Earnings management motives, idiosyncratic risk and corporate social responsibility in an emerging market

Abstract

This research investigates the impact of the three earnings management methods according to Dechow and Skinner (2000) and Gunny (2005), i.e., accrual earnings management (AEM), real earnings management (REM), and fraudulent accounting (FRA), on idiosyncratic risk. This research also examines the moderating effect of corporate social responsibility (CSR) disclosure on these associations. This research employs balance panel data consisting of 492 observations from 2016 to 2019. This research obtains 123 companies listed under the manufacturing industry of the Indonesia Stock Exchange (IDX) through purposive sampling. To test the hypotheses, this research uses multiple linear regression models. This research finds that all three earnings management methods are positively associated with idiosyncratic risk. Furthermore, CSR disclosure is proven to weaken the effect of accrual earnings management and fraudulent accounting on idiosyncratic risk, but this does not apply to real earnings management. These results are robust after a sensitivity test. This research fills the existing gap within idiosyncratic risk study. Among similar studies, this research is the first to investigate the effect of fraudulent accounting on idiosyncratic risk and the moderating effect of CSR disclosure. This research also raises awareness of the cost of idiosyncratic risk, especially in emerging markets with relatively smaller stock markets, which makes diversification more challenging. It provides insights to market regulators on how investors can benefit from more disclosures

Manajemen Laba, Leverage Dan Penghindaran Pajak: Peran Moderasi Tanggung Jawab Sosial Perusahaan

“…Kebijakan tersebut di antaranya adalah kebijakan akrual dalam pelaporan keuangan dan kebijakan pendanaan perusahaan. Kebijakan akrual manajer Manajemen Laba, Leverage Dan Penghindaran Pajak: Peran Moderasi Tanggung Jawab Sosial Perusahaan Manuel,D., Sandi, Firmansyah, A., & Trisnawati, E. dalam pelaporan keuangan biasanya dikenal dengan manajemen laba (Prakosa et al, 2022). Manajemen laba merupakan tindakan mengaburkan informasi laba sesungguhnya yang berhubungan dengan pendapatan jangka pendek yang dilakukan manajer dengan membuat suatu kebijakan tertentu guna mempercepat transaksi biaya maupun pendapatan atau metode lainnya (Alfarizi et al, 2021).…”

Do Fair Value Decisions Increase Idiosyncratic Risk?

“…Risk is influenced by market, industry, and company factors (Prakosa et al, 2022). It harms both the company and the investor because it raises concerns about profitability and sustainability for the company while it adds uncertainty to future expected returns for investors.…”

“…The proportion of systematic and unsystematic risk in a single stock changes over time due to external and internal factors (Prakosa et al, 2022). Several market/industrywide factors, such as the global stock market crash, widespread supply chain disruption, and economic and political instability, contribute to systematic risk because they affect the entire market/industry.…”

“…Because of the trading mechanism, stock prices will continue to shift toward a new equilibrium. Information is treated as a commodity in this ideal market, which means the same for investors (Prakosa et al, 2022). There are "a large number of rational, profit-maximizing competitors actively competing, each attempting to forecast future market values of individual securities, and where important current information is almost freely available to all participants" in an efficient market (Fama, 1970).…”

“…When institutional investors find it more expensive to hold a particular stock, the stock buy-sell rhythm quickens, and the idiosyncratic risk rises (Chichernea et al, 2015). Several studies examined idiosyncratic risk by hedging policy (Chng et al, 2017), corporate social responsibility (Chen et al, 2018;Hasan & Habib, 2019;Kong et al, 2020;Tzouvanas et al, 2020), earnings management (Prakosa et al, 2022;Suhanda & Firmansyah, 2020), and corporate governance (Chen et al, 2016;Ghafoor et al, 2019). This research aims to look into fair value decisions based on idiosyncratic risk.…”