Earnings Quality and Audit Quality: Analysis of Investor Reaction

Abstract

This study aims to analyze investor reaction to management behavior in preparing financial reports, especially earnings quality and audit quality. We also analyze the effect of financial performance as moderation. Generally, investors react positively to a company's financial performance, but the amount of fraud surrounding financial information, including auditor cooperation, raises big questions for investors about a company's financial information. We analyzed companies within the manufacturing sector that were listed on the Indonesia Stock Exchange from 2015 to 2019, and it was found that investors reacted positively to earnings quality and audit quality moderated by financial performance. These results provide evidence that management should focus on earnings quality in financial reports and on the audit process to ensure quality and exceptional financial performance to obtain positive reactions from investors, which has a positive impact on increasing the value of companies' shares. This study used the stock prices on the publication date of the financial statements, which reflect the direct reactions of investors to the information contained in the financial statements, such as earnings quality, audit quality, and financial performance. The different investor reactions were apparent on the day of the deadline for submitting financial statements according to existing regulations. These results reflect that the use of stock prices on the publication dates more accurately describes the reaction of investors than on the deadline for submitting financial statements. Contribution/Originality:This study contributes to existing literature by investigating investor reaction to management behavior in preparing financial reports, especially earnings quality and audit quality. INTRODUCTIONThe change in the status of a private company to a public company is based on several reasons, one of which is receiving funding from investors through buying and selling shares on the stock exchange. As an internal entity aware of the ins and outs of a company's internal transactions, management will make various efforts to portray their companies positively to attract investors.As people who do business, on the other hand, investors do not want to be reckless when making choices in stock transactions. Some investors consider the maximum return in the form of returns in the short term, while other groups consider stable returns in the long term, including a company's relationship with the community (Waluyo, 2017). Of the two types, investors' analysis of the issuer will differ as well as their reactions to the information published by the issuer through annual reports and financial reports (Melgarejo, Montiel, & Sanz, 2016;Sunder, 2017).

Supervisory Function And Earnings Quality: Gender Analysis

“…There are three sorts of variables in this study, the most important of which is earnings quality, the dependent variable, which is the value of earnings that is informed close to the actual value and without manipulation so that investors can use the earnings information in making investment policies. In this study, earnings quality is measured by Performance-adjusted discretionary accruals, including Tax (PAiT) developed in previous studies (Tarmidi et al, 2021) of the prior measurement, namely performance-adjusted discretionary accruals (PAccr) (Yasser et al, 2016) with the following formula: PAiT is Total Accruals, measured by reducing current assets without bank cash with current debt without bank debt minus depreciation expense divided by total assets. Then, the regression residuals are solved and multiplied by 1.…”

Determinants of Erm Quality and Its Impact on Company Value

“…This study has four components to measure ERM implementation: strategy, operations, reporting and compliance. Independent variables include four variables of Company Size as measured by Ln total assets, Auditor Quality is measured by a value of 1 if audited by the big four KAPs (Tarmidi & Murwaningsari, 2019;Tarmidi et al, 2021), and otherwise, Ownership Concentration is measured by the number of shares owned by shareholders above 20%, and Board of Directors Monitoring is measured by the number directors divided by log sales while the Tobins Q formula measures company value (Tarmidi & Murwaningsari, 2019).…”

Earnings Quality: The Role of Owners

“…Each company policy has an impact on the financial reports used by internal and external parties. Therefore, financial information must provide reliable information so that it can be used appropriately by investors (Tarmidi et al, 2021), creditors, and other potential users in investment activities and lending and business cooperation. As a principal, the owner of the company has the power to influence management over any policies taken (Karamanou and Vafeas, 2016;Tessema et al, 2018).…”