EARNINGS QUALITY: DETERMINANT FACTORS AND
The research aimed to discuss the determinant factors of earnings quality and the economic consequences in Indonesian capital market. Those factors are innate, performance, company risk and industry risk. The quality of earnings was measured attributes are accrual quality, persistence, predictability, smoothness, and the quality of factorial earnings, whereas the economic consequence was measured of security residual variance.
The research employed three steps of testing, namely (1) testing of the attributes of earnings quality were different from each other, (2) analyzing the determining factors of earnings quality and (3) testing the effect of earnings quality in the stock market in terms of the relationship between information asymmetric and the earnings quality.
The result of the first testing showed that all of the four attributes of earnings quality were different from each other. The analysis of determinant factors showed that leverage variable had a significant relationship with five attributes of earnings quality, than sales and firm size showed significant relationship with four attributes of earnings information quality. The other variables such as operation cycle, performance and the classification of the industry resulted in two attributes of earnings quality. The economic consequence testing resulted in three attributes of earnings quality that had a significant relationship with the security residual variance. Those attributes were accrual quality, smoothness, and factorial earnings quality.
Key word: earnings quality, innate factors, performance, company risk, industry risk, security residual variance
* This study is a part of my dissertation at Gadjah Mada University. I would like to express my deepest thanks to my promotor Prof. Dr. Bambang Sudibyo, MBA; Prof. Dr. Jogiyanto Hartono, MBA; and Dr. Gudono, MBA.
So far, the financial statements produced by companies are employing accrual-based accounting due to its relevance to the measurement of company financial performance, (Dechow 1994; Dechow et al. 1998; Palepu et al. 2000; Wild et al. 2001; Dechow and Dichev, 2002, and Liu et al. 2002), its ability to show the real financial condition and to predict the future cash flow (Wild et.al 2001), and its ability to predict the movement of the future stock price (Chan et al. 2001). This is supported by Financial Accounting Standard Board by stating that the Information about enterprise earnings and its components measured by accrual accounting generally provides a better indication of enterprise performace than does information about current cash receipts and payments (SFAC No.1 paragraf 44). Moreover, the Financial Accounting Standard also states that earnings information was oftenly used as the measurement of company performance as well as other measurements such as return on investment and something related to earnings per share.
The earnings information resulted from the accrual accounting is closely related to the earnings quality (Thomas and Zhang, 2000; Hribar, 2000; Richardson, 2001; and Dechow dan Dichev, 2002), which are very important for the users of financial statements such as the investor and creditor who use it as the basic of economic decision making especially those related to contracting decision and investment decision. In additon, the financial statement can also be used, indirectly, as one of the quality indicators of financial reporting standard as made by the standard setters.