Market Response toward Accrual Earnings Management, Real Transactions, and Strategic Revenue Recognition - Earnings Management1

Abstract

This study investigates how the capital market response to a variety of earnings management tools i.e., accrual-based earnings management, real transaction activities, and strategic revenue recognition. We measure the market response to the information content of earnings by the earnings response coefficient (ERC). By using pooled-OLS regression from 748 firm-years data of public listed companies on the Indonesian Stock Exchange (IDX) in 2004-2009, we find some evidence of a negative association between earnings response coefficients and information content of earnings that contained earnings management. Our study find that real transactions earnings management in operating activities has negative association with earnings response coefficient, but we do not find any evidence from the other earnings management tools. The findings of this study imply that the market participants are able to capture a certain kind of earnings management behaviour that may reduce the earnings response coefficient. Keywords:Real transaction activities; accrual earnings management; strategic revenue recognition ABSTRAK Penelitian ini bertujuan untuk mengetahui bagaimana respon pasar terhadap berbagai cara dalam melakukan manajemen laba seperti manajemen laba berbasis akrual, manajemen laba melalui aktivitas riil dan manajemen laba melalui strategi pengakuan pendapatan. Respon pasar terhadap kandungan informasi laba diukur dengan earning response coefficient (ERC). Data diolah menggunakan pooled-OLS untuk 748 pengamatan yang berasal dari perusahaan-perusahaan yang terdaftar di Bursa Efek

Market Consequences and Real Earnings Management: Empirical Study in Indonesia

“…Encouraging MLR practices in the current period will reduce future cash flows (Roychowdhurry, 2006). The measurement of MLR in this study uses a model developed by Roychowdhurry (2006) and used by several previous studies such as Dewi & Herusetya (2016); Subekti (2012); and Yuliana & Alim (2017).…”

“…Companies that generate profits can provide better prospects than companies that report losses. This assessment is reflected in the company's changing share price due to the publication of the two pieces of information (Dewi & Herusetya, 2016;Subekti, 2012;Yuliana, 2013;Yuliana & Alim, 2017). However, in the earnings figures reported by companies, there can be adverse selection and moral hazard elements.…”

“…Previous research examining the consequences of earnings management can be grouped into several clusters in the context of capital market accounting. First, research that examines earnings management consequences on abnormal returns (Dewi & Herusetya, 2016;Rudiawarni, Sulistiawan, & Feliana, 2017;Subekti, 2012;Yuliana, 2013;Yuliana &Alim, 2017;Yuliana, Anshori, & Alim, 2015). The researchers in this study use abnormal returnsto test market reactions.…”

“…Research by Dewi & Herusetya (2016), Yuliana & Alim (2017), and Yuliana et al (2015) found empirical evidence that earnings management received adverse reactions from investors. The market can respond to earnings management by indicating a decrease in the abnormal rate of return.…”

Pengaruh Informasi Laba Terhadap Reaksi Pasar Dengan Manajemen Laba Riil Dan Manajemen Laba Akrual Sebagai Variabel Moderasi

“…Unexpected earnings merepresentasikan informasi yang belum tertangkap oleh pasar sehingga pasar akan bereaksi pada saat pengumuman (Suwardjono, 2011). Unexpected earnings menggunakan model random walk yang dihitung dengan rumus (Dewi & Herusetya, 2015):…”