managers, shareholders and stakeholders of the company.
The International Financial Accounting Standards (IFRS) – to which
the Indonesian FRS is converging to – dictate some categories of financial
information to be disclosed in financial statement. One of the information that
is particularly scrutinised by both stakeholders and shareholders of a business
entity is earnings. It is a valuable indicator of accountability of
managers/directors, predictor of company‘s growth as well as measurement of
earning power in the future (Kieso, Weygandt, and Warfield, 2010). Its
attribute as a measurement of earning power – the ability of a company to
generate profit from the invested capital after taking into account the
company‘s liabilities – is especially important for the shareholders whose
maintain interest is improving its own wealth as they invest in the company.
At the same time, since it works as a measurement of managerial performance,
it is used as a bargaining chip for the managers in obtaining fair compensation
for their work in the company (Godfrey, Hodgson, Tarca, Hamilton, and
Holmes, 2010). As a result, in a pursuit of maximising their own utility,
managers try to manipulate earnings so that it looks better for the company‘s
3
image, even if the numbers do not match the reality on the ground (Healy,
1985; Watts and Zimmerman, 1978). These Activities are called as earning
management.
Various studies have been conducted to relate corporate governance
issues and the level of earnings management. In this thesis, two issues are
explored, which are multiple directorship and political connections. Multiple
directors, as the name suggests, are directors who hold directorship
appointment in more than one company. Given that Indonesian companies
follow the two-tier board system as opposed to the unit the unitary board
system, it is more likely that multiple directorship occurs. Furthermore, the
appointment will be more obvious with clear demarcation of responsibilities if
a commissioner in a particular company works as director in another vice
versa (Millet-Reyes and Zhao, 2010). Some rules have been enacted to
formally acknowledge and regulate it with the earliest for private entities was
introduced in 2010 by the Commission for the Supervision of Business
Competition (Komisi Pengawas Persaingan Usaha or KPPU) which disallows
multiple directorship practices for directors who aim to monopolise certain
industry or to play unfairly against their companies‘ competitors. This is
similar to the Clayton Act in the US which allows multiple directorship or
interlocking directorate if the practice does not create amti-competition and
monopolistic business environment (Axinn and Yoerg, 1984). The supporters
in favour of multiple directors‘ base their argument on the fact that it is bound
to happen given the high competition in the market to get the best and the
4
brightest leading the company (Fama, 1980). On top of monopoly argument,
the opponents of this view, however, see this practice as a disservice for the
companies involved where it is argued that multiple directors will have a lack
of focus to perform their duties as they work for many companies
simultaneously (Jiraporn, Kim, and Davidson, 2008). Recently, the Indonesian
Financial Services Authority (Otoritas Jasa Keuanagan or OJK) issued
Regulation No. 33/POJK.04/2014 on Directors and Board of Commissioners
of Issuers of Public Companies which provides legal platforms for multiple
directors to continue their work albeit with more defined conditions.
In its relationship with earnings management, similar to the general
pros and cons, multiple directorships is argued to be influencing earnings
management in a variety of ways. Chiu, Teoh and Tian (2013) believe that the
shared directorship will facilitate the spread of and, if implied, enhance
earnings management activities in those companies with multiple directors,
especially if the company have weak management control. On the other hand,
it is argued that the case of interlocking directors reduces earnings
management as these individuals have better understanding on financial
reporting where they serve for other companies and they are in the position to
uphold their reputation (Jiraporn et al, 2008; Shu, Yeh, Chu, and Yang, 2015).
While investigations about this relationship has been extensively conducted in
other countries, few were conducted using Indonesian context where, for
instance, corporate structure is divided into two separate boards which is
argued to result in a different degree of governance effectiveness as compared
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to a single board structure (Millet-Reyes and Zhao, 2010). It is possible to that
the result of the study here differs from the previous studies, which were
commonly conducted in a single board structure environment.
Another interesting phenomenon observed in Indonesia‘s business
scene is politically-connected companies. These firms have either at least one
large shareholders with 10% of voting and above or one director
(commissioner or executive director) is a member of parliament, a minister or
the head of state or affiliated with political party (Faccio, 2006). Cultivated
during Soeharto‘s era and to a large extent, provide undue benefits for the
companies involved, directors in these companies may form poorly and to
compensate that, they will manage company‘s earnings (Apriliani, 2015;
Faccio, 2006). Political connections in terms of involvement of politicians also
deteriorate information effectiveness and quality as greater transparency
harms in the interest of politicians in expropriating the benefits from the
shareholders and stakeholders (Piotroski, Wong and Zhang, 2015). In essence,
political connections work in tandem with earnings management activities that
are problematic for the company. However, the reverse is true under
assumptions that as political connections increase political visibility or public
scrutiny, failure to bring about greater accountability and better reporting
quality will cost the firm even more than the internal benefits reaped from
doing it (Braam, Nandy, Weitzel and Lodh, 2015; Chaney et al., 2011).
Some attempts have been made to reduce political connections in
Indonesia companies, starting with the state-owned enterprises (SOEs) by the
6
virtue of government regulation which prohibits directors of state-owned
entities from being affiliated any political party or standing for political office.
However, no regulation has been enacted for private companies. As such, it is
still relevant to examine how the relationship between company‘s political
connections influences earnings management practices in today‘s Indonesian
companies.
This research is developed from the prior research done by Chiu, Teoh
and Tian (2013) and Braam et al (2015). The differences of this study with the
previous study are the author compiles the independent variables which are
multiple directorship and political connection to investigate their influence
towards earnings management using modified Jones model‘s proxy.
Moreover, the population of this study is manufacturing companies listed on
LQ45 in Indonesia Stock Exchange (IDX) in period 2013-2018. Meanwhile,
the previous research is done in other countries with different population.
Based on the reason above, the writer wants to propose a little about
―The Influence of Multiple Directorships and Political Connection on
Earnings Management (Study at Manufacturing Companies listed on
LQ45 Index in Indonesia Stock Exchange Period 2013-20 18)”
B. Problem Formulation
Based on the research problems explained earlier, the following
research questions were formulated:
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1. Does the practice of multiple directorships influences earnings
management?
2. Does the practice of political connection influences earnings management?
C. Purpose and Benefit
1. Purposes of Research
In the earlier part, it has been established briefly how corporate
governance relates with the quality of financial information, especially so in
terms of earnings. It is also noted that two issues related to governance, namely
multiple directorships and political connections can influence the managers to
use earnings management in positive or negative ways. As these are
investigated in this research, the main objectives for the study are:
1. To analyze the influence of multiple directorships on earnings
management.
2. To analyze the influence of political connection on earnings management.
2. Benefits of Research
It is expected that this research will make positive contributions as
theoretical and practical to the following parties:
a. Regulators
Results from the investigations are expected to assist regulators in
designing, evaluating and improving the existing rules pertaining to multiple
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directorship and political connections of members of the board of directors
and commissioners in public companies.
b. Researchers
Currently, there are very few studies in Indonesia that specifically
investigate the influence of multiple directorships as one issue in corporate
governance with various firm-specific parameters. While for political
connections, this study is focusing its discussion on a specific industry
with a more recent timeframe. This study is thus expected to increase
understanding of multiple directorship practices, with respect to the
relationship between political connections and earning management
activities, this could help in further researches involving multiple
directorships, political connections and earnings management.
c. Companies
It is expected that the study results will provide recommendations
for companies to improve their corporate governance, especially for their
busy managers and act accordingly with respect to political connections
and earnings management.
d. Investors
This research should help investors in choosing which company
they will invest into by looking into the presence of interlocking
directorate and political connections of a particular company.
9
CHAPTER 2
STUDY LITERATURE
A. Introduction
In order to understand the case of multiple directorships and political
connections in a firm and their relationships with earnings management
practices, this chapter discusses the theories and any relevant information
related to both issues. The discussion highlights some prior studies that are
used in the development of the context and concept of this research in
Indonesia. The final section of this chapter explains the proposed hypotheses
for investigating the relationships between multiple directorships and earnings
management as well as political connections and earnings management.
B. Literature
1. Agency Theory and Stewardship Theory
Agency theory, the main theme of discussion in this entire study, was
first initiated by Jensen and Meckling (1976). There are two parties involved
in the theory (principal and agent), bound to a set of contract, with different
responsibilities. The principal, as the owner of the business entity, provides
capital for running the business activities. Whereas the agent acts on behalf of
the principal to manage those capital and run the company. Although both
parties are in the same goals, when exercising the contract, they have separate
interest. The principal is motivated to grow the company for the sake of
maximising their own wealth while the agent works solely to gain private
benefits, financial or otherwise, for his/her services as based on the positive
10
accounting theory where he or she is driven by his/her self-own interest
(Whittington, 1987).
Using the assumption that the two parties are ‗utility maximisers‘ and
are driven by personal interests, the divergence of interest will be inevitable
between the principal and agent, giving rise to the agency problem. Since the
goal of a firm is principal-centric (i.e. maximising principal‘s wealth), the
solution to the problem rests on correcting the agent‘s interest to be in line
with that of the principal by means of incentives, monitoring and bonding
activities (Godfrey et al., 2010). Given the logical assumptions used, the
agency theory succeeded to explain a lot of problematic managerial behaviour,
such as earnings manipulation and also provided a basis for stronger corporate
governance as separation of ownership and control became apparent
(Abdullah and Valentine, 2009).
Over the years, agency theory has gained further acceptance in the
academic discourse, but there were debates on the use of the assumed inherent
opportunistic and individualistic behaviour of the agent. Donaldson and Davis
(1991) proposed an alternative assumption with their stewardship theory. As
the name suggests, agents do not necessarily work for themselves; they can
work to attain the interest of the principal and are assumed to be cooperative
and trustworthy. The argument was further extended by Daily, Dalton, and
Canella (2003) who believed that it is in managers‘ self-interest to exercise
their stewardship functions well in order to improve their standing in the
corporate world. Corporate governance mechanisms are thus supposed to
11
ensure the optimization of managers‘ stewardship functions for achieving
organizational goals.
While this theory was perceived to counter the agency theory entirely,
in the subsequent study by Davis, Schoorman, and Donaldson (1997), it was
argued that the stewardship theory merely complements the agency theory by
taking into account the selfless behaviour of agents in their aspiration to
further maximize their utilities, thus expanding the understanding of principal-
agent relationship as well as the governance activities involved in managing it.
It is also worth noting in their paper that with the presence of asymmetric
information – a situation arising due to managers handling more company
operations than the shareholders – agency conflict is more likely to occur
(Davis et al., 1997). This is something the agency theory has already
postulated before, rendering the use of stewardship theory on its own
inadequate without first looking at the agency theory.
As it will be further discussed in the later section, corporate
governance functions to reduce asymmetric information problem, a source of
agency conflict in a company. This cements the fact that corporate governance
is based on the agency theory. In the same way, unethical behaviour of
managers, such as earnings manipulation, arises as a result of the agency
problem, something that has already been explained extensively in the agency
theory. Thus, linking these two components using the agency theory as their
considerations is appropriate and relevant to this study.
12
2. Corporate Governance
In 1999, the Organization for Economic Cooperation and Development
(OECD) published the Principles of Corporate Governance. It outlines the
definition of corporate governance to mean the following (OECD, 1999):
1. Internal mechanisms to control and operate a firm.
2. A set of relationship between the company‘s management, board,
shareholders and stakeholders.
3. Framework to develop and execute company objectives and monitor
company‘s performance in terms of effectiveness and efficiency.
Corporate governance is also defined as a check and balance system
where upon its implementations, it is based on six values: transparency,
accountability, responsibility, independence, fairness and equality (National
Committee on Governance, 2006).
Exploring the Principles further, corporate governance seeks to
correct some key areas that are the ingredients for agency problem to
materialize. Firstly, it seeks to reduce information asymmetry as exemplified
by the Principle V (five) on Disclosure and Transparency which points out
the possibility of managers not being truthful about the information it releases
to the shareholders so that they are not well-informed to make decisions.
Secondly, it tackles the self-interest motivation of the managers and
controlling shareholders in the Type I and Type II agency problem
respectively as emphasized by continuous calls for the company to provide
equitable and fair treatment of all shareholders and stakeholders. Thirdly, it
13
highlights the importance of monitoring and oversight functions of the Board
–explicitly stated in the Principle VI (six) – which is crucial in ensuring the
mitigation of the other two problems.
Other than mitigating the agency conflict, implementation of GCG
can improve performance and operational efficiency, effectively connect
companies to the capital market, lower the risk perception by creditors and
improve company reputations in the eyes of investors (IFC Indonesia, 2014).
In turn, this should improve the company‘s worth and beyond that; deepen
the domestic financial market development (Veronica and Bachtiar, 2005).
With the said benefits, a company faces better prospect of growth and it will
be unlikely that management engages in dishonest behaviour. Even if they
still try to fulfil their personal interest that are at odds with the interest of the
owners, the monitoring and oversight aspect of the corporate governance
processes are in place to detect and prevent the intention to progress further.
In these regards, it becomes relevant to incorporate the elements of
corporate governance for this study that is investigating one channel that the
management use to benefit them, namely earnings management. That is, how
some components of governance, such as the nature of directorships and the
political aspect of governance in terms of political connections can influence
the quality of oversight and monitoring requires preventing the deterioration
of quality of financial information as a result earnings manipulation.
14
3. Corporate Structure
One area of corporate governance that deals with the issue related to
principal-agent relationship is the corporate structure. The structure must be
able to ―ensure the strategic guidance of a company, the effective monitoring
of management by the board, and the board‘s accountability to the company
and the shareholders‖ (OECD, 2015, p. 51). From this objective alone, it is
clear that the structure will have at least two compartments, one for managing
the company operation and one for overseeing the actions of those who
manage the company. By convention, the former is called non-executive
director and the latter is called executive director.
While there are some variations as to the structure itself, the two most
common forms of the board are one-tier/unitary board and two-tier/dual board.
In the unitary board, both types of director sit in the same board whereas in
dual board, the executive directors work together in the management board
and the non- executive ones form the supervisory board. In Indonesia, the
2007 Limited Liability Company Act (Undang-Undang Perseroan Terbatas
Tahun 2007) mandated the dual board for the corporate structure. Different
from the usual dual board in East European countries, the boards of directors
are appointed by the general meeting of shareholders instead of the
supervisory board. Nonetheless, the role of the board of directors and
supervisory board, or the board of commissioners, remains the same.
According to Aste (1999) stated in Millet‐Reyes and Zhao (2010), dual
board present different strengths than the unitary board. First, there is a clear
15
demarcation of responsibilities between two boards. Second, the relative size
of each board is smaller, giving way for quicker decision-making processes to
occur. Third, the two boards can have greater flexibility to nominate its
members which can improve diversity. All these should put the dual board to
be more effective in the implementation of good corporate governance.
However, it is also noted that there are problems associated with dual board
system. First, interlocking directorate occurs more often. Second, there will be
a practice of ‗political appointment‘ where former executive directors are
appointed immediately as non-executive directors and vice versa, which can
disproportionally strengthen their influence in the company. All these can
potentially impact the effectiveness of the dual board in implementing good
corporate governance.
4. Multiple Directorship
The need for multiple directors is explained using a simple demand-
supply relationship posited by Fama and Jensen (1983). They raised a point on
the nature of director‘s market which continues to search for the best talent
available for any directorship position. With that signal and given the scarcity
of those talents, it is only sensible that one talent will be valued and sought
after highly by many companies. The individual will see this demand as
recognition of his work and thus is willing to take up offers from more than
one entity to boost his reputation. In that sense, multiple directorship signals
directors‘ quality.
16
Aside from the reputation factor, multiple directorships can be
triggered by the intensity of firm‘s transaction and size. In the first place, as
firms make use of resources to conduct its business, directors have a role in
bridging the resource holders and the firm‘s owners (Pfeffer and Salancik,
1978). It is therefore important for them to have strong relationship with
external environment while being able to minimise the risk of environmental
uncertainty and the presence of environment- dependent transaction cost
involved in such arrangements (Hillman, Canella, and Paetzold, 2000). Other
than strong relationship, tackling the two issues necessitates the need of
directors/agents with informational network, justifying the possibility of
appointing busy managers who have stronger informational network (Yusoff
and Alhaji, 2012).
Booth and Deli (1995) cited in Ferris, Jagannathan, and Pritchard
(2003) stated that when a particular company experience more transactions
with external parties, directors with diverse connection to these parties are
required in managing the more complex contracting activities. Applying the
same logic, as a business entity grows, its businesses expand, thus requiring
agents/directors who have skills and vast knowledge of acquiring sources of
capital for the benefit of the firm and thus its shareholders. Busy managers are
perceived as possessing such characteristics and it is in the company‘s interest
to use them. For instance, one busy manager is actually close with a potential
business partner because the latter has been in business with another company
that is served by this same manager. The social/networking skill that this
17
manager has can help to smoothen company transactions, possibly bringing
good deals for the company itself.
The case of multiple directorships presents some advantages for the
firm. Chen, Lai, and Chen (2015) contend that with busy managers, the
company will incur lower agency costs because the said managers are high-
flyer individuals with proven capabilities to lead or monitor a company as the
executive or non-executive directors respectively. Their self-interest digresses
little from shareholders‘ since they want to ensure the company performs well
to improve their expertise, hence their selling points in the market. These
selling points will further encourage the use of their skills in other companies,
thus benefiting the managers themselves in the future. Other than that, the firm
will gain from the perspective of strategic management (Chen et al., 2015).
This is especially important when the firm should resort to major corporate
actions, such as merger and acquisition (MandA) or raising capital. With
multiple directors, their connections and networks fill in the gap on available
strategies that the company can be used. The directors can compare and
contrast practices from all the firms they are assigned to, giving them the
advantage of choosing best practices and benchmark for the firm‘s
performance.
Despite the advantages, the presence of busy directors can be
detrimental to the company. Firstly, the agency cost rises as a result of them
being overwhelmed by the monitoring and supervision workload as they serve
different companies. In a study conducted by Core, Holthausen, and Larcker
18
(1999) for example, it showed that at the presence of multiple directors, the
company‘s CEO received higher compensation packages even though the firm
performance was lower. In this regard, the less supervised managers use the
golden opportunity to serve themselves at the expense of shareholders‘ needs
(Chen et al., 2015). Secondly, the company faces the impact from multiple
directors‘ learning cost as they have to adjust and gain skills required
conducting proper governance in the company. It is expected that at the
beginning of their term, their performance is weak before improving rapidly
later on. With lower efficacy of governance after the appointment of multiple
directors, the company faces the risk of an increase in undesirable
management activities that are attributed to weak governance (Chen et al.,
2015).
Finally, multiple directors who usually are seen as outside directors
face the challenge of obtaining information from the executive directors,
especially CEO of the different company they serve into (Adams and Ferreira,
2007; Raheja, 2005). The assumption here is that the directors serve in
companies of different industry than where they come from originally. This is
quite relevant in Indonesia, as the implementation of Commission for the
Supervision of Business Regulation No. 7/2009 regarding the Guidelines of
Interlocking Directorate prohibits any director to serve in companies of the
same industry. It creates information gap for the multiple directors as they
may come from one industry they are familiar of, only to serve another
company in an unfamiliar industry. With the presence of asymmetric
19
information, multiple directors cannot achieve the best outcome of governance
they hope for. Thus their supervisory and oversight role is not optimal.
5. Political Connection
A company is said to be politically connected if at least one of their
directors or one large shareholder with more than 10% voting rights is a
member of parliament, a minister or head of state or affiliated to a political
party (Faccio, 2006). This type of company exists in Indonesia due to rampant
corruption and weak enforcement of investor protection laws (Carney and
Child, 2013; Chaney et al., 2011; Faccio, 2006).
Prior research showed that firms seek political connection due to the
benefits associated with the influence of the politicians or public office
holders. In a country where political instability could occur easily, political
connection is valued for providing protection and reputation for the connected
company (Fisman, 2001). Furthermore, political connection is used to
facilitate many business interests. One, the firm can lobby for the
implementation of regulation to restrict the entrance of other companies in the
market (Bunkanwanicha and Wiwattanakantang, 2009). Two, it is able to
make use of the perceived good reputation and politicians‘ networks to obtain
more credit facilities from financial institutions, often at lower rate than others
without the connection (Boubakri, Cosset, and Saffar, 2012). Three, political
connections provide certainty for the company during an economic crisis as it
has higher chance of being granted some bailouts from the government
(Faccio, 2006). From here, political connections should impact positively on
20
the firm‘s performance and also its value and managers may not be
incentivised to unethically exaggerate financial information, unless they have
strong self-interest to do so.
Accordingly, however, political connections are perceived to lower the
quality of the firm‘s financial reports (Chaney et al., 2011; Zhaoming, Xinyi,
and Hong, 2010). One study revealed that accounting choices are tied to the
political costs related to the outcome of financial reports while another study
showed that discretionary accruals are used to hide expropriation activities by
the managers (Piotroski et al., 2015; Watts and Zimmerman, 1978). The
reason is that the firm which enjoys such connections will not have the
incentive to increase transparency for the fear of political scrutiny as well as
enhancing the directors‘ self-interest (Chaney et al., 2011; Faccio, 2006;
Ramanna and Roychowdhury, 2010). Also, it was found that politically-
connected firms fared worse than their non-connected counterparts, especially
during the election period or if they are doing business in politically-charged
areas (Bertrand, Kramarz, Schoar, and Thesmar, 2006). That is because the
connected firms are expected to pay back for the favours and benefits obtained
from the politicians and often times it is done during election times where
politicians seek for re-election into their respective political office. With lower
incentive to transparency and easily fluctuating performance in the highs and
lows of political situation, it gives a strong case for management to conduct
some degree of manipulation of financial information, for example in earning
figures.
21
6. Earnings Management
Scholars have debated a lot on the definitions of earnings management
due to different motives and ways involved to do so (Beneish, 2001).
Regardless of the differing opinions, the philosophy behind earnings
management is that the managers manipulate financial information to ensure
that their self-interest is served, whether in terms of fulfilling the fiduciary
duties or protecting the company from inadequate and inflexible business
contracts (Scott, 2012). Thus, it is quite appropriate that this study takes a
more general definition of earnings management as stated by Scott (2012, p.
423) which is ―the choice by a manager of accounting policies, or real actions,
affecting earnings so as to achieve some specific reported earnings objective‖.
1. Motives for Earnings Management
As stated earlier, manipulation of earnings can be driven either by
the desire to protect one‘s reputation (in terms of being able to fulfil the
fiduciary duties) or to protect the company from contractual problems. In
that sense, earnings manipulation can be seen from opportunistic and
efficiency perspectives. Under the opportunistic perspective, managers
manipulate accounting numbers with malicious intent (e.g. getting
overcompensated, protecting reputation). In doing so, the quality and
decision-usefulness of financial information is deteriorated, which means
that opportunistic earnings management is bad for the company (Jones,
2015). However, under the efficiency perspective, manipulation is done to
reduce information mismatch or gap between managers and shareholders
22
or investors. This is in line with the previous discussion on earnings
quality, in which managers disclose information as a way to tell the
external parties about the company‘s conditions. Because this
manipulation essentially put earnings figures closer to the real value, this
is beneficial for the company (Godfrey et al., 2010).
Focusing on the opportunistic earnings management, there are five
general motives as to why managers to engineer earnings value that
departs from its real value. These are explained below.
a. Bonus Plan Motive
In some companies, executive bonuses are tied to earnings
target. As such, there is an incentive for them to play around with
earnings so as to meet their target bonuses (Healy, 1985). Usually this
is done with short-term target in mind, thus earnings management is
done to ensure higher earnings today at the expense of future earnings.
b. Debt Covenant Motive
In the eyes of creditor, they want to gain comfortable interest
from lending their money to the firm and thus stipulate some earnings
target or leverage ceiling for the company to adhere to. If the company
want to get more lending at or below the current interest rate, the
management may proceed to manipulate earnings upwards for meeting
the earnings target. Consequently, higher earnings can correspond to
higher asset value which will reduce leverage ratio (DeFond and
Jiambalvo, 1994)
23
c. Political Cost Motive
This motive concerns the company with a degree of political
visibility, such as being politically-connected or state-owned
enterprises. The condition gives rise to political cost where the
company is under constant public monitoring (Godfrey et al., 2010).
The management want to ensure that they stay under the radar as it
continues to obtain benefits from the political exposure. This is done by
ensuring the firm‘s earnings are maintained at certain acceptable level
(Scott, 2012).
d. Expectation and Reputation Motive
Skinner and Sloan (2002) cited in Scott (2012) found out that
companies are punished more severely if they underperform rather than
them being rewarded for outperforming the market‘s expectations.
Because of that, management is incentivised to manipulate earnings
highly during bearish business cycle. This incentive is intensified as the
management‘s reputation is linked to the company‘s performance.
Thus, earnings management work to avoid market punishment on both
the company‘s share price and managers‘ reputation
e. Initial Public Offering (IPO) Motive
For companies wishing to be listed in a stocks exchange, they
must provide some financial information on their worth in the market.
The management want to obtain as much capital as possible from the
IPO, which can only be done by projecting an image of healthy and
24
profitable company (Marquardt and Wiedman, 2004). That gives a
reason to overstate financial data, including earnings prior to IPOs.
2. Mechanism for Earnings Management
According to Mohanram (2003) and Trueman and Titman (1988),
there are various ways in which earnings management is exercised. They
are:
a. Taking a bath
The management enhances current loss by writing off assets and
recognizing expected future costs. In this way, they want to polish
future earnings because of the present turbulence within the company
(e.g. the company is under stress or restructuring).
b. Income Minimisation
While the way it is done is similar to taking a bath, the goal is to
lower current earnings that are way above forecasts, which can raise
public scrutiny, especially if the company is politically visible. The
ways to do so include rapid write-offs of capital and intangible assets or
expensing, instead of capitalising, advertising and research and
development (RnD) costs.
c. Income Maximisation
This is done with the bonus plan motive in mind, as the
compensation packages of company executives are tied to earnings
25
target. Conversely, the practice is used to meet the conditions required
in the debt covenant.
d. Income Smoothing
The practice ensures certain trend of company‘s earnings with little
or no fluctuations of earnings in place. This can be driven by both the
interest of investors and managers. Sometimes, investors prefer steady
performance of the company at all times and it helps them in their
decision-making. Meanwhile, for risk-averse managers, it is favourable
that they can be compensated at relatively predictable level while being
perceived to be doing well, even though they do not really do anything
for the company (Lambert, 1984).
3. Types of Earnings Management
Earnings management takes place when managers choose some
accounting policies or engage in real manipulations (Jones, 2015). For
accrual earnings management, it can be done by either choosing a
favourable accounting policy directly or playing around discretionary
accruals, such as inventory valuation and receivable provisions and write-
offs (Li, 2009). Although total accruals are composed of normal and
discretionary accruals, discretionary accruals are measured to identify the
degree of accrual-based earnings management because the managers
engage directly in its creation while for normal accruals; they are natural
mechanisms to capture adjustments on company‘s performance (Dechow
et al., 2010).
26
As far as accrual earnings management is concerned, once it is
conducted beyond what can be managed by the company, more earnings
management practices will follow in the future. If the management has
raised earnings upwards, the future earnings will be lower and vice versa.
This concept is called accrual. Reverse (Allen, Larson, and Sloan, 2013;
Marquardt and Wiedman, 2004). While earnings management in itself can
be used with shareholders‘ interest in mind, accrual reverse will indicate
opportunistic earnings management that are detrimental for the
shareholders. This is where the good corporate governance practices come
into play to ensure earnings management do not fall into the accrual
reverse form. Meanwhile, it also means that the presence of earnings
management over the years can symbolise dishonest behaviour on
managers‘ part.
In the case of real earnings management, managers engage in
manipulating real business activities, such as on advertising, RandD,
timing for the purchase and disposal of capital assets and overproduction
practices (Cohen and Zarowin, 2010). Essentially, real earnings
management is designed to deceive stakeholders on some financial
reporting targets using regular operational activities which may not be
beneficial for the firm‘s value (Roychowdhury, 2006). Since the
manipulation occurs due to the deviation of normal practices, the impact
will be two-fold: increase (decrease) of current earnings and decrease
(increase) of future cash flows. For instance, overproduction in present
27
period increases current earnings but will generate higher inventory
holding costs due to excesses of inventory that is directly related to cash
flows from operations.
Although real earnings management presents greater long-term
costs for the firm than accruals, managers believe that to depend only on
accrual earnings management will incur private costs, minimally in the
short run, on them (Scott, 2012). The reasons are (1) the use of accruals
will more likely be detected by auditors and regulators and (2) once
accruals can no longer cover the difference between true earnings figures
and the desired target earnings at the reporting date, real manipulation is
impossible to be conducted (Roychowdhury, 2006). This preference
prevailed in politically-connected firms, where management will more
likely to replace accruals with real earnings management that are not easily
measured and detected. This preference is stronger when companies are in
the political spotlight with intense public monitoring (Braam et al., 2015).
Aside from the fact that the two types of earnings management
differ in the target of manipulation, Table 2.1 summarises other
differences between accrual and real earnings management.
Table 2.1
Differences between Accrual and Real Earnings Management
Type Accrual Real
Impact on cash flows Inderect Direct
Detection risk High Low
Management motive For long-term
targets, e.g. income
smoothing
For short-term target,
such as executive
compensation target or
market expectation
28
Sources: modified and adapted from Roychowdhury (2006); Achleitner, Günther,
Kaserer, and Siciliano (2014); Braam et al. (2015) by the author.
In recent years, there are more studies that make use of real and
accrual- based earnings management to showcase the level of earnings
quality. One reason is that the management have been aware of the fact
that from the past major scandals, such as Enron and WorldCom,
accounting regulations have been strengthened to prevent accrual-based
earnings management. In one study, with the introduction of SOX in 2002,
accrual-based earnings management declined sharply while real earnings
management picked up the pace (Cohen, Dey, and Lys, 2008). This
showed that companies today use a combination of accrual and real
earnings management with preference towards the latter, making it
relevant to bring real earnings management calculation in the study of
earnings manipulation.
However, it is important to acknowledge that real earnings
management are relatively new in the discussion of earnings quality. Its
measurement is still subject to further evaluations, as compared to a
variety of measurements of accrual-based earnings management that have
been robustly discussed over many studies. A recent study by Cohen,
Pandit, Wasley, and Zach (2015) challenged researchers to find more
robust alternative(s) for measuring real earnings management, by basing
their argument on the fact that the current measurement is prone to
misspecifications that could lead to validity problems in studies
29
concerning real earnings management. In order to provide more reliable
interpretation on earnings quality, accruals are used as a proxy for earnings
management. At the same time, they correspond well with the accrual
accounting system used in all Indonesian companies (Dechow et al.,
2010).
4. Accrual-based Earnings Management Model
The measurement of accrual-based earnings management usually
focuses on valuing the discretionary accruals that quantitatively reflect the
degree of managers‘ discretions in the financial reporting processes
(Beneish, 2001). The most famous and widely used method is the Jones
(1991) model. This model uses a logical premise that the changes in the
firm‘s economic conditions can induce earnings management to occur,
which is why it uses the changes in sales and the changes in plant,
property and equipment (PPE) as the measuring variables. This model was
later modified by Dechow et al. (1995) by adjusting sales figures with the
value of receivables. The new model is called modified Jones model.
A new measurement of discretionary accruals was introduced in
Dechow and Dichev (2002) model which focuses on the use of cash flows
from three different time periods and working capital as they argued that
accruals need to assume future cash flows for the company. There is also
the Beneish (1997, 1999) model that uses unweighted and weighted
probabilities of earnings manipulation. These two models look into the
accruals quality instead of the value of the accruals itself.
30
With regards to the various methods to measure discretionary
accruals, in this study, it uses Modified Jones Model (1995) model. First
of all, the test on modified Jones model or Dechow et al. (1995) model
showed that it was statistically significant in relations to the incidence of
fraudulent activities, where earnings management will occur (Jones,
Krishnan, and Melendrez, 2008). Furthermore, the modified Jones model
was said to be the most relevant in the context of Malaysia and Thailand
(Selahudin, Zakaria, Sanusi, and Budsaratnagoon, 2014). Given that
Indonesian economy quite resembles Malaysia and Thailand where (1)
family-controlled firms are prevalent, (2) political connections are
common and (3) the three countries are considered as emerging
economies, the same line of argument on the appropriateness of the
modified Jones model should hold for Indonesia.
C. Previous Research
The issue of multiple directorships has been explored by various
scholars in the last decade (see Ferris et al. (2003), Chiu et al. (2013), Iturriaga
and Rodríguez (2014), Kiel and Nicholson (2006), Shu et al. (2015), Latif,
Kamardin, Mohd, and Adam (2013), Kamardin, Latif, Mohd, and Adam
(2014)). The results observed no particular trends which relate multiple
directorships and other variables, such as firm performance, board monitoring
and earnings management (see Table 2.2 below).
The study of multiple directorships is applicable in Indonesia given the
rarity of the research and that the practice itself is allowed and regulated by
31
the authorities. Furthermore, many prior studies were mostly conducted in the
developed market setting, such that this study which uses the setting of an
emerging market can contribute in terms of whether the impact of multiple
directorships is similar across various market setting. Only a few studies have
been conducted in similar markets as Indonesia, like in Malaysia and
Thailand, thus this study should further enrich the knowledge regarding the
multiple directors and their impacts on various business aspects.
Table 2.2
Summary of Previous Studies on Multiple Directorships
No
Title
(Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
1 Too Busy to
Mind the
Business?
Monitoring
by directors
with Multiple
Board
Appointment.
Ferris, S.P.,
Jagannatahan
, M., and
Pritchard,
A.C, (2003)
The sample are
US firms with
total asset above
$100 Million
Uses
Multiple
Directorship
as variable
Multiple
Directorship and
Board Monitoring
did not support
the idea of
limiting the
number of
directors‘
appointment for
any individual
director.
2 Board
Interlocks
and Earnings
Management
Contagion,
Accounting
Review,
88(3), 915-
944. Chiu,
P.C., Teoh,
S.H., and
Tian, F.
(2013)
The samples are
118 US firms
from 1997 to
2001
Uses
Multiple
Directorship
as variable
Positive
correlation among
variables and it is
stronger when the
interlocked
director holds
leadership or
accounting related
position
32
Table 2.2 (continued)
No
Title
(Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
3 Board of
Directors and
Firms
Performances
: the Effect of
Multiple
Directorships
Spanish
Journal of
Finance and
Accounting,
43(2), 177-
92. Iturriaga
F.J.L., and
Rodriguez,
I.M. (2014)
The samples are
311 firm in
Spain from 2007
to 2009
Uses
Multiple
Directorship
as variable
Multiple
Directorships and
Firm Performance
At low level of
multiple
directorship
(below four), the
variable correlates
positively with
firm‘s
performance.
4 Multiple
Directorships
and
Corporate
Performance
in Australian
Listed
Companies.
Kiel, G C.,
and
Nicholson, G.
J. (2006)
The samples are
1250 Australian
firms as of 20
June 2003
Uses
Multiple
Directorship
as variable
Multiple
Directorships and
Firm Performance
Multiple
directorships did
not appear to be
related with the
firm‘s financial
performance.
5 Board
External
Connectedne
ss and
Earnings
Management.
Shu, P.G.,
Chu,S.-B.,
and Yang,
Y,-W. (2015)
5940 firm-year
observations in
Taiwan from
2007-2011
Uses
Multiple
Directorship
as variable
Board External
Connectedness
and Earnings
Management
Negative
correlation among
variables and it is
more significant
when the board is
connected in the
same industry.
33
Table 2.2 (continued)
No
Title
(Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
6 Multiple
Directorship,
Board
Characteristic
s, and Firm
Performance
in Malaysia.
Latif R.A.,
Kamardin,
H., Mohd,
K.N.T (2013)
The samples are
132 Malaysian
firms in 2008
Uses
Multiple
Directorship
as variable
Multiple
Directorships and
Firm Performance
had a positive
relation but not
significant
correlation
between multiple
directorships and
firm‘s market
performance.
7 Multiple
Directorships
and the
Monitoring
Role of the
Board of
Directors:
Evidence
from
Malaysia.
Kamardin,
H., Latif,
R.A., Mohd,
K.N.T (2014)
The samples are
134 Malaysian
firms in 2008
Uses
Multiple
Directorship
as variable
Multiple
Directorships and
Monitoring Role
of Directors
No association
observed between
two variables.
Sources: modified and adopted from Ferris et al. (2003); Chie et al. (2013); Iturriaga and
Rodriguez (2014); Kiel and Nicholson (2006); Shu et al. (2015); Latif et al. (2013);
Kamardian et al. (2014) by the author.
Similar situation exists for the study of political connections where it
has been explored in various ways with the use of cross-country data. The
contribution for this study comes from the fact that it focuses on the
individual country in which the role of politics in the business arena is strong.
This is despite the similar variables involved in the investigation which are
34
political connections and earnings management. Table 2.3 summarises prior
studies linked to this research.
Table 2.3
Summary of Previous Studies on Political Connections
No
Title
(Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
1 Accrual-
Based and
Real
Earnings
Management
and Political
Connections.
Braam, G.,
Nandy, M.,
Weitzel, U.,
and Lodh, S.
(2015)
The samples are
5493 companies
in 30 countries
from 1997 to
2001
Uses political
connection as
variable and
uses Accrual
based as
proxy of
earnings
management.
P olitical
Connections and
Earnings
Management
Higher incidence
of real earnings
management due
to substitution
from accrual
earnings
management in
politically-
connected firms.
2 The impact
of Political
Connections
on Firms‘
Operating
Performance
and
Financing
Decisions.
Boubakri, N.,
Cosset, J.C.,
and Saffar,
W. (2012)
The samples are
234 business
entities in 12
developed and
11 developing
countries from
Uses political
connection as
variable
Political
Connections and
Operating
Performance as
well as Financing
Decisions
Positive
correlations among
variables, proving
the argument that
political
3 The Quality
of
Accounting
Information
in Politically
Connected
Firms.
Chaney, P.K.,
Faccio, M., -
The samples are
4954 firms in 19
countries from
2001 to 2005
and 4308 firms
in 19 countries
from 1996 to
2005.
Uses political
connection as
variable
Political
Connection and
Earnings Quality
Negative
correlations
between political
connections and
earnings quality.
35
Table 2.3 (continued)
No
Title
(Researcher,
year)
Research Methodology Research
Result Differentiation Similarities
and Parsley,
D. (2011)
4 Politically-
Connected
Firms: Are
They
Connected to
Earnings
Opacity?.
Journal of
Accounting
and
Economics.
Research in
Accounting
Regulation,
17, 25-38.
Riahi-
Belkaoui, A.
(2004)
The samples are
532 firms from
32 countries.
Uses political
connection as
variable
Political
Connections and
Earnings
Opacity
Had a positive
correlations
between two
variables and that political
connections
drive accounting
quality more
than accounting
rules
5 Political
Connections
and
Operational
Performance
of Non-
Financial
Firms: New
Evidence
from Poland.
Emerging
Markets
Review.
Jackowiz, K.,
Kozlowski,
L., and
Mielcarz, P .
(2014)
The samples are
316 Polandian
non-financial
companies in
2001-2011
Political
Connections and
Firm‘s
Operational
Performance
Negative
correlation
between firm‘s
performance and
profitability
6 Earnings
Conservation
Perspective:
The samples are
427 Chinese
firms from 2004
Political
Connections and
Earnings
36
Table 2.3 (continued)
No
Title
(Researcher,
year)
Research Methodology Research
Result Differentiation Similarities
Political
Connections
and Earnings
Quality-
Evidence
from China‘s
Private Listed
Companies.
Paper
presented at
the M and D
forum
Zhaoming,
Z., Xinyi, L.,
and Hong, Y.
(2010)
To 2009
Quality
Politically-
connected
private listed
firms have
poorer earnings
quality (negative
correlations)
Sources: modified and adopted from Braam et al. (2015); Boubakri et al. (2012); Chaney et
al. (2011); Riahi-Belkaoui (2004); Jackowicz, Kozłowski, and Mielcarz (2014); Zhaoming et
al. (2010) by the author
As the purpose of this research is to find out the relationship between
multiple directorships and earnings management and between political
connections and earnings management, multiple directorships and political
connections are treated as separate independent variables. Previous study found
that multiple directorships are related negatively with earnings management
(Shu et al., 2015). Also, political connections are related negatively with
earnings quality (Chaney et al., 2011; Riahi-Belkaoui, 2004; Zhaoming et al.,
2010). Since it is possible that lower earnings quality is due to high incidence
of earnings management, the relationship between political connections and
37
earnings management can be investigated as well. The summary of the
conceptual framework is visualised below.
Table 2.4
Conceptual Framework
D. Hypothesis
1. Multiple Directorships and Earnings Management
There are two ways that multiple directorships influence earnings
management as proposed by Jiraporn et al. (2008) in two hypotheses:
reputation and busyness hypothesis. From the perspective of reputation,
multiple directorships are valuable title for those who have it. It assumes that
Independent Variables
Political Connection
Dependent Variables
Earnings Management
The Influence of Multiple Directorships and Political Connection on
Earnings Management (Study at Manufacturing Companies listen on LQ45
Index in Indonesia Stock Exchange Period 2013-2018
Theory:
Agency Theory and Stewardship Theory
Independent Variables
Multiple Directorships
Multiple Linear Regressions
Findings
Conclusion, Suggestion, and Recommendation
38
multiple directors are high- flier individuals with excellent records, skills and
business acumens which are why they are highly sought after by other
companies. Because of this, they will be very careful with their reputations as
highly-skilled individuals and take their job more seriously than others who
do not have multiple directorships. It is in their best interest to remain
competitive because others can catch up to them as well. It is believed that
these directors will do better supervision and learn more than their peers and
thus mitigate earnings management in all companies under their stewardship.
Studies by Iturriaga and Rodríguez (2014) and Latif et al. (2013) confirmed
the hypothesis when multiple directorships improved firm performance. With
improved performance, it is plausible that the management do not need to
resort to earnings management in advancing their own agenda. Similar
conclusion was derived by Shu et al. (2015), when they discovered negative
relationship between multiple directorships and earnings management which
was measured using discretionary accruals. They argue on the platform of
learning effect; whereby multiple directors gain a lot of information from
various companies which actually enhance their skills to prevent agency
problems from taking place.
The above studies that support the reputation hypothesis assume
diversified ownership in which no one or few shareholders dominate the
voting of board members. In Indonesia, however, concentrated ownership is
prevalent; with many companies are family-owned (Apriliani, 2015). This
create a situation where the appointment of board members is simply based
39
on their closeness to the block or family owners which may imply less
priority on reputational or skilfulness factor. Nonetheless, Holderness and
Sheehan (2000) posited that despite the inherent bias to favour or promote
desirable or family-related individuals to serve the boards, block shareholders
still take into consideration the reputation of these individuals in the capital
market itself. This ultimately boils down to the overall reputation of the
company and the shareholders since the capital market will definitely react
when there is a signal that company‘s management are incompetent.
Accordingly, in cases of multiple directors, they will not choose any
individual but those with reputable market perception – in line with the
reputation hypothesis.
On the other spectrum from the busyness perspective, multiple
directors lack attention span and cognitive abilities to perform their duties.
They are either genuinely incapable of conducting the monitoring and
oversight functions because of high workloads or are seeing the lack of
attention as an incentive to advance their interests given their positions. Either
way, this opens up to higher possibility of earnings management taking place
in those companies as managers are not properly monitored and guided by the
supervisory board members. Or, if the managers are busy themselves, they
will be distracted and are unable to make optimal decisions for company
operations. Apart from that, multiple directors are also seen as weakening the
overall corporate governance of the company (Core et al., 1999; Fich and
Shivdasani, 2006). Furthermore, in one study conducted by Chiu et al. (2013),
40
the presence of interlocked directors actually spread the practice of earnings
management in the susceptible companies. Although not directly in support to
this hypothesis, the condition highlights the fact that multiple directors do not
work as properly as they should have been. Instead of ensuring the
susceptible firms do not get involved into earnings management practices,
these multiple directors advance their own agenda which could be said being
exacerbated by them holding various directorships positions. Consistently,
busy directors enhance accounting fraud which, by definition, includes
earnings management with the similar premise of them having little time and
effort to perform their monitoring functions (Beasley, 1996).
From the above, there is a possibility that multiple directorships
prevent or enhance agency problem as manifested in opportunistic earnings
management practices by the company executives and managers. Hence, the
hypothesis for this relationship is proposed as follows:
H1: Multiple directorships influence earnings management.
2. Political Connection and Earnings Management
In the earlier section, it has been discussed that politically-connected
firm is viewed from the political connections of both its executive and non-
executive directors. Chaney et al. (2011) showed that political connections
reduce earnings quality, by proxy of earnings accruals, as a company can use
this relationship to protect itself from legal problems. This will relate well
with political cost hypothesis since directors will try to mask the true value of
the company out of fear for public scrutiny – a high political cost for the firm
41
(Godfrey et al., 2010). Furthermore, as the connected firms gain better access
to business-related needs (e.g. tender contracts and loans), the managers will
extract some of these extra benefits for themselves by masking the true figure
of overall benefits to the investors. This is in line with rational, opportunistic
behaviour perspective of the agents under the agency theory. Additionally,
political connections reduce the firm‘s profitability (Jackowicz et al., 2014).
Lower profitability can induce the management to conduct earnings
manipulation to make the firm look better, for instance by taking a bath or
income maximisation. Hence, it can be argued that political connections will
increase earnings accruals given earnings manipulation intensifies when the
firm‘s profit is lower.
In Indonesia, public supervision is visible albeit being inconsistently
applied. Press freedom, as one proxy to gauge public monitoring, has been
acknowledged to have been improved by a lot since the downfall of Soeharto
(Frederick, Worden, and Library of Congress Federal Research Division,
2011; Freedom House, 2015). Investigations into high profile cases involving
state-owned entities such as 2001 accounting scandal of PT Kimia Farma Tbk
and 2007 insider trading scandal of PT Perusahaan Gas Negara (Persero) Tbk
highlight the ability of media to satisfy public demands of improved
accountability in firms with heavy State involvement. Nonetheless, Nugroho
Siregar, and Laksmi (2012) highlight how most of prominent Indonesian
media are tied to political parties with coverage that are biased in favour of
political affiliations of their owners. Extending this into the discussion of
42
public monitoring of politically-connected companies, the abovementioned
condition may reduce the effectiveness of public supervision of those
companies given that the same political parties control the media.
Other than supervision argument, in other study by Boubakri et al.
(2012), as firms have better access to external financing, they will have
improved performance than the non-connected peers. At this condition,
political connections become valuable for these companies as it allows them
access to external resources needed for business activities. With these two
positive associations, it is unlikely that a firm involves in earnings
management. Considering the above arguments, the hypothesis for this
relationship is:
H2: Political connections influence earnings management.
3. Conclusion
It is understood that the driving force for managers to conduct earnings
manipulation is for fulfilling their own self-interest before the shareholders.
Implicatively, reducing the possibility of opportunistic earnings management
to occur, just like any agency conflicts, can be achieved by implementing
good corporate governance architecture. In relations to that, issues of
governance such as multiple directorships and political connections can
influence the way and the result of addressing earnings management as
evidenced by prior researches on these matters. In the next chapter, the
research model is presented for investigating the hypotheses regarding the
43
influence of multiple directorship practices and political connections on
earnings management in Indonesian context.
44
CHAPTER 3
RESEARCH METHODOLOGY
A. Scope of Research
This research uses quantitative research method and applies
Indonesian public listed companies as unit of analysis for the duration of 6
(six) years from 2013 to 2018. Using secondary data as research instrument,
this study is an observation-based research. The population is limited to
manufacturing companies from all listed companies on LQ45 Index in
Indonesia Stock Exchange (IDX) and that the samples are taken using
purposive sampling technique so that they conform to the research objectives
under some specific criteria. SPSS 23 is used to analyse the data while
Microsoft Office Excel 2007 is used to collect and modify the data.
B. Sampling Method
Data provided by IDX and the respective company website were
collected for this study. Meanwhile, population of this research is
manufacturing companies listed on LQ45 Index in Indonesia Stock Exchange
(IDX) in the period between 1 January 2013 and 31 December 2018. The
timeline is chosen because of three considerations: (1) the availability of data
for the study itself; and (2) the political and economic stability associated
with this timeframe. For samples, they are taken using non-probability
purposive sampling with the following criteria:
44
1. The companies are listed in the manufacturing industry in LQ45
Index, as defined by IDX in three sectors: basic and chemical
industry, consumer goods industry and miscellaneous industry.
2. The companies are consistently listed in LQ45 Index in IDX for
the period observed (between 1 January 2013 and 31 December
2018).
3. The companies reporting date is 31 December for the period
observed.
4. In the case of newly-listed company in 2013, its Initial Public
Offering (IPO) took place at the first half of the year.
5. The companies have multiple directors and/or political connection
for at least once within the duration of the study.
6. The companies‘ revenue should lower than 100 trillion rupiah.
Using the above criteria, there are 7 sample companies for each observed
year.
With respect to the samples, the data is said to be a panel data which
incorporate the cross-sectional and time-series data. In this study, balanced
panel data is used because it allows an observation of the same unit in every
time period which reduces the noise introduced by unit heterogeneity
(Baltagi, 2008).
45
Table 3.1
Data Sampling Procedures
Item No. of Companies
Listed manufacturing companies on LQ45 in IDX as
of 31 December 2013
10
Listed companies without consistent listing record
Listed companies with different reporting date
Listed companies without all the required information
Listed companies with revenue above 100 trillion
rupiahs
-
-
2
1
Samples chosen (per year) 7
Samples chosen for the entire period of observation
(x6)
42
Sources: work of the author based on IDX data
C. Collection Data Method
In obtaining the data in this study, researchers used two ways, library
research and documentations research.
1. Library Research
Library Research Studies conducted by processing the data,
journals, articles, and other written media related to the topic of discussion
of this study. Researchers obtain data relating to the issues being
researched through books, journals, thesis, internet, and other devices
related to the title of the study.
2. Documentation Research
Documentation Research study documentation is a method of data
collection by collecting secondary data used for settlement in this study.
The main data of this research is secondary data. Researchers obtained
data from the Indonesia Stock Exchange website. In this study, which
46
became the subject of research is the annual report and audited financial
statements. Researchers obtained data by downloading financial statement
on the official website of the Indonesian stock exchange that is
www.idx.co.id and websites of each company.
D. Data Analysis Method
The analytical tool used in this research is multiple linear regressions
using SPSS 23, where the regression equation contains elements of
interaction (Multiplication of two or more independent variables). This
interaction test used to determine the extents of interaction between variables
which are audit quality, earning management and earning quality.
1. Descriptive Statistic
Descriptive statistics provide an overview or description of the data
seen from the mean, standard deviation, variance, maximum, minimum,
sum, range, kurtosis, and skewness (Ghozali, 2012).
Descriptive statistics are based on data that has been collected and
then analyzed. This analysis is used to provide a description of the
research variables (audit quality, earnings management, and earning
quality) which can be seen from the amount of data, maximum, minimum,
average number, range, and standard deviation.
2. Classical Assumption Test
Once the estimator model has been decided, further tests are
conducted to ensure that the regression model is of the best linear unbiased
47
estimate (BLUE), Assumptions must be meet the normality test,
multicolinearity test, heteroscedasticity test, and autocorrelation test.
a. Normality Test
The test will be conducted to multiple directorship and political
connection, Normality test aims to test whether the regression model,
the independent variable, dependent variable or both have a normal
distribution or not. The regression model that has a data distribution is
normal or near-normal regression model is said to be good (Ghozali,
2011).
There are two ways to detect whether or not residual normal
distribution, namely by looking at the analysis graph normal probability
plot and statistical tests. But this research will perform the process of
normality tests for the data with Kolmogorov-Smirnov (K-S) test.
Histogram and Probability plot test is also used in this test.
b. Multicollienearity Test
According to Jaggia and Kelly (2013), when a regression model
is multicollinear, it presents with some problems. First, it will be very
difficult to distinguish the individual impact of one independent
variable, because it is related to other independent variable(s). Second,
if the model is highly multicollinear, the independent variables can be
statistically insignificant or that the parameter estimates carry wrong
directional sign. Kothari (2015) suggested the use of the variance
48
inflation factor (VIF) to determine whether an independent variable is
not only correlated with the dependent variable but also is correlated
with the other independent variable(s). If the VIF value is greater than
10, the model is said to be multicollinear and the problematic
independent variable must be eliminated from the analysis.
c. Heteroscedasticity Test
A good research model should have constant variance of error
for all observations, regardless of time and objects involved. This
homoscedastic condition is required before the tests of hypothesis can
be performed (Wooldridge, 2013). To test the presence of
heteroscedasticity issue, the Breusch-Pagan test is used. If the p-value
of the test is less than a given significance level which is normally
established at 5%, the model is heteroscedastic.
d. Autocorrelation Test
This test aims to test whether in linear regression model there is
a correlation between confounding error on period t with confounding
error on period t-1 (previous year). This symptoms cause consequences
that confidence interval becomes wider and also the variance and
standard error will be interpreted too low. Autocorrelation test done in
this research is using Run test. This test is aims to test whether there is a
high correlation between residuals. There is an autocorrelation between
residuals is when the value of Asymp. Sig (2-tailed) is significant or
49
below 0.05. If more than 0.05 or not significant, it‘s mean that there is
no autocorrelation between residuals (Janie, 2012).
3. Test of Hypothesis
a. Global Significance Test (F-test)
With the aim of knowing the overall extent of independent
variable(s) predicting the change the dependent variable, it is important
to check whether all coefficients of independent variable(s) are
statistically significant (Nachrowi and Usman, 2006). To do so, the F-
stat test is performed. Using a given significance level, α, at 1% or 5%
or 10%, the model is said to be significant once the probability of F-test
falls below α.
b. Variable Significance Test (F-test)
There is a possibility that while the model is significant in
explaining the relationship between independent variable(s) and
dependent variable, some individual variables do not possess the
characteristic of statistical significance (Jaggia and Kelly, 2013;
Nachrowi and Usman, 2006). In this case, the t-stat test is used to
measure the significance of each independent variable in explaining the
change in the dependent variable. Using a given significance level, α, at
1% or 5% or 10%, an independent variable is said to be significant once
the probability of t-stat falls below α.
c. Coefficient Determination Test (R square-test)
50
The R-square test is used to measure how close each
observation is to the regression line produced by the entire data set
(Jaggia and Kelly, 2013). With the values ranging from 0 to 1, the
higher the value of R-square, the higher the percentage of response
variable variation that is explained by the linear regression model
d. Adjusted R square Test
The R-square value will rise if more independent and control
variables are added up into the regression equation. This will render the
R-square value inaccurate when the model actually includes
unimportant or inappropriate variables (Jaggia and Kelly, 2013). The
adjusted R-square test will show how much the linear regression model
could explain the variable variations after discounting the effect of the
quantity of independent variables used in the linear equation of the
model.
E. Research Variables Operationalization
1. Dependent Variable
Discretionary accruals as a proxy of earnings management is used in
this study. Apart from reflecting how much managers engage in accrual-based
earnings management (Dechow et al., 2010; Kighir, Omar, and Mohamed,
2014) the fact that the previously rule-based Indonesian Financial Accounting
Standard (Pernyataan Standar Akuntansi Keuangan or PSAK) is converging
to the principle-based International Financial Reporting Standards (IFRS)
puts more managerial discretion on the use of accounting policies, thus
making accrual-based earnings management likely to take place.
As previously discussed in Chapter 2, discretionary accruals in this
study are measured using the Modified Jones Model (1991) that is
51
modification from Jones Model. The modified model is designed to reduce
the measurement error of discretionary accruals when discretion is applied
over sale. The study from Dechow et al. (1995) finds that a modified Jones
model provides the most powerful test of earnings management compared to
Healy DeAngelo, standard Jones, and industry model. The breakdown of the
model is as follows:
TACC = NIit - CFOit
TACCit/Ait-1 = ᵝ1 (1/Ait-1) + ᵝ2 (∆REVit/Ait-1) + ᵝ3 (PPEit/Ait-1) + εit
NDAit = ᵝ1 (1/Ait-1) + ᵝ2 (∆REVit/Ait-1 - ∆REC/Ait-1) + ᵝ3 (PPEit/Ait-1)
DAit = TAit/Ait-1 – NDAit
Where TACCit : Total accruals of firm i in year t
NDAit : Nondiscretionary accruals firm i in year t
TAit : Total Accrual firm i in year t
NIit : Net Income firm i in year t
CFOit : Cash from operating activities firm i in year t
CFFOit : Cash flow from operation of firm i at the end of the year t
Ait-1 : Total assets of firm i at the beginning of year t
∆REVit : Change in revenue of firm i from year t-1 to year t
52
∆RECit : Change in receivables of firm i from year t-1 to year t
PPEit : Gross property, plant and equipment (PPE) in firm i at the
end of year t
ε : Error
The value of discretionary accruals is the residual value from the
regression of Equation 3.4for modified jones model (1995). In this study,
absolute value is used since accruals are not differentiated based on income
increasing or income decreasing motive of the managers. Transformation into
the natural logarithm of the absolute values is performed to address the
problem of non-normality when using the absolute value of discretionary
accruals (Carcello, Hollingsworth, Klein, and Neal, 2006). The transformed
values are used for the main regression model.
2. Independent Variables
To examine the hypotheses, the two independent variables are:
a. Multiple Directorship (MUL)
In previous studies, multiple directorships are indicated only by
whether it exists or not. However, using the argument on busyness
hypothesis and learning effect hypothesis, it can be inferred that the
number of interlocked directors could give different extent of earnings
manipulation. To provide greater interpretation on how multiple directors‘
impact earnings management, this independent variable is categorized as
53
dummy variable, where multiple directorship occurs are given score 1
while the non-multiple ones are given score 0. The definition of board
members is refined to mean commissioners and executive directors.
Google search engine and company‘s annual report are the sources of
information for this variable.
b. Political Connections (POL)
A politically-connected company is established if at least one of their
directors (commissioners and directors) or one large shareholder with
more than 10% voting rights is a member of parliament, a minister or head
of state or affiliated to a political party (Faccio, 2006). In this research, as
the focus is on the top corporate officers, whether they act as
commissioners or executive directors, a company is said to be politically-
connected if at least one of the directors is:
1. A member of or affiliated to a political party,
2. A member or affiliated to member(s) of regional and/or national
parliament
3. Connected to the executive branch of Indonesian government (i.e.
president, vice-president and cabinet members), and/or
4. Connected to current or former member(s) of the Indonesian
Armed Forces(TNI) and National Police (POLRI)
54
This independent variable is categorized as dummy variable, where
politically-connected companies are given score 1 while the non-
connected ones are given score 0.
The information on political connectedness of commissioner
director or director is primarily obtained using Google search engine. On
top of that, the information is cross-checked with the more detailed
description of the individuals found in Bloomberg website, company
website and/or company‘s annual report. Physical identification in terms
of facial image is also performed when suspected individuals share the
same name.
Table 3.2
Variable Operationalization
No Variable Measurement Scale
1 Multiple Directorships
(Jiraporn et al, 2008)
where multiple
directorship occurs are
given score 1 while the
non-multiple ones are
given score 0
Nominal
2 Political Connection
(Faccio, 2006)
where politically-
connected companies are
given score 1 while the
non-connected ones are
given score 0
Nominal
3 Earnings Management DAit = TAit/Ait-1 – NDAit Ratio
55
CHAPTER 4
FINDING AND ANALYSIS
A. General Description of Research Object
1. Research Object Description
The population of this research is Manufacturing Companies Listed
on LQ45 Index in Indonesia Stock Exchange (IDX) in period 2013-2018. The
samples used in this research were selected by purposive sampling method
using the criteria that have been determined.
The data used for this research is secondary data from annual financial
report of 2013 to 2018 which is available at the Indonesia Stock Exchange
site or Company‘s website.
Table 4.1
Detail of Research Sample
Item No. of Companies
Listed manufacturing companies in LQ45 in IDX as of
31 December 2013
10
Listed companies without consistent listing record
Listed companies with different reporting date
Listed companies without all the required information
Listed companies with revenue above 100 trillion
rupiahs
-
-
2
1
Samples chosen (per year) 7
Samples chosen for the entire period of observation
(x6)
42
Source: Modified by author
As it can be seen from table 4.1, the total sample of manufacturing
companies on LQ45 from 2013-2018 is 42 samples. The 7 companies are
already met the predefined criteria. And the focus of this study is to see
56
whether multiple directorship and political connection influence the earnings
management.
B. Analysis and Discussion
1. Descriptive Statistics Analysis
Descriptive statistic analysis done by comparing minimum, maximum
and mean values of each variable. Descriptive statistic analysis on table 4.2 is
a descriptive analysis for variable used in this study which is Multiple
Directorship, Political Connection, Earnings Management.
Table 4.2
Descriptive Statistics Analyses in Period 2013-2018
N Minimum Maximu
m
Mean Std.
Deviation
MUL
POL
EM
Valid N
(listwise)
42
42
42
42
.00000
.00000
.00000
1.00000
1.00000
.21314
.8571429
.3095238
.0183107
.35416680
.46790114
.05354630
Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by author
With the mean value of 0.8571429, it shows that 85% of the board in
an average Manufacturing Company on LQ45 Index filled with multiple
directors. This means that if particular company is composed of 10 (ten)
directors and commissioners, about eight of them is holding directorship or
commissioner position in at least one other company.
In the case of political connection, it shows a high proportion of
manufacturing companies are politically connected. While this results is
supportive of the argument made by Ding et al. (2014) cited in Apriliani
57
(2015) about how companies in developing countries have a higher tendency
to be politically connected, this result should be used with caution since at a
given year, the companies can be politically connected or otherwise
depending on who the directors are, thus making the above results
inconclusive to describe the overall picture of Indonesian companies in terms
of political connections.
2. Classical Assumption Test
a. Normality Test
Normality test aims to test whether in regression model, independent
variable, dependent variable, or both has normal distribution or not. Good
regression model has normal distribution of data or close to normal
(Ghozali, 2012).
1. Normality Test with Histogram
The Result of normality test can be seen in the Figure 4.1
Figure 4.1
Normality Test with Histogram
58
Source: Captured from the Result in SPSS 23 by author
As seen in histogram graph, the graph is symmetric which
means not swerve to right or left. Based on the histogram graph above,
the data is normally distributed.
2. Normal Probability Plot Test
Probability Plot test or (P-Plot test) is another way to measure
the normality.
Figure 4.2
Normality Test with Probability plot
Source: Captured from the Result in SPSS 23 by author
Normal distribution will form a diagonal straight line and
the plot of residual data will be compared with the diagonal line
(Ghozali, 2013). As seen in Figure 4.2, the dots are not spread and
stuck in the area of diagonal line and the dots follow the direction of
the diagonal line. A straight diagonal line in a normal probability plot
indicating normally distributed data.
3. Normality Test in Statistics
59
As mentioned in Chapter 3, one of the main assumptions in
Linear Regression is normality. The result of Klomogrov-Smirnov
shows that Asymp. Sig (2-tailed) result is 0.162 which is more than
0.05. From the result, it concludes that the distribution of data in this
research is normal.
Table 4.3
Klomogrov-Smirnov Test Result
Unstanderdized
Residual
N
Normal Parametersa.b
Mean
Std. Deviation
Most Extreme Differences Absolute
Positive
Negative
Test Statistic
Asymp. Sig. (2-tailed)
42
.000000
.04769317
.117
.117
-.070
.117
.162
a. Test distributon is normal
b. Calculated from data
c. Liliefors Significance Correction Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
Author
b. Multicollinearity Test Results
This test aims to examine whether regression model found
correlation between independent variable or not. Multicollonearity test
done by using Tolerance value or Variance Inflation Factor (VIF).To
know the existence or absence of multicollonearity by looking a tolerance
value or Variance Inflation Factor (VIF). General Cut Off value use to
show the existence of multicollonearity is tolerance value ≥ 0,10 or equal
to VIF value ≤ 10. If tolerance value is under 0.10 or VIF value above 10
60
then there is a multicollonearity. Multicollonearity test result is on the
table below:
Table 4.4: Multicolinearity Test
Coefficients*
Model
Collinearity Statistics
Tolerance VIF
(Constant)
MUL
POL
.628
.628
1.592
1.592
a. Dependent Variable: EM
Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
author
As it can be seen from Table 4.4, the results show that both
independent variables are free from multicolinearity problems since the
Tolerance is > 0,10 and VIF < 10.
c. Heteroscedasticity Test Results
Heteroscedasticity test aims to test whether in regression model
there is an inequality variance of the residual of one observation to others.
If variance of residual one observation to another observation fixed or
same, then it is called homocedasticity and if different it is called
heteroscedasticity. Good regression model is homoscedasticity or does not
occur heteroscedasticity (Ghozali, 2012). Heteroscedasticity test result is
on the table below:
61
Table 4.5: Heteroscedasticity Test with Park Test
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients t Sig.
B
Std.
Error Beta
1 (Constant)
MUL
POL
-4.204
.656
-.176
.885
.838
.658
.242
-.083
-4.748
.782
-.267
.000
.445
.793
a. Dependent Variable: LN_RES2 Source: Adopted and Captured from the Result in SPSS 23 by author
As it can be seen at figure 4.3, the signification value between
independent variable and absolute residual is > 0,05 in Sig. Value. It then
concluded that data in this research have similar variants in regression
function or homosdasticity or heteroscedasticity does not occur.
d. Autocorrelation Test Results
Autocorrelation test is used to determine and detect the presence
of autocorrelation. The autocorrelation test aims to test whether in the
linear regression model there is a correlation between confounding error in
period t and period t-1 (previous year). A good model is a regression
model that is free from autocorrelation (Ghozali, 2012). Autocorrelation
test is on the table below:
62
Table 4.6: Autocorrelation Test
Runs Test
Unstandardized Residual
Test Valuea -.00497
Cases < Test Value 21
Cases >= Test Value 21
Total Cases 42
Number of Runs 22
Z .000
1.000 Asymp. Sig. (2-tailed)
a. Median Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
Author
From the table 4.6, Runs test is used for autocorrelation test and the
results show the Asymp. Sig. (2 tailed) is >0.05, it means hypothesis 0 is
rejected. Therefore, the used data is random so that no autocorrelations occurs
to the tested data.
3. Test of Hypothesis
The Hypothesis test in this research uses the multiple regression
models. It is conducted with Simultaneous Test (F-Test), Coefficient
Determination Test (R2)
and partial regression test (T-test).
a. Simultaneous Test Results
F test is used to find out whether the independent variable is
simultaneously can affect the dependent variable (Ghozali, 2015).If the F
probability is < 0.05, Ha is accepted and rejects Ho, whereas if probability
F > 0.05 then Ho is accepted and rejects Ha. F test can be seen in the Table
4.7 below:
63
Table 4.7
Simultaneous Test (F-test)
ANOVAa
Model Sum of Squares Df Mean Square F Sig.
1 Regression .024 2 .012 5.080 .011b
Residual .093 39 .002
Total .118 41
a. Dependent Variable: EM
b. Predictors: (Constant), POL, MUL
Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
author
As it can be seen from the table 4.7, F value is 5.080 and Sig.
Value is 0.011. It shows that significant value < alpha (α=0.05). It then
concluded that there is significant effect simultaneously between multiple
directorship and political connection towards earnings management.
b. Determination Coefficient (R2)
Test Results
The coefficient of determination (R²) essentially measures how
far the model‘s ability to explain the variation of dependent variable. The
value of coefficient of determination is between zero and one. Small R²
value means the ability of independent variables in explaining dependent
variable variation is limited (Ghozali, 2012).
Table 4.8
Determination Coefficient Test (R2)
Model Summaryb
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .455a .207 .166 .04890078
a. Predictors: (Constant), POL, MUL
b. Dependent Variable: EM
Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
author
64
As it can be seen from table 4.8, the R2 value is 0.166 or 16%.
This means 16% of earnings management variation can be explained by
the variation of independent variable which is Multiple Directorship and
Political Connections. While the remainder is 84% (100% - 16%)
explained by other variable that not include in regression model, such as
information asymmetry, audit adjustment, and etc.
c. Partial Test (T-test) Results
Individual parameter significance test is (t statistics test) used to
see partially effect of independent variable on dependent variable. To
interpret coefficient of independent variable can used unstandardized
coefficients or standardized coefficients. This study used standardized
coefficients so there is no the constant. The benefit of using standardized
beta is that able to eliminate the different of size unit on independent
variable (Ghozali, 2012). As we can see in the table below
Table 4.9
Partial Test (T-test)
Source: Modified and Adopted from the Descriptive Summary Results in SPSS 23 by
author
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant)
MUL
POL
-.070
.084
.051
.029
.027
.021
.557
.448
-2.432
3.095
2.491
.020
.004
.017
a. Dependent Variable: EM
65
Based on the results from table 4.9, it shows that multiple
directorships (MUL) has the significant value of 0.004 (<0.05). It means H1 is
accepted and multiple directorships effects earnings management. This output
is supportive by (Core et al., 1999; Fich and Shivdasani, 2006).
H1 = Multiple Directorship influences earnings management is
accepted
T-test result for political connection (POL) has the significant value
of 0.017 (<0.05). It means H2 is accepted and political connection influence
earnings management. This output is supportive by (Boubakri et al, 2012).
H2 = Political Connection influences earnings management is
accepted
Referring to the result from table 4.9, it concludes the multiple
linear regression is as follows:
DACCit = -0.070 - 0.084 MULit - 0.051 POLit
From the linear regression shows that constant value is -0.070, it
proposed those independent variables which are multiple directorships and
political connection are constant, then earnings management is -0.070 or -7%.
The MUL coefficient value is 0.084, it shows the negative result
where the multiple directorship occur in 1% so that will be decrease the
earnings management (EM) of 0.084 times in the period 2013-2018,
assuming other variables in the fixed regression equation.
The POL coefficient value is 0.051, it shows the negative result
where the multiple directorship occur in 1% so that will be decrease the
66
earnings management (EM) of 0.051 times in the period 2013-2018,
assuming other variables in the fixed regression equation.
C. Hypothesis Evaluation
1. The Influence of multiple directorships on earnings management
The first hypothesis tries to investigate whether multiple
directorships influence on accrual-based earnings management, shown in
Table 4.9 that multiple directorship has significant value of 0.004. This
significant value indicates that multiple directorship influences earnings
management.
In terms of discretionality, multiple directorships relate to earnings
management. This result is supported with busyness hypothesis where the
more the directors are externally connected, the busier they are and thus
the board loses its ability to effectively monitor the conduct of the
management/executive directors (Jiraporn et al. 2008). In another
interpretation, the results contrast that from Kamardin et al. (2014) which
claim that multiple directors do not affect monitoring role of the directors.
Referring to discussion in chapter 2, another possible reason for the
positive relationship is that multiple directors have to invest time and
resources on their own to understand the business of different companies
(Chen et al., 2015).
Given the significant positive relationship, it implies that the recent
OJK regulation to limit the number of companies and posts allowed to be
served by single director for various positions, such as executive director,
67
non-executive director and committee members in the right direction since
it will improve the implementation of corporate governance in Indonesia
companies. The regulation becomes a preventive measure to tackle the
busyness arguments because with such limitations, directors can focus on
their work and that the possibility of earnings management to spread from
one entity to another is reduced.
2. The Influence of political connection on earnings management
The second hypothesis deals with the influence of political
connection on earnings management. Shown in Table 4.9 that political
connection has significant value of 0.17 (< 0.05). This significant value
indicates that political connection influences earnings management
positively.
This result is in line with the prior research that as firms has better
access to external financing, they will have improved performance than
the non-connected peers. At this condition political connections become
valuable for these companies as it allows them access to external resources
needed for business activities (Boubakri et al, 2012). In another
interpretation, the results contrast that from (Chaney et al., 2011) which
claims that political connections are perceived to lower the quality of the
firm‘s financial reports.
Furthermore, another reason is that political connection is used to
facilitate many business interests. The firm can lobby for the
implementation of regulation to restrict the other companies to enter the
68
market (Bunkanwanicha and Wiwattanakantang, 2009) or Political
connection can provide certainty for the company during an economic
crisis as it higher chance of being granted some bailouts from the
government (Faccio, 2006).
69
CHAPTER 5
CONCLUSION
A. Conclusion
From the evaluation of the research hypotheses in the previous chapter,
it is concluded that:
1. Multiple directors prove to be influencing earnings management as
measured using modified Jones absolute discretionary accruals in listed
manufacturing companies on LQ45 index in Indonesia.
2. Political connections of the directors prove to be significantly influencing
earnings management as measured using modified Jones model.
B. Suggestions and Recommendation
1. Suggestion
In terms of measurements, for multiple directorships, the term
external directorship refers to the directorship one director has in another
public company. However, it is possible that the director is also busy in
private companies or private subsidiaries of a holding company. It was
difficult to gauge the full extent of multiple directorships since the
financial data on private companies were not available at the IDX database
nor capital market data provider such as Bloomberg etc. Also, some
companies appointed directors at the middle of the year, which led to
questions if these individuals could fully influence the preparation of
financial statements at the end of the year, regardless of whether they were
70
busy directors or not. All these present subjective judgements in the study
that could not have been avoided at that time.
Political connection used variable dummy as the proxy to capture the
degree of political connectedness of the companies. Nonetheless, to look for a
measurement that can reliably, precisely and objectively capture the extent of
influence of political connections require the use of private information that was
unbelievable at the time of the study and outside the capability of the writer to
obtain them.
Regarding sample sizes, there might be possibility that limiting it to
manufacturing sector incidentally remove a number of companies with multiple
directors and political connections. Thus, the samples became unrepresentative of
the population comprising of listed companies in Indonesia.
2. Recommendation
From the above limitations, it is suggested that in future researches:
a. The sample sizes can be expanded to include all listed companies in the
IDX and to distinguish the impact of multiple directorship from financial
and non- financial sector or per industrial classification.
b. The measurement of accrual-based earnings management can be changed
to other models, such as Larcker and Richardson (2004), Kothari et al.
(2005), and Beneish (1997, 1999) model to improve the understanding on
the influence of multiple directorship and political connections from
perspective of accruals manipulation.
71
c. The measurement of multiple directors can further detail the definition of
external connectedness as being only connected to public companies. Also
there can be a more refined definition for including the newly appointed
director(s) since it is directly related to the score value of measurement.
Furthermore, the impact of multiple directorship in subsidiaries of the
same group or in companies outside of the group. These can be applied to
state-owned enterprises as well.
d. The measurement of political connection can depart from the usual 1-0
criteria to improve the accuracy and the reflection of the influence of
different extent of political connection on earnings management, in
conjunction with the presence of multiple directorships.
72
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APPENDIX
Appendix 1 Sample Companies List
No Ticker Name
1 GGRM Gudang Garam Tbk
2 ICBP Indofood CBP Sukses Makmur Tbk
3 INDF Indofood Sukses Makmur Tbk
4 INTP Indocement Tunggal Prakarsa Tbk
5 KLBF Kalbe Farma Tbk
6 SMGR Semen Indonesia (Persero) Tbk
7 UNVR Unilever Indonesia Tbk
Appendix 2 Composite measurement
No Ticker Year MUL POL EM
1 GGRM 2013 1 0 - 0.054838499081716
2 ICBP 2013 1 0 0.035931744207060
3 INDF 2013 1 0 0.004325499123720
4 INTP 2013 1 0 - 0.028771341876220
5 KLBF 2013 1 1 0.021074950754800
6 SMGR 2013 0 1 - 0.024126191310978
7 UNVR 2013 1 1 0.213140753880684
8 GGRM 2014 1 0 0.008881384000288
9 ICBP 2014 1 0 - 0.009495461551603
10 INDF 2014 1 0 - 0.000460785262238
11 INTP 2014 1 0 - 0.017406013715174
12 KLBF 2014 1 1 0.068907873780380
13 SMGR 2014 0 1 - 0.023900884178904
14 UNVR 2014 1 0 0.130402444449129
15 GGRM 2015 1 0 0.009975446990630
16 ICBP 2015 1 0 - 0.005087273288475
17 INDF 2015 1 0 - 0.007834708899430
18 INTP 2015 1 0 0.034328272263606
19 KLBF 2015 1 1 0.045736873859818
20 SMGR 2015 0 1 - 0.007116550709195
21 UNVR 2015 1 0 0.072040296707939
22 GGRM 2016 1 0 0.070900835346487
23 ICBP 2016 1 0 0.007552368710042
24 INDF 2016 1 0 0.005455201049573
25 INTP 2016 1 0 0.028907421610125
26 KLBF 2016 1 1 0.011116964298915
83
Appendix 2 Composite measurement (continued)
No Ticker Year MUL POL EM
27 SMGR 2016 0 1 - 0.049740460612166
28 UNVR 2016 1 0 0.076510248608753
29 GGRM 2017 1 0 0.0637480587401383
30 ICBP 2017 1 0 -0.0676844094760888
31 INDF 2017 1 0 -0.0653618935647358
32 INTP 2017 1 0 0.0384051861090257
33 KLBF 2017 1 1 0.0042590246496302
34 SMGR 2017 0 1 0.0053403715308014
35 UNVR 2017 1 0 0.0599041549913429
36 GGRM 2018 1 0 0.0140445059031812
37 ICBP 2018 1 0 0.0193675912817146
38 INDF 2018 1 0 -0.0654853238721694
39 INTP 2018 1 0 0.0344305980269778
40 KLBF 2018 1 1 0.0960649909876003
41 SMGR 2018 0 1 -0.0111519707985782
42 UNVR 2018 1 0 0.0267563778147656
Appendix 3 Multiple Directorship measurement
No Ticker Year
2013 2014 2015 2016 2017 2018
1 GGRM 1 1 1 1 1 1
2 ICBP 1 1 1 1 1 1
3 INDF 1 1 1 1 1 1
4 INTP 1 1 1 1 1 1
5 KLBF 1 1 1 1 1 1
6 SMGR 0 0 0 0 0 0
7 UNVR 1 1 1 1 1 1
Appendix 4 Political Connection measurement
No Ticker Year
2013 2014 2015 2016 2017 2018
1 GGRM 0 0 0 0 0 0
2 ICBP 0 0 0 0 0 0
3 INDF 0 0 0 0 0 0
4 INTP 0 0 0 0 0 0
5 KLBF 1 1 1 1 1 1
6 SMGR 1 1 1 1 1 1
7 UNVR 0 0 0 0 0 1
84
Appendix 4 Earnings Management measurement
No Ticker 2018
TACC/At-1 NDACCit DACCit
1 GGRM -0.0111662 0.0436722501057211 -0.0548384991
2 ICBP 0.05671846 0.0207867113643946 0.0359317442
3 INDF 0.01709414 0.0127686412432360 0.0043254991
4 INTP -0.020223 0.0085483460249635 -0.0287713419
5 KLBF 0.03223495 0.0111600036257592 0.0210749508
6 SMGR -0.0072857 0.0168404567533738 -0.0241261913
7 UNVR 0.22591419 0.0127734372458930 0.2131407539
2017
TACC/At-1 NDACCit DACCit
1 GGRM 0.03545473 0.0265733430366626 0.0088813840
2 ICBP 0.00111387 0.0106093311080774 -0.0094954616
3 INDF 0.01314415 0.0136049303361549 -0.0004607853
4 INTP -0.016402 0.0010039743514199 -0.0174060137
5 KLBF 0.08097133 0.0120634544822539 0.0689078738
6 SMGR -0.011442 0.0124589308480621 0.0239008842
7 UNVR 0.13805333 0.0076508880640926 0.1304024444
2016
TACC/At-1 NDACCit DACCit
1 GGRM 0.0313908 0.0214153574436314 0.0099754470
2 ICBP 0.0152214 0.0203086777253590 -0.0050872733
3 INDF 0.00228271 0.0101174217011316 -0.0078347089
4 INTP 0.02280403 -0.0115242419231664 0.0343282723
5 KLBF 0.06799991 0.0222630383154748 0.0457368739
6 SMGR -0.0025002 0.0046163767915655 -0.0071165507
7 UNVR 0.12000462 0.0479643186928139 0.0720402967
2015
TACC/At-1 NDACCit DACCit
1 GGRM 0.09332055 0.0224197171981841 0.0709008353
2 ICBP 0.02093934 0.0133869729177215 0.0075523687
3 INDF 0.00869534 0.0032401393720210 0.0054552010
4 INTP 0.0206336 -0.0082738217740873 0.0289074216
5 KLBF 0.02357371 0.0124567481210735 0.0111169643
6 SMGR -0.0418757 0.0078647568775443 - 0.0497404606
7 UNVR 0.10716857 0.0306583226137454 0.0765102486
85
Appendix 4 Earnings Management measurement (continued)
No Ticker 2014
TACC/At-1 NDACCit DACCit
1 GGRM 0.11024048 0.04163421451275550000 0.0686062686
2 ICBP -0.0195351 0.04459817260823390000 -0.0641333124
3 INDF -0.037741 0.02393886070833230000 - 0.0616798678
4 INTP 0.05518979 0.01085212792332290000 0.0443376657
5 KLBF 0.03617436 0.01890044544995560000 0.0172739184
6 SMGR 0.02696564 0.01309956082573450000 0.0138660742
7 UNVR 0.12205612 0.05566686781912110000 0.0663892510
2013
TACC/At-1 NDACCit DACCit
1 GGRM 0.03545473 0.02736077122430770000 0.0186761373
2 ICBP 0.00111387 0.03721967713148050000 0.0207769967
3 INDF 0.01314415 0.01272327124678950000 -0.0620256510
4 INTP -0.016402 0.01192904541213660000 0.0397465306
5 KLBF 0.08097133 0.03634320687144990000 0.1090699750
6 SMGR -0.011442 0.03478105854349920000 -0.0019261924
7 UNVR 0.13805333 0.04671849151140990000 0.0346374455
86
Appendix 5 SPSS Test Result
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
MUL 42 .00000 1.00000 .8571429 .35416880
POL 42 .00000 1.00000 .3095238 .46790114
EM 42 -.06768 .21314 .0183107 .05354630
Valid N (listwise) 42
Model Summaryb
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .455a .207 .166 .04890078
a. Predictors: (Constant), POL, MUL
b. Dependent Variable: EM
ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression .024 2 .012 5.080 .011b
Residual .093 39 .002
Total .118 41
a. Dependent Variable: EM
b. Predictors: (Constant), POL, MUL
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) -.070 .029 -2.432 .020
MUL .084 .027 .557 3.095 .004 .628 1.592
POL .051 .021 .448 2.491 .017 .628 1.592
a. Dependent Variable: EM
87
Appendix 5 SPSS Test Result (continued)
One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual
N 42
Normal Parametersa,b
Mean .0000000
Std. Deviation .04769317
Most Extreme Differences Absolute .117
Positive .117
Negative -.070
Test Statistic .117
Asymp. Sig. (2-tailed) .162c
a. Test distribution is Normal.
b. Calculated from data.
c. Lilliefors Significance Correction.
88
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients t Sig.
B Std. Error Beta
1 (Constant)
MUL
POL
-4.204
.656
-.176
.885
.838
.658
.242
-.083
-4.748
.782
-.267
.000
.445
.793
a. Dependent Variable: LN_RES2
82
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