Conservatism, Earnings Quality, and Stock Prices - Indonesian Evidence

Abstract

Research aims: This research investigates the association of conservatism (both conditional and unconditional) with quality of earnings as well as with stock prices on companies listed on the Indonesia Stock Exchange (IDX).Design/Methodology/Approach: The research uses a sample of 846 observations of publicly listed companies on the Indonesian Stock Exchange for the fiscal year that ends on December 31, 2016 through 2018. Conditional conservatism is measured by using an asymmetric timeliness measure from Basu (ATMB). Net income ratio (CFO/NI) is a proxy for earnings quality whereas ratio between market value and book value (MTB) is a measure of unconditional conservatism. The data used in this study are obtained both from Indonesian Stock Exchange database, and from company annual reports.Research findings: The study finds that all companies analyzed implement conservative accounting policies and practices. Besides, quality of earnings and stock prices are negatively associated with conditional conservatism. This research also proves that stock price negatively associated with unconditional conservatism, whereas unconditional conservatism does not associated with earnings quality.Theoretical contribution/ Originality: This study enriches the existing literature about conservatism, especially in emerging market environment. Moreover, this study discusses a set of conservatism that consist of conditional and unconditional conservatism. This may give a complete picture of conservatism practices adopted by Indonesian companies.Practitioner/Policy implication: Since conservatism can solve agency cost problems, the result of this study may affect the way a company produce useful information for interest parties.Research limitation/Implication: The use of the purposive sampling method limits generalizations, because sample designs could not be assumed to characterize all companies listed on IDX.

Determinan Konservatisme Akuntansi: Bukti Empiris pada Perusahaan Manufaktur yang Terdaftar di Bursa Efek Indonesia

“…Konservatisme akuntansi menjadi satusatunya karakteristik kualitatif yang mencakup persyaratan ini (Neag & Maşca, 2015). Selain itu, konservatisme menjadi salah satu indikator kualitas laba, selain kualitas akrual, prediktabilitas, keberlanjutan, persistensi, ketepatwaktuan, dan ketidakpastian laba (Ahmed, 2020;Krismiaji & Sururi, 2021). Laba dianggap berkualitas tinggi jika laba merupakan prediktor dari laba yang berkelanjutan (future earnings).…”

Accounting Comparability, Conservatism, Executive Compensation-Performance, and Information Quality

“…In addition, unconditional conservatism does not influence the accounting comparability through the first and second factors (the relationship between cash flows and earnings of each share and the relationship between share return and earnings and losses of each share). Penman and Zhang (2002), Elbolok (2011), andDidar et al (2016), have reported similar results. Their findings show that unconditional conservatism has no impact on the quality of reporting.…”

“…MB is a measure of unconditional conservatism (Ismail and Elbolok 2011). M represents market value, and B represents book value.…”

An INTEGRATED MODEL TO EXPLAIN EARNINGS QUALITY: FINANCIAL PERFORMANCE AS A INTERVENING

“…This is reinforced by research conducted by Sardo et al, (2018), Amin et al, (2018), andAli et al, (2021) which state that conservatism has a positive effect on financial performance. Meanwhile, research Krismiaji & Sururi (2021) states conservatism does not affect financial performance.…”