Effect Of Income Smoothing, Dividend Policy, Leverage, And Corporate Size Of Earnings Response Coefficient
Effect of Income Smoothing, Dividend Policy, Leverage, and Company Size on Earnings Response Coefficient
Introduction
The earnings response coefficient (ERC) is a crucial metric in finance that measures the market's reaction to a company's earnings information. It is essential to understand the factors that influence ERC, as it can help investors make informed decisions and company management formulate effective financial strategies. This study aims to analyze the effect of income smoothing, dividend policy, leverage, and company size on ERC, providing valuable insights into the dynamics of the capital market in Indonesia.
Research Background
The population used in this study consisted of all food and beverage companies listed on the Indonesia Stock Exchange (IDX) in the 2016-2018 period. The research method applied is a saturated sampling method, where the entire population becomes a sample. This approach is different from probability sampling techniques that provide random opportunities to each member of the population. Data collection was carried out by downloading the company's annual report through the official IDX website, www.idx.co.id.
The Importance of Earnings Response Coefficient
The ERC is a critical metric in finance that measures the market's reaction to a company's earnings information. It is calculated by regressing the stock price change to the earnings surprise. A higher ERC indicates that the market reacts more positively to earnings surprises, while a lower ERC indicates that the market reacts less positively. Understanding the factors that influence ERC is essential for investors and company management to make informed decisions.
Income Smoothing: A Negative Impact on ERC
Income smoothing is a common practice among companies to refine earnings fluctuations. However, this study finds that income smoothing has a negative impact on ERC. It can be interpreted that when the company makes income smoothing, the market becomes less responsive to published earnings information. This is because income smoothing can create a false sense of stability, leading investors to underestimate the company's true earnings potential.
Leverage: A Negative Impact on ERC
A high level of debt also has a negative impact on ERC. When a company has a high leverage, investors may feel worried about the risk of bankruptcy, so they tend not to react positively to the income statement issued. This is because high leverage can increase the company's risk profile, making it less attractive to investors.
Dividend Policy: A Positive Impact on ERC
Conversely, a clear and consistent dividend policy has a positive effect on ERC. Companies that provide dividends regularly can provide positive signals to investors about the stability and performance of the company, which in turn increases the market response to reported profits. This is because dividend payments can indicate a company's ability to generate cash flows and distribute profits to shareholders.
Company Size: A Positive Impact on ERC
Company size also has a positive effect on ERC. Large companies usually have more information and stronger reputation in the market, so their earnings information tends to be more trusted and get better reactions than investors. This is because large companies tend to have more transparent and reliable financial reporting, which can increase investor confidence.
Conclusions
Overall, this research confirms that the independent variable - income smoothing, dividend policy, leverage, and company size - simultaneously affect the dependent variable, namely earnings response coefficient. This knowledge can help company management in formulating better financial strategies and guiding investors in making more informed decisions. It is hoped that this research can be a reference for further study in the fields of finance and accounting, as well as providing deeper insights regarding the dynamics of the capital market in Indonesia.
Implications for Practitioners
The findings of this study have several implications for practitioners. Firstly, companies should avoid income smoothing practices, as they can create a false sense of stability and lead to a negative impact on ERC. Secondly, companies should maintain a clear and consistent dividend policy, as it can provide positive signals to investors and increase the market response to reported profits. Thirdly, companies should maintain a healthy level of debt, as high leverage can increase the company's risk profile and lead to a negative impact on ERC. Finally, large companies should continue to maintain their strong reputation and transparent financial reporting, as it can increase investor confidence and lead to a positive impact on ERC.
Limitations of the Study
This study has several limitations. Firstly, the sample size is limited to food and beverage companies listed on the IDX, which may not be representative of the entire market. Secondly, the study only examines the effect of income smoothing, dividend policy, leverage, and company size on ERC, and does not consider other factors that may influence ERC. Finally, the study only examines the effect of these factors on ERC in the Indonesian market, and may not be generalizable to other markets.
Future Research Directions
This study provides several avenues for future research. Firstly, researchers can examine the effect of other factors on ERC, such as corporate governance, executive compensation, and industry characteristics. Secondly, researchers can examine the effect of these factors on ERC in other markets, such as the US or Europe. Finally, researchers can examine the effect of these factors on ERC over a longer period of time, to see if the findings are consistent over time.
Conclusion
In conclusion, this study provides valuable insights into the dynamics of the capital market in Indonesia. The findings of this study confirm that income smoothing, dividend policy, leverage, and company size simultaneously affect ERC. This knowledge can help company management in formulating better financial strategies and guiding investors in making more informed decisions. It is hoped that this research can be a reference for further study in the fields of finance and accounting, as well as providing deeper insights regarding the dynamics of the capital market in Indonesia.
Frequently Asked Questions (FAQs) about the Effect of Income Smoothing, Dividend Policy, Leverage, and Company Size on Earnings Response Coefficient
Q: What is earnings response coefficient (ERC)?
A: Earnings response coefficient (ERC) is a metric that measures the market's reaction to a company's earnings information. It is calculated by regressing the stock price change to the earnings surprise.
Q: What is income smoothing, and how does it affect ERC?
A: Income smoothing is a practice where companies refine earnings fluctuations to create a false sense of stability. This study finds that income smoothing has a negative impact on ERC, as it can lead to a decrease in market responsiveness to published earnings information.
Q: What is the impact of leverage on ERC?
A: A high level of debt has a negative impact on ERC. When a company has a high leverage, investors may feel worried about the risk of bankruptcy, leading to a decrease in market responsiveness to the income statement issued.
Q: How does dividend policy affect ERC?
A: A clear and consistent dividend policy has a positive effect on ERC. Companies that provide dividends regularly can provide positive signals to investors about the stability and performance of the company, leading to an increase in market responsiveness to reported profits.
Q: What is the impact of company size on ERC?
A: Company size has a positive effect on ERC. Large companies usually have more information and stronger reputation in the market, leading to a higher level of market responsiveness to their earnings information.
Q: What are the implications of this study for company management?
A: The findings of this study suggest that company management should avoid income smoothing practices, maintain a clear and consistent dividend policy, maintain a healthy level of debt, and continue to maintain their strong reputation and transparent financial reporting.
Q: What are the limitations of this study?
A: This study has several limitations, including a limited sample size, a focus on a specific industry (food and beverage), and an examination of only a few factors that may influence ERC.
Q: What are the future research directions based on this study?
A: Future research can examine the effect of other factors on ERC, such as corporate governance, executive compensation, and industry characteristics. Additionally, researchers can examine the effect of these factors on ERC in other markets, such as the US or Europe.
Q: What are the practical implications of this study for investors?
A: The findings of this study suggest that investors should be cautious of companies that engage in income smoothing practices, have high leverage, or have a poor dividend policy. Additionally, investors should consider the company size and reputation when making investment decisions.
Q: What are the implications of this study for policymakers?
A: The findings of this study suggest that policymakers should consider the impact of income smoothing, leverage, and dividend policy on ERC when developing regulations and policies related to corporate finance and accounting.
Q: What are the implications of this study for future research in finance and accounting?
A: The findings of this study provide a foundation for future research in finance and accounting, particularly in the areas of corporate finance, accounting, and capital markets. Researchers can build on this study by examining the effect of other factors on ERC and exploring the implications of these findings for company management, investors, and policymakers.