Earnings Management in Retail Industry: Indonesian Listed Firms

Chelsie Tristany

Abstract


Agency problem encourages the use of contracts to mitigate the conflict of interest between investors and managers. The use of reward contract incite discretionary actions from the managers’ side and as a result, earnings management is applied through various forces. This paper aims to reveal the firm attributes that may influence the motivation of managers to manage earnings in Indonesian retail listed companies during 2017 to 2019. The independent variables employed are firm size, leverage and profitability with firm size, debt to equity ratio, and return on assets as the proxies respectively. The dependent variable is earnings management with discretionary accruals measure using modified Jones model (1995) as the proxy. The result indicates that the three variables simultaneously affect earnings management significantly. However, individually, the only variable that has a significant effect on earnings management is profitability. The result reveals that both firm size and leverage are considered as insignificant characteristics in the study of earnings management. It indicates that size of firm or the amount of debt financing does not significantly affect manager’s decision in employing earnings management. However, profitability has a significant effect due to the frequent use as a target in reward contracts to measure the effort of managers in maximizing the wealth of shareholders and determinant in the bonus or compensation the managers would receive.


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