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EFEK ENTRENCHMENT DAN ALIGNMENT PADA MANAJEMEN LABA
I Putu Sugiartha Sanjaya
Universitas Atma Jaya Yogyakarta
The objective of this research is to investigate whether controlling shareholder manages earnings. The issue is most important to be revealed because ownership of public companies is concentrated and low protections for non controlling shareholders in Indonesia. Therefore, controlling shareholder is motivated to manage earnings. This research also investigates whether control rights of controlling shareholder positively influence earnings management. The issue relates to entrenchment effect. This research also investigates whether cash flow rights reduce earnings management. The issue relates to alignment effect. This research used data of ultimate ownership and financial statement. The data are collected from Indonesia Stock Exchange during 2001 to 2007. There are 786 year companies during seven years. This study documents that the control rights motivate the controlling shareholder to manage earnings. Control rights entrench controlling shareholder to manage earnings. It implicates the entrenchment effect. Cash flow rights negatively influence earnings management. It implicates the alignment effect.
Keywords: entrenchment, alignment, control rights, cash flow rights, and earnings management
The phenomenon of ownership of public companies in Indonesia is concentrated. Concentrated ownership is the concentration of cash flow rights and control rights concentration of families, governments, financial institutions are widely held, widely owned companies, or others as the controlling shareholder. This phenomenon is demonstrated empirically by Claessens et al. (2000), Febrianto (2005), and Siregar (2006). Concentrated ownership may encourage controlling shareholders to expropriation. Expropriation is a process control or control the use of a person’s right to maximize their own welfare with the distribution of wealth from others (Claessens et al., 1999). Riel cases in Indonesia, published in the magazine Trust (2003) is PT Barito Pacific Timber Tbk, which acquired 60% of PT Enim Musi Lestari. Another case is the role of Robert Tantular as the controlling shareholder of PT Bank Century Tbk, which disburse credit to PT Wibowo Containers Rezeki Accent Investment Indonesia and PT. Both companies are owned by Robert Tantular (Cash, 2009).
Expropriation is feasible because the controlling shareholders can take advantage of the limitations of law in a country with civil law such as Indonesia. According to Johnson et al. (2000b), the countries adopted the civil law emphasis on a predictable legal and trust in legislation to regulate the behavior of private interests. The law in civil law systems are made by legislators (La Porta et al., 2000). Things like this is an incentive for controlling shareholders to creatively organize transactions that unfairly so in accordance with the contents of legislation.
Johnson et al. (2000a) demonstrated the value obtained by Indonesia to uphold the rights of shareholders nonpengendali is 1. The distance value is 1-5. The value 5 is the highest value that describes the protection of shareholders nonpengendali stronger. Value obtained by Indonesia reflects nonpengendali shareholder protection is very weak. It becomes an incentive for controlling shareholders to make the expropriation of shareholders nonpengendali.
Improvement of expropriation by controlling shareholders implies entrenchment effect. Because, the controlling shareholder has a strong control for use in an effort to meet the company’s interests than the interests of all shareholders (Bozec and Laurin, 2008). Entrenchment is the act of controlling shareholders are protected by copyright control for expropriation (Fan and Wong, 2002). ….