Does managerial ability enhance earnings quality? The moderating role of corporate governance quality and ownership concentration
DOI:
https://doi.org/10.31106/jema.v17i2.6067Keywords:
Managerial Ability, Earnings Quality, Ownership Concentration, Governance Quality, Agency TheoryAbstract
Earnings quality is information that can be determined by various factors, one of which is managerial ability. Thus, management quality itself can have a positive or negative impact on earnings quality, depending on the factors that affect their relationships. This study was conducted to reexamine the effect of managerial ability on earnings quality by including corporate governance quality and ownership concentration as factors that are expected to be able to explain the inconsistencies in the results of previous studies. This study used the data of manufacturing companies listed on the Indonesia Stock Exchange in 2010-2016 as study sample with total observations were 253. The analysis technique used for hypothesis testing was a multiple linear regression analysis. This study succeeds in proving the moderation role of governance quality in strengthening the relationship between managerial ability and earnings quality. However, the role of ownership concentration as moderator factors failed to prove in this study. Interestingly, there is a negative effect between managerial ability and earnings quality. The opportunistic actions taken by managers who want to meet their performance targets was considered as the reason of the negative effect between managerial ability and earnings quality.References
Abbadi, S., Hijazi, Q., & Al-Rahahleh, A. (2016). Corporate governance quality and earnings management: Evidence from jordan. Australasian Accounting, Business and Finance Journal, 10(2), 54–75. https://doi.org/10.14453/aabfj.v10i2.4
Bao, S. R., & Lewellyn, K. B. (2017). Ownership structure and earnings management in emerging markets—An institutionalized agency perspective. International Business Review, 26(5), 828–838. https://doi.org/10.1016/j.ibusrev.2017.02.002
Bertrand, M., & Schoar, A. (2003). Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics, 118(4), 1169–1208. https://doi.org/10.1162/003355303322552775
Bertrand, Marianne, & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111(5), 1043–1075. https://doi.org/10.1086/376950
Bolmiri, S. H., Gardoon, A., & Kahkesh, P. H. (2016). Study of the effect of management ability on earnings quality. International Journal of Management, Accounting and Economics, 3(5), 319–335.
Bonsall, S. B., Holzman, E. R., & Miller, B. P. (2017). Managerial ability and credit risk assessment. Management Science, 63(5), 1425–1449. https://doi.org/10.1287/mnsc.2015.2403
Bryan, D., Liu, M. H. C., Tiras, S. L., & Zhuang, Z. (2013). Optimal versus suboptimal choices of accounting expertise on audit committees and earnings quality. Review of Accounting Studies, 18(4), 1123–1158. https://doi.org/10.1007/s11142-013-9229-8
Cohen, J. R., Hoitash, U., Krishnamoorthy, G., & Wright, A. M. (2014). The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), 243–273. https://doi.org/10.2308/accr-50585
Crossland, C., & Hambrick, D. C. (2007). How national systems differ in their constraints on corporate executives: a study of CEO effects in three countries. Strategic Management Journal, 28(8), 767–789. https://doi.org/10.1002/smj.610
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401. https://doi.org/10.1016/j.jacceco.2010.09.001
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35–59. https://doi.org/10.2308/accr.2002.77.s-1.35
DeFond, M. L. (2010). Earnings quality research: Advances, challenges and future research. Journal of Accounting and Economics, 50(2–3), 402–409. https://doi.org/10.1016/j.jacceco.2010.10.004
Demerjian, P. R., Lev, B., Lewis, M. F., & McVay, S. E. (2013). Managerial ability and earnings quality. The Accounting Review, 88(2), 463–498. https://doi.org/10.2308/accr-50318
Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177. https://doi.org/10.1086/261354
Dichev, I. D., Graham, J. R., Harvey, C. R., & Rajgopal, S. (2013). Earnings quality: Evidence from the field. Journal of Accounting and Economics, 56(2–3), 1–33. https://doi.org/10.1016/j.jacceco.2013.05.004
Djuitaningsih, T., & Rahman, A. (2012). Pengaruh kecakapan manajerial terhadap kinerja keuangan perusahaan. Media Riset Akuntansi, 1(2).
Fan, J. P. ., & Wong, T. . (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33(3), 401–425. https://doi.org/10.1016/S0165-4101(02)00047-2
GarcÃa Lara, J. M., Osma, B. G., & Neophytou, E. (2009). Earnings quality in exâ€post failed firms. Accounting and Business Research, 39(2), 119–138. https://doi.org/10.1080/00014788.2009.9663353
Ge, W., Matsumoto, D., & Zhang, J. L. (2011). Do CFOs have style? An empirical investigation of the effect of individual CFOs on accounting practices. Contemporary Accounting Research, 28(4), 1141–1179. https://doi.org/10.1111/j.1911-3846.2011.01097.x
Gul, F. A., Fung, S. Y. K., & Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors’ industry expertise. Journal of Accounting and Economics, 47(3), 265–287. https://doi.org/10.1016/j.jacceco.2009.03.001
Harris, O., Karl, J. B., & Lawrence, E. (2019). CEO compensation and earnings management: Does gender really matters? Journal of Business Research, 98, 1–14. https://doi.org/10.1016/j.jbusres.2019.01.013
Huang, X. (Sharon), & Sun, L. (2017). Managerial ability and real earnings management. Advances in Accounting, 39, 91–104. https://doi.org/10.1016/j.adiac.2017.08.003
Huang, Z., & Xue, Q. (2016). Re-examination of the effect of ownership structure on financial reporting: Evidence from share pledges in China. China Journal of Accounting Research, 9(2), 137–152. https://doi.org/10.1016/j.cjar.2015.11.001
Jensen, M. C., & Meckling, W. H. (1976). Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Jung, K., & Kwon, S. Y. (2002). Ownership structure and earnings informativeness. The International Journal of Accounting, 37(3), 301–325. https://doi.org/10.1016/S0020-7063(02)00173-5
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400. https://doi.org/10.1016/S0165-4101(02)00059-9
Lassoued, N., Attia, M. B. R., & Sassi, H. (2018). Earnings management in islamic and conventional banks: Does ownership structure matter? Evidence from the MENA region. Journal of International Accounting, Auditing and Taxation, 30, 85–105. https://doi.org/10.1016/j.intaccaudtax.2017.12.003
Le Breton-Miller, I., Miller, D., & Bares, F. (2015). Governance and entrepreneurship in family firms: Agency, behavioral agency and resource-based comparisons. Journal of Family Business Strategy, 6(1), 58–62. https://doi.org/10.1016/j.jfbs.2014.10.002
Li, K., Lu, L., Mittoo, U. R., & Zhang, Z. (2015). Board independence, ownership concentration and corporate performance—Chinese evidence. International Review of Financial Analysis, 41, 162–175. https://doi.org/10.1016/j.irfa.2015.05.024
Lobo, G. J., & Zhou, J. (2001). Disclosure quality and earnings management. Asia-Pacific Journal of Accounting & Economics, 8(1), 1–20. https://doi.org/10.1080/16081625.2001.10510584
Man, C. K., & Wong, B. (2013). Corporate governance and earnings management: A survey of literature. Journal of Applied Business Research, 29(2), 391–418. Retrieved from https://ssrn.com/abstract=3003835
Marchini, P. L., Mazza, T., & Medioli, A. (2018). The impact of related party transactions on earnings management: some insights from the Italian context. Journal of Management and Governance, 22(4), 981–1014. https://doi.org/10.1007/s10997-018-9415-y
McNichols, M. F. (2002). Discussion of the quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 61–69. https://doi.org/10.2308/accr.2002.77.s-1.61
Mersni, H., & Ben Othman, H. (2016). The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region. Journal of Islamic Accounting and Business Research, 7(4), 318–348. https://doi.org/10.1108/JIABR-11-2014-0039
Murniati, M., Sa’diyah, M., & Subadriyah, S. (2019). Hermeneutics of earning management: Between pressure and opportunity. JEMA: Jurnal Ilmiah Bidang Akuntansi Dan Manajemen, 16(1), 46. https://doi.org/10.31106/jema.v16i1.1666
Pan, Y., Wang, T. Y., & Weisbach, M. S. (2015). Learning about CEO ability and stock return volatility. The Review of Financial Studies, 28(6), 1623–1666. https://doi.org/10.1093/rfs/hhv014
Piot, C., & Janin, R. (2007). External auditors, audit committees and earnings management in France. European Accounting Review, 16(2), 429–454. https://doi.org/10.1080/09638180701391030
Pomeroy, B., & Thornton, D. B. (2008). Meta-analysis and the accounting literature: The case of audit committee independence and financial reporting quality. European Accounting Review, 17(2), 305–330. https://doi.org/10.1080/09638180701819832
Prakoso, G., & Purwanto, A. (2017). Pengaruh pemilihan kantor akuntan publik dan karakteristik manajemen terhadap manajemen laba. Diponegoro Journal of Accounting, 6(1), 128–140.
SeTin, S., & Murwaningsari, E. (2018). The effect of managerial ability towards earning quality with audit committee as moderating variable. Journal of Business and Retail Management Research, 12(3).
Shette, R., Kuntluru, S., & Korivi, S. R. (2016). Opportunistic earnings management during initial public offerings: evidence from India. Review of Accounting and Finance, 15(3), 352–371. https://doi.org/10.1108/RAF-03-2015-0048
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Sousa, E. F. de, & Galdi, F. C. (2016). The relationship between equity ownership concentration and earnings quality: evidence from Brazil. Revista de Administração, 51(4), 331–343. https://doi.org/10.1016/j.rausp.2016.07.006
Susilawati, D., & Rakhman, F. (2018). The effect of ownership structure and investor protection to firm value: Analyst following and as moderating variable. Jurnal Akuntansi Dan Investasi, 19(1), 64–75. https://doi.org/10.18196/jai.190192