The Effect Of The Hood Size, The Proportion Of Independent Commissioners, Free Cash Flow, Institutional Ownership, And Company Size To Earnings Management In Manufacturing Companies Listed On The IDX

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The Effect of Hood Size, Proportion of Independent Commissioners, Free Cash Flow, Institutional Ownership, and Company Size to Earnings Management in Manufacturing Companies Listed on the IDX

Reveals Factors Affecting Profit Management in Manufacturing Companies on the IDX

As the world of business continues to evolve, the importance of effective corporate governance and earnings management has become increasingly crucial for companies listed on the Indonesia Stock Exchange (IDX). This study aims to reveal the effect of the size of the Public Accountant Firm (KAP), the proportion of independent commissioners, free cash flow, institutional ownership, and company size to earnings management in manufacturing companies listed on the IDX. By examining these factors, this study seeks to provide empirical evidence on the factors that affect profit management in manufacturing companies on the IDX.

Background and Literature Review

Earnings management is a critical issue in corporate governance, as it can have significant consequences for investors and the overall economy. It refers to the practice of manipulating financial statements to achieve a specific goal, such as increasing earnings or avoiding losses. In recent years, there has been a growing concern about earnings management practices in companies listed on the IDX. This study aims to contribute to the existing literature by examining the effect of various factors on earnings management in manufacturing companies listed on the IDX.

Methodology

This study uses a quantitative approach, employing multiple linear regression analysis to examine the effect of various factors on earnings management. The population in this study was 134 manufacturing companies listed on the IDX in 2013. Data was obtained from the annual report of the 2013 manufacturing company. The sampling method used was purposive sampling, so as to obtain a sample of 101 companies. The modified Jones model was used to measure discretionary accruals, which is a widely used proxy for earnings management.

Results

The results of this study show that institutional ownership structure has a negative and significant influence on earnings management. This means that the higher the proportion of institutional ownership, the lower the level of earnings management carried out by the company. This finding is consistent with the literature, which suggests that institutional investors play an important role in monitoring company performance and preventing earnings management practices.

Discussion

The results of this study can be explained by the role of institutional investors as a supervisory mechanism. Institutional investors, such as pension funds, insurance companies, and mutual funds, tend to have the ability and stronger motivation in monitoring company performance. They have greater resources to analyze financial information and assess the quality of company profits. Additionally, institutional investors are actively involved in corporate governance through voting and dialogue mechanisms with management. They tend to encourage management to prioritize the company's long-term value and avoid earnings management practices that are detrimental to investors.

Limitations and Future Research Directions

This study has several limitations, including the research period and samples. The research only uses 2013 data, which may not be representative of the current situation. Additionally, the research samples are only limited to manufacturing companies listed on the IDX. Further research is needed to examine the effect of other factors and more complex dynamics in earnings management in companies in Indonesia.

Conclusion

In conclusion, this study provides empirical evidence that the institutional ownership structure is an important factor in suppressing the practice of earnings management in manufacturing companies in Indonesia. The results of this study can be a consideration for regulators and investors in improving corporate governance and minimizing earning management practices which is detrimental to investors.

Recommendations

Based on the findings of this study, the following recommendations can be made:

  • Regulators should encourage institutional investors to play a more active role in monitoring company performance and preventing earnings management practices.
  • Companies listed on the IDX should prioritize the appointment of independent commissioners to ensure effective corporate governance.
  • Investors should be aware of the importance of institutional ownership structure in suppressing earnings management practices.

Future Research Directions

Further research is needed to examine the effect of other factors and more complex dynamics in earnings management in companies in Indonesia. Some potential research directions include:

  • Examining the effect of other institutional ownership structures, such as foreign ownership, on earnings management.
  • Investigating the role of corporate governance mechanisms, such as audit committees and board of directors, in preventing earnings management practices.
  • Analyzing the impact of earnings management on company performance and investor behavior.

By continuing to explore the factors that affect earnings management in companies in Indonesia, this study aims to contribute to the existing literature and provide valuable insights for regulators, investors, and companies listed on the IDX.
Q&A: The Effect of Hood Size, Proportion of Independent Commissioners, Free Cash Flow, Institutional Ownership, and Company Size to Earnings Management in Manufacturing Companies Listed on the IDX

Frequently Asked Questions

This Q&A article aims to provide answers to some of the most common questions related to the effect of hood size, proportion of independent commissioners, free cash flow, institutional ownership, and company size to earnings management in manufacturing companies listed on the IDX.

Q1: What is earnings management, and why is it a concern for companies listed on the IDX?

A1: Earnings management refers to the practice of manipulating financial statements to achieve a specific goal, such as increasing earnings or avoiding losses. It is a concern for companies listed on the IDX because it can have significant consequences for investors and the overall economy.

Q2: What is the role of institutional ownership in preventing earnings management practices?

A2: Institutional investors, such as pension funds, insurance companies, and mutual funds, tend to have the ability and stronger motivation in monitoring company performance. They have greater resources to analyze financial information and assess the quality of company profits. Additionally, institutional investors are actively involved in corporate governance through voting and dialogue mechanisms with management.

Q3: What is the significance of the proportion of independent commissioners in preventing earnings management practices?

A3: The proportion of independent commissioners is an important factor in preventing earnings management practices. Independent commissioners are not affiliated with the company and are therefore less likely to be influenced by management. They can provide an objective perspective and help to prevent earnings management practices.

Q4: What is the relationship between free cash flow and earnings management?

A4: Free cash flow is not a significant factor in preventing earnings management practices. In fact, free cash flow can sometimes be used to fund earnings management practices. However, the results of this study show that free cash flow does not have a significant influence on earnings management.

Q5: What is the significance of company size in preventing earnings management practices?

A5: Company size is not a significant factor in preventing earnings management practices. In fact, larger companies may be more likely to engage in earnings management practices due to the complexity of their financial statements and the pressure to meet investor expectations.

Q6: What are the implications of this study for regulators and investors?

A6: The results of this study have several implications for regulators and investors. Regulators should encourage institutional investors to play a more active role in monitoring company performance and preventing earnings management practices. Investors should be aware of the importance of institutional ownership structure in suppressing earnings management practices.

Q7: What are the limitations of this study?

A7: This study has several limitations, including the research period and samples. The research only uses 2013 data, which may not be representative of the current situation. Additionally, the research samples are only limited to manufacturing companies listed on the IDX.

Q8: What are the future research directions for this study?

A8: Further research is needed to examine the effect of other factors and more complex dynamics in earnings management in companies in Indonesia. Some potential research directions include examining the effect of other institutional ownership structures, such as foreign ownership, on earnings management, and investigating the role of corporate governance mechanisms, such as audit committees and board of directors, in preventing earnings management practices.

Q9: What are the practical implications of this study for companies listed on the IDX?

A9: The results of this study have several practical implications for companies listed on the IDX. Companies should prioritize the appointment of independent commissioners to ensure effective corporate governance. Companies should also be aware of the importance of institutional ownership structure in suppressing earnings management practices.

Q10: What are the conclusions of this study?

A10: In conclusion, this study provides empirical evidence that the institutional ownership structure is an important factor in suppressing the practice of earnings management in manufacturing companies in Indonesia. The results of this study can be a consideration for regulators and investors in improving corporate governance and minimizing earning management practices which is detrimental to investors.