THE EFFECT OF BUSINESS STRATEGY AND FIRM CHARACTERISTICS ON
EARNINGS MANAGEMENT
1.0 Introduction:
The rapid development and intense competition in the business world requires every
company to be able to survive and have an advantage in its field of business (Rice and
Agustina, 2012: 95). The company is a collection of contracts from parties who have interests
(Rice and Agustina, 2012: 96). The company is faced with the condition to be more
transparent in its business provide financial information on its company, especially for
companies that offer their shares in the capital market (Astuti, 2015: 01).
Financial reports are a communication medium used to connect parties with an interest
in the company and also to account for what managers do with the owner's resources (Prastiti,
2013: 1). PSAK No. 1 Year 2013 The purpose of financial statements is to provide
information about the financial position, financial performance and cash flows of a company
entity that is useful for a large number of users in making economic decisions and also shows
the results of management's responsibility for the use of resources (Dimercia and Krisnadewi,
2016: 2324). Financial statements also provide information about company profits. Profit is
an indicator used to measure company performance (Siallagan and Machfoedz, 2006: 1).
Therefore, management often takes action so that the financial statements presented look
good with the earnings management method. Management whose achievements are assessed
in generating profits will tend to manage profits opportunistically (Mahiswari and Nugroho,
2014: 01). Earnings management is defined as an attempt by company managers to intervene
or influence information in financial reports with the aim of deceiving stakeholders who want
to know financial performance and condition (Sulistyanto, 2008: 06).
There are various cases regarding earnings management, one of which is the case of
PT Indofarma. This case began with Bapepam's review of alleged violations of capital market
regulations, especially those related to the presentation of financial statements by PT
Indofarma. Bapepam found evidence, among others, that the value of work in process was
overvalued in the presentation of work in process inventory in 2001 by Rp 28.87 billion. As a
result, cost of goods sold was understated and net profit was overstated by the same amount.
Bapepam decided to impose an administrative sanction of Rp 500 million to the Board of
Directors of PT Indofarma who served during the period when the 2001 financial statements
were issued. BNI securities analysis also added that Indofarma's sales in 2002 only increased
by 12%, while production costs swelled by 82% and marketing costs rose by 41%. This case
illustrates that the implementation of management profit in a company will have a negative
impact on the company as well as on investors and creditors (detik.com, edition dated
November 08, 2004, accessed on June 10, 2004).
2017).
Agency theory explains a relationship that occurs between the owner (principal) and the
other party, namely the agent (Paramitha, 2014: 12). The relationship between the principal
and the agent can lead to conditions of information imbalance because the agent has a
position that has more information about the company than the principal (Verawati and Muid,
2012: 06). There is an information gap between managers and company owners, so
management has the opportunity to maximize their interests, one of which is earnings
management (Fauziah, 2014: 18).
There are various factors that influence earnings management practices, including
business strategy and company characteristics. Business strategy is an integrated plan by
considering strategic aspects within the company (Paylosa, 2014: 11). The company's
business strategy affects all company activities because all business process activities,
operational activities, and transactions carried out and all business decisions made by
managers must be in line with business strategy (Arieftiara et al., 2013: 2). Research on
business strategy is generally about the effect of business strategy on tax avoidance such as
research conducted by Arieftiara et al. in 2013. This study uses two types of business
strategies, namely prospector and defender from the Miles and Snow (1978) typology in
(Arieftiara et al., 2013: 6).
The results of research by Miles and Snow (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector strategy type are companies that continuously seek
new market opportunities by competing through new products and market development and
experimenting with potential responses to emerging environmental trends. Usually companies
find it difficult to seek maximum profit but always avoid low profitability, because it is more
profitable prioritizing effectiveness over efficiency (Paylosa, 2014: 04). In order for the
company to continue to be given the trust of investors to continue investing their shares, the
company increases the company's profits. Thus, it is likely that the company will carry out
earnings management.
The results of research by Miles and Snow (1978) in Sistyan (2010: 31) defender
strategy is if the company operates in a relatively stable production area, thus the company is
more concerned with efforts to maintain a certain market share portion of the overall market
by creating certain products and services and a stable number of customers. Technology
financing is done as efficiently as possible and efficiency is central to organizational
performance (Paylosa, 2014: 04). Therefore, the company does not spend much to meet its
production needs, but still generates stable profits, so the level of corporate earnings
management actions is also reduced. Thus the company does not need to manipulate its
profits so that investors want to join the company, so it is less likely that the company will
carry out earnings management.
Company characteristics in this study use company size, leverage, company age and
profitability. Company size is the total value of wealth owned by the company (Nurmalita,
2011: 03). Larger companies generally receive more attention from external parties such as
investors, analysts, and the government, so that companies are more careful in managing their
financial statements (Yatulhusna, 2015: 34). The presentation of earnings in large companies
is more accurate and more careful, because operating activities in large companies are more
complex. With a more accurate and careful presentation of earnings, there is a small
possibility that large companies will carry out earnings management. Research conducted by
Astuti (2017: 08) states that company size has a negative effect on earnings management. In
contrast to Bestivano's research (2013: 24) states that the larger the size of the company, the
positive effect on earnings smoothing.
Leverage is the ratio between total assets and total company assets (Irawan, 2013: 38).
Another opinion states that leverage is measurement of the amount of assets financed by
debt, where the debt comes from creditors, not from shareholders or investors (Frans, 2015:
43). Debt policy is another alternative to obtaining funds other than selling shares. In a debt
agreement, there is a company's interest in being positively assessed by creditors in terms of
the ability to pay their debts (Verawati and Muid, 2012: 10). Therefore, the company will
commit fraud in the form of earnings management, namely increasing reported profits to
increase bargaining power bargaining power company in debt negotiations, reduce creditor
concerns and to obtain credit limit concessions. Research Wibisana and Ratnaningsih,
(2014: 10) stated that leverage has a positive effect on earnings management. In contrast to
the research of Wardani et al. (2011:133) found that leverage has a negative effect on
earnings management. Company age is the age since the establishment of the company until
the company has been able to carry out its operations (Yatulhusna, 2015: 27). Companies that
have been around for a long time generally have more stable profitability than newly
established companies or those with a shorter time (Bestivano, 2013: 08). Therefore, it can be
said that companies that have been around for a long time have relatively stable profits. With
relatively stable profits, the company's actions in carrying out earnings management are also
more stable increasingly reduced. This is because long-established companies already know
condition financial condition of the company and the problems problems faced so that to deal
with problems regarding its finances company not experience difficulties. Research
conducted by Yatulhusna (2015: 79) states that company age has a significant negative effect
on earnings management. Astuti (2015: 11) states that company age has a positive effect on
earnings management.
Profitability is the level of net profit earned by the company in carrying out its
operations (Astuti, 2017: 04). When the profit generated by the company in one period is
very high, there is a possibility of a decrease in profit in the following period (Yaulhusna,
2015: 73). Thus, managers will manage their profits so that they are not too high so that
excess profits that are not reported by the company can be presented for the earnings report in
the following period. Research conducted by Wibisana and Ratnaningsih (2014: 11) states
that the level of profitability has a positive effect on earnings smoothing. This research is
supported by research, while Bestivano's research (2013: 23) states that profitability has no
effect on earnings management.
Based on previous research, there are several research gaps. The author aims to
conduct research again on business strategy (prospector and defender), company size,
leverage, company age, and profitability with the aim of proving the gaps that arise. The
author also takes samples from manufacturing companies listed on the Indonesia Stock
Exchange (IDX) because manufacturing companies are large companies that support the
Indonesian economy. The difference between this research and previous research is that this
study uses additional independent variables of business strategy. Previous research which is a
reference in this study on average describes the effect of company characteristics on earnings
management, but in this study business strategy variables are added. Therefore, the authors
will make a study with the title "The Effect of Business Strategy and Company
Characteristics on Earnings Management".
2.0 Literature Review And Hypothesis Development:
2.1 The Effect of Business Strategy on Earnings Management:
The results of Miles and Snow's research (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector type of strategy are companies that are strategically
prospective continuously looking for new market opportunities by competing through new
products and market development and experimenting with potential responses to emerging
environmental trends. Usually companies find it difficult to seek maximum profit but always
avoid low profitability, because they are more concerned with effectiveness than efficiency
(Paylosa, 2014: 04). In order for the company to continue to be given confidence by investors
to continue investing their shares, the company will increase the company's profits. So, the
more the prospector strategy is implemented by a company, it will affect the increase in
companies doing earnings management. Therefore, the prospector strategy has a positive
effect on earnings management because if the company is doing tax avoidance, the company
tends to report lower profits to reduce the tax burden.
The results of Miles and Snow's (1978) research in Sistyan (2010: 31) defender
strategy, namely if the company operates in a relatively stable production area, thus the
company is more concerned with efforts to maintain a certain market share portion of the
overall market by creating certain products and services and a stable number of customers.
Therefore, the company does not spend much to meet its production needs, but still generates
stable profits, so the level of corporate earnings management actions is also reduced. Thus the
company does not need to manipulate its profits so that investors want to join the company,
so it is less likely that the company will carry out earnings management. So the more the
defender strategy is implemented by the company, there is only a small possibility that the
company will carry out earnings management.
2.2 The Effect of Leverage on Earnings Management:
Leverage is a measurement of the amount of assets financed by debt, where the debt
comes from creditors, not from shareholders or investors (Frans, 2015: 43). Debt policy is
another alternative to obtaining funds other than selling shares. In a debt agreement, there is a
company's interest in being positively assessed by creditors in terms of the ability to pay their
debts (Verawati and Muid, 2012: 10). Therefore, the company will commit fraud in the form
of earnings management, namely increasing reported earnings to increase the company's
bargaining power in debt negotiations, reduce creditor concerns and to obtain credit limit
concessions.
2.3 The Effect of Company Age on Earnings Management:
Company age is the age since the establishment of the company until the company has
been able to carry out its operations (Yatulhusna, 2015: 27). Companies that have been
around for a long time generally have more stable profitability than newly established
companies or those with a short time (Bestivano, 2013: 08). With relatively stable profits, the
company's actions in carrying out earnings management are also reduced. Thus, the longer a
company stands, the smaller the percentage of companies doing earnings management.
2.4 The Effect of Profitability on Earnings Management:
Profitability is the level of net profit that the company has managed to obtain in
carrying out its operations (Astuti, 2017: 04). When the profit generated by the company in
one period is very high, there is a possibility of a decrease in profit in the following period
(Yaulhusna, 2015: 73). Thus, managers manage their profits so that they are not too high, so
that excess profits that are not reported by the company can be presented for the earnings
report in the following period. Therefore, there are many possibilities for companies that have
high profitability to carry out earnings management. The greater the profitability of a
company, the higher the possibility of managers doing earnings management.
2.5 Business Strategy
The business strategy in this study uses two strategy variables, namely prospector and
defender strategies, because they are two typologies of strategies that are at two extremes
(Paylosa, 2014: 01). The main focus of prospectors is how to find and make the most of new
products, market areas and opportunities (Arieftiara, 2013: 07). The defender strategy is if the
company operates in a relatively stable production area, the products offered are limited
compared to its competitors and the company rarely makes adjustments in technology and the
structure or method of operation of the company and can be predicted in the direction of
future changes (Sistyan 2010: 31).
This study uses four proxies to measure the company's business strategy which are
designed to be assessed or given a score to reflect the business strategy used by the company
(Muhammad, 2012: 39). To obtain the STRATEGY score, this study uses measurements from
the research of Higgins, et al. (2010: 10), namely:
Ability to efficiently produce and distribute goods and services:
Thomas et al (1991) in Muhammad (2012: 39) state that the company's ability to
produce and distribute goods and services efficiently is very important for the company's
business strategy, especially for companies that focus on efficiency, because defender
companies have a large number of employees less than the company prospector.
CONCLUSIONS
Based on the findings and discussion in the previous chapter, the following conclusions
can be drawn:
Business strategy variables have no effect on earnings management. The results of this study
are in line with research conducted by Muhammad (2012: 63) which states that business
strategy has no effect on tax avoidance.
The company size variable has no significant effect on earnings management. The results of
this study are in line with research conducted by Yatulhusna (2015: 78), Mahiswari and
Nugroho (2014: 16) and Irawan (2013: 08).
The leverage variable has a significant positive effect on earnings management. The results of
this study are in line with research conducted by Wibisana and Ratnaningsih (2014: 10),
Yatulhusna (2014: 10) and Yatulhusna (2014: 10).
(2015:80) and Irawan (2013:07)
The company age variable has a significant negative effect on earnings management. These
results are in line with research conducted by Yatulhusna (2015: 76), Nurhasanah (2014: 60)
and Zen and Herman (2007: 60).
The profitability variable has no significant effect on earnings management. These results are
in line with research conducted by Astuti (2017: 07).
Financial reports are a communication medium used to connect parties with an interest
in the company and also to account for what managers do with the owner's resources (Prastiti,
2013: 1). PSAK No. 1 Year 2013 The purpose of financial statements is to provide
information about the financial position, financial performance and cash flows of a company
entity that is useful for a large number of users in making economic decisions and also shows
the results of management's responsibility for the use of resources (Dimercia and Krisnadewi,
2016: 2324). Financial statements also provide information about company profits. Profit is
an indicator used to measure company performance (Siallagan and Machfoedz, 2006: 1).
Therefore, management often takes action so that the financial statements presented look
good with the earnings management method. Management whose achievements are assessed
in generating profits will tend to manage profits opportunistically (Mahiswari and Nugroho,
2014: 01). Earnings management is defined as an attempt by company managers to intervene
or influence information in financial reports with the aim of deceiving stakeholders who want
to know financial performance and condition (Sulistyanto, 2008: 06).
There are various cases regarding earnings management, one of which is the case of
PT Indofarma. This case began with Bapepam's review of alleged violations of capital market
regulations, especially those related to the presentation of financial statements by PT
Indofarma. Bapepam found evidence, among others, that the value of work in process was
overvalued in the presentation of work in process inventory in 2001 by Rp 28.87 billion. As a
result, cost of goods sold was understated and net profit was overstated by the same amount.
Bapepam decided to impose an administrative sanction of Rp 500 million to the Board of
Directors of PT Indofarma who served during the period when the 2001 financial statements
were issued. BNI securities analysis also added that Indofarma's sales in 2002 only increased
by 12%, while production costs swelled by 82% and marketing costs rose by 41%. This case
illustrates that the implementation of management profit in a company will have a negative
impact on the company as well as on investors and creditors (detik.com, edition dated
November 08, 2004, accessed on June 10, 2004).
2017).
Agency theory explains a relationship that occurs between the owner (principal) and the
other party, namely the agent (Paramitha, 2014: 12). The relationship between the principal
and the agent can lead to conditions of information imbalance because the agent has a
position that has more information about the company than the principal (Verawati and Muid,
2012: 06). There is an information gap between managers and company owners, so
management has the opportunity to maximize their interests, one of which is earnings
management (Fauziah, 2014: 18).
There are various factors that influence earnings management practices, including
business strategy and company characteristics. Business strategy is an integrated plan by
considering strategic aspects within the company (Paylosa, 2014: 11). The company's
business strategy affects all company activities because all business process activities,
operational activities, and transactions carried out and all business decisions made by
managers must be in line with business strategy (Arieftiara et al., 2013: 2). Research on
business strategy is generally about the effect of business strategy on tax avoidance such as
research conducted by Arieftiara et al. in 2013. This study uses two types of business
strategies, namely prospector and defender from the Miles and Snow (1978) typology in
(Arieftiara et al., 2013: 6).
The results of research by Miles and Snow (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector strategy type are companies that continuously seek
new market opportunities by competing through new products and market development and
experimenting with potential responses to emerging environmental trends. Usually companies
find it difficult to seek maximum profit but always avoid low profitability, because it is more
profitable prioritizing effectiveness over efficiency (Paylosa, 2014: 04). In order for the
company to continue to be given the trust of investors to continue investing their shares, the
company increases the company's profits. Thus, it is likely that the company will carry out
earnings management.
The results of research by Miles and Snow (1978) in Sistyan (2010: 31) defender
strategy is if the company operates in a relatively stable production area, thus the company is
more concerned with efforts to maintain a certain market share portion of the overall market
by creating certain products and services and a stable number of customers. Technology
financing is done as efficiently as possible and efficiency is central to organizational
performance (Paylosa, 2014: 04). Therefore, the company does not spend much to meet its
production needs, but still generates stable profits, so the level of corporate earnings
management actions is also reduced. Thus the company does not need to manipulate its
profits so that investors want to join the company, so it is less likely that the company will
carry out earnings management.
Company characteristics in this study use company size, leverage, company age and
profitability. Company size is the total value of wealth owned by the company (Nurmalita,
2011: 03). Larger companies generally receive more attention from external parties such as
investors, analysts, and the government, so that companies are more careful in managing their
financial statements (Yatulhusna, 2015: 34). The presentation of earnings in large companies
is more accurate and more careful, because operating activities in large companies are more
complex. With a more accurate and careful presentation of earnings, there is a small
possibility that large companies will carry out earnings management. Research conducted by
Astuti (2017: 08) states that company size has a negative effect on earnings management. In
contrast to Bestivano's research (2013: 24) states that the larger the size of the company, the
positive effect on earnings smoothing.
Leverage is the ratio between total assets and total company assets (Irawan, 2013: 38).
Another opinion states that leverage is measurement of the amount of assets financed by
debt, where the debt comes from creditors, not from shareholders or investors (Frans, 2015:
43). Debt policy is another alternative to obtaining funds other than selling shares. In a debt
agreement, there is a company's interest in being positively assessed by creditors in terms of
the ability to pay their debts (Verawati and Muid, 2012: 10). Therefore, the company will
commit fraud in the form of earnings management, namely increasing reported profits to
increase bargaining power bargaining power company in debt negotiations, reduce creditor
concerns and to obtain credit limit concessions. Research Wibisana and Ratnaningsih,
(2014: 10) stated that leverage has a positive effect on earnings management. In contrast to
the research of Wardani et al. (2011:133) found that leverage has a negative effect on
earnings management. Company age is the age since the establishment of the company until
the company has been able to carry out its operations (Yatulhusna, 2015: 27). Companies that
have been around for a long time generally have more stable profitability than newly
established companies or those with a shorter time (Bestivano, 2013: 08). Therefore, it can be
said that companies that have been around for a long time have relatively stable profits. With
relatively stable profits, the company's actions in carrying out earnings management are also
more stable increasingly reduced. This is because long-established companies already know
condition financial condition of the company and the problems problems faced so that to deal
with problems regarding its finances company not experience difficulties. Research
conducted by Yatulhusna (2015: 79) states that company age has a significant negative effect
on earnings management. Astuti (2015: 11) states that company age has a positive effect on
earnings management.
Profitability is the level of net profit earned by the company in carrying out its
operations (Astuti, 2017: 04). When the profit generated by the company in one period is
very high, there is a possibility of a decrease in profit in the following period (Yaulhusna,
2015: 73). Thus, managers will manage their profits so that they are not too high so that
excess profits that are not reported by the company can be presented for the earnings report in
the following period. Research conducted by Wibisana and Ratnaningsih (2014: 11) states
that the level of profitability has a positive effect on earnings smoothing. This research is
supported by research, while Bestivano's research (2013: 23) states that profitability has no
effect on earnings management.
Based on previous research, there are several research gaps. The author aims to
conduct research again on business strategy (prospector and defender), company size,
leverage, company age, and profitability with the aim of proving the gaps that arise. The
author also takes samples from manufacturing companies listed on the Indonesia Stock
Exchange (IDX) because manufacturing companies are large companies that support the
Indonesian economy. The difference between this research and previous research is that this
study uses additional independent variables of business strategy. Previous research which is a
reference in this study on average describes the effect of company characteristics on earnings
management, but in this study business strategy variables are added. Therefore, the authors
will make a study with the title "The Effect of Business Strategy and Company
Characteristics on Earnings Management".
2.0 Literature Review And Hypothesis Development:
2.1 The Effect of Business Strategy on Earnings Management:
The results of Miles and Snow's research (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector type of strategy are companies that are strategically
prospective continuously looking for new market opportunities by competing through new
products and market development and experimenting with potential responses to emerging
environmental trends. Usually companies find it difficult to seek maximum profit but always
avoid low profitability, because they are more concerned with effectiveness than efficiency
(Paylosa, 2014: 04). In order for the company to continue to be given confidence by investors
to continue investing their shares, the company will increase the company's profits. So, the
more the prospector strategy is implemented by a company, it will affect the increase in
companies doing earnings management. Therefore, the prospector strategy has a positive
effect on earnings management because if the company is doing tax avoidance, the company
tends to report lower profits to reduce the tax burden.
The results of Miles and Snow's (1978) research in Sistyan (2010: 31) defender
strategy, namely if the company operates in a relatively stable production area, thus the
company is more concerned with efforts to maintain a certain market share portion of the
overall market by creating certain products and services and a stable number of customers.
Therefore, the company does not spend much to meet its production needs, but still generates
stable profits, so the level of corporate earnings management actions is also reduced. Thus the
company does not need to manipulate its profits so that investors want to join the company,
so it is less likely that the company will carry out earnings management. So the more the
defender strategy is implemented by the company, there is only a small possibility that the
company will carry out earnings management.
2.2 The Effect of Leverage on Earnings Management:
Leverage is a measurement of the amount of assets financed by debt, where the debt
comes from creditors, not from shareholders or investors (Frans, 2015: 43). Debt policy is
another alternative to obtaining funds other than selling shares. In a debt agreement, there is a
company's interest in being positively assessed by creditors in terms of the ability to pay their
debts (Verawati and Muid, 2012: 10). Therefore, the company will commit fraud in the form
of earnings management, namely increasing reported earnings to increase the company's
bargaining power in debt negotiations, reduce creditor concerns and to obtain credit limit
concessions.
2.3 The Effect of Company Age on Earnings Management:
Company age is the age since the establishment of the company until the company has
been able to carry out its operations (Yatulhusna, 2015: 27). Companies that have been
around for a long time generally have more stable profitability than newly established
companies or those with a short time (Bestivano, 2013: 08). With relatively stable profits, the
company's actions in carrying out earnings management are also reduced. Thus, the longer a
company stands, the smaller the percentage of companies doing earnings management.
2.4 The Effect of Profitability on Earnings Management:
Profitability is the level of net profit that the company has managed to obtain in
carrying out its operations (Astuti, 2017: 04). When the profit generated by the company in
one period is very high, there is a possibility of a decrease in profit in the following period
(Yaulhusna, 2015: 73). Thus, managers manage their profits so that they are not too high, so
that excess profits that are not reported by the company can be presented for the earnings
report in the following period. Therefore, there are many possibilities for companies that have
high profitability to carry out earnings management. The greater the profitability of a
company, the higher the possibility of managers doing earnings management.
2.5 Business Strategy
The business strategy in this study uses two strategy variables, namely prospector and
defender strategies, because they are two typologies of strategies that are at two extremes
(Paylosa, 2014: 01). The main focus of prospectors is how to find and make the most of new
products, market areas and opportunities (Arieftiara, 2013: 07). The defender strategy is if the
company operates in a relatively stable production area, the products offered are limited
compared to its competitors and the company rarely makes adjustments in technology and the
structure or method of operation of the company and can be predicted in the direction of
future changes (Sistyan 2010: 31).
This study uses four proxies to measure the company's business strategy which are
designed to be assessed or given a score to reflect the business strategy used by the company
(Muhammad, 2012: 39). To obtain the STRATEGY score, this study uses measurements from
the research of Higgins, et al. (2010: 10), namely:
Ability to efficiently produce and distribute goods and services:
Thomas et al (1991) in Muhammad (2012: 39) state that the company's ability to
produce and distribute goods and services efficiently is very important for the company's
business strategy, especially for companies that focus on efficiency, because defender
companies have a large number of employees less than the company prospector.
CONCLUSIONS
Based on the findings and discussion in the previous chapter, the following conclusions
can be drawn:
Business strategy variables have no effect on earnings management. The results of this study
are in line with research conducted by Muhammad (2012: 63) which states that business
strategy has no effect on tax avoidance.
The company size variable has no significant effect on earnings management. The results of
this study are in line with research conducted by Yatulhusna (2015: 78), Mahiswari and
Nugroho (2014: 16) and Irawan (2013: 08).
The leverage variable has a significant positive effect on earnings management. The results of
this study are in line with research conducted by Wibisana and Ratnaningsih (2014: 10),
Yatulhusna (2014: 10) and Yatulhusna (2014: 10).
(2015:80) and Irawan (2013:07)
The company age variable has a significant negative effect on earnings management. These
results are in line with research conducted by Yatulhusna (2015: 76), Nurhasanah (2014: 60)
and Zen and Herman (2007: 60).
The profitability variable has no significant effect on earnings management. These results are
in line with research conducted by Astuti (2017: 07).
Financial reports are a communication medium used to connect parties with an interest
in the company and also to account for what managers do with the owner's resources (Prastiti,
2013: 1). PSAK No. 1 Year 2013 The purpose of financial statements is to provide
information about the financial position, financial performance and cash flows of a company
entity that is useful for a large number of users in making economic decisions and also shows
the results of management's responsibility for the use of resources (Dimercia and Krisnadewi,
2016: 2324). Financial statements also provide information about company profits. Profit is
an indicator used to measure company performance (Siallagan and Machfoedz, 2006: 1).
Therefore, management often takes action so that the financial statements presented look
good with the earnings management method. Management whose achievements are assessed
in generating profits will tend to manage profits opportunistically (Mahiswari and Nugroho,
2014: 01). Earnings management is defined as an attempt by company managers to intervene
or influence information in financial reports with the aim of deceiving stakeholders who want
to know financial performance and condition (Sulistyanto, 2008: 06).
There are various cases regarding earnings management, one of which is the case of
PT Indofarma. This case began with Bapepam's review of alleged violations of capital market
regulations, especially those related to the presentation of financial statements by PT
Indofarma. Bapepam found evidence, among others, that the value of work in process was
overvalued in the presentation of work in process inventory in 2001 by Rp 28.87 billion. As a
result, cost of goods sold was understated and net profit was overstated by the same amount.
Bapepam decided to impose an administrative sanction of Rp 500 million to the Board of
Directors of PT Indofarma who served during the period when the 2001 financial statements
were issued. BNI securities analysis also added that Indofarma's sales in 2002 only increased
by 12%, while production costs swelled by 82% and marketing costs rose by 41%. This case
illustrates that the implementation of management profit in a company will have a negative
impact on the company as well as on investors and creditors (detik.com, edition dated
November 08, 2004, accessed on June 10, 2004).
2017).
Agency theory explains a relationship that occurs between the owner (principal) and the
other party, namely the agent (Paramitha, 2014: 12). The relationship between the principal
and the agent can lead to conditions of information imbalance because the agent has a
position that has more information about the company than the principal (Verawati and Muid,
2012: 06). There is an information gap between managers and company owners, so
management has the opportunity to maximize their interests, one of which is earnings
management (Fauziah, 2014: 18).
There are various factors that influence earnings management practices, including
business strategy and company characteristics. Business strategy is an integrated plan by
considering strategic aspects within the company (Paylosa, 2014: 11). The company's
business strategy affects all company activities because all business process activities,
operational activities, and transactions carried out and all business decisions made by
managers must be in line with business strategy (Arieftiara et al., 2013: 2). Research on
business strategy is generally about the effect of business strategy on tax avoidance such as
research conducted by Arieftiara et al. in 2013. This study uses two types of business
strategies, namely prospector and defender from the Miles and Snow (1978) typology in
(Arieftiara et al., 2013: 6).
The results of research by Miles and Snow (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector strategy type are companies that continuously seek
new market opportunities by competing through new products and market development and
experimenting with potential responses to emerging environmental trends. Usually companies
find it difficult to seek maximum profit but always avoid low profitability, because it is more
profitable prioritizing effectiveness over efficiency (Paylosa, 2014: 04). In order for the
company to continue to be given the trust of investors to continue investing their shares, the
company increases the company's profits. Thus, it is likely that the company will carry out
earnings management.
The results of research by Miles and Snow (1978) in Sistyan (2010: 31) defender
strategy is if the company operates in a relatively stable production area, thus the company is
more concerned with efforts to maintain a certain market share portion of the overall market
by creating certain products and services and a stable number of customers. Technology
financing is done as efficiently as possible and efficiency is central to organizational
performance (Paylosa, 2014: 04). Therefore, the company does not spend much to meet its
production needs, but still generates stable profits, so the level of corporate earnings
management actions is also reduced. Thus the company does not need to manipulate its
profits so that investors want to join the company, so it is less likely that the company will
carry out earnings management.
Company characteristics in this study use company size, leverage, company age and
profitability. Company size is the total value of wealth owned by the company (Nurmalita,
2011: 03). Larger companies generally receive more attention from external parties such as
investors, analysts, and the government, so that companies are more careful in managing their
financial statements (Yatulhusna, 2015: 34). The presentation of earnings in large companies
is more accurate and more careful, because operating activities in large companies are more
complex. With a more accurate and careful presentation of earnings, there is a small
possibility that large companies will carry out earnings management. Research conducted by
Astuti (2017: 08) states that company size has a negative effect on earnings management. In
contrast to Bestivano's research (2013: 24) states that the larger the size of the company, the
positive effect on earnings smoothing.
Leverage is the ratio between total assets and total company assets (Irawan, 2013: 38).
Another opinion states that leverage is measurement of the amount of assets financed by
debt, where the debt comes from creditors, not from shareholders or investors (Frans, 2015:
43). Debt policy is another alternative to obtaining funds other than selling shares. In a debt
agreement, there is a company's interest in being positively assessed by creditors in terms of
the ability to pay their debts (Verawati and Muid, 2012: 10). Therefore, the company will
commit fraud in the form of earnings management, namely increasing reported profits to
increase bargaining power bargaining power company in debt negotiations, reduce creditor
concerns and to obtain credit limit concessions. Research Wibisana and Ratnaningsih,
(2014: 10) stated that leverage has a positive effect on earnings management. In contrast to
the research of Wardani et al. (2011:133) found that leverage has a negative effect on
earnings management. Company age is the age since the establishment of the company until
the company has been able to carry out its operations (Yatulhusna, 2015: 27). Companies that
have been around for a long time generally have more stable profitability than newly
established companies or those with a shorter time (Bestivano, 2013: 08). Therefore, it can be
said that companies that have been around for a long time have relatively stable profits. With
relatively stable profits, the company's actions in carrying out earnings management are also
more stable increasingly reduced. This is because long-established companies already know
condition financial condition of the company and the problems problems faced so that to deal
with problems regarding its finances company not experience difficulties. Research
conducted by Yatulhusna (2015: 79) states that company age has a significant negative effect
on earnings management. Astuti (2015: 11) states that company age has a positive effect on
earnings management.
Profitability is the level of net profit earned by the company in carrying out its
operations (Astuti, 2017: 04). When the profit generated by the company in one period is
very high, there is a possibility of a decrease in profit in the following period (Yaulhusna,
2015: 73). Thus, managers will manage their profits so that they are not too high so that
excess profits that are not reported by the company can be presented for the earnings report in
the following period. Research conducted by Wibisana and Ratnaningsih (2014: 11) states
that the level of profitability has a positive effect on earnings smoothing. This research is
supported by research, while Bestivano's research (2013: 23) states that profitability has no
effect on earnings management.
Based on previous research, there are several research gaps. The author aims to
conduct research again on business strategy (prospector and defender), company size,
leverage, company age, and profitability with the aim of proving the gaps that arise. The
author also takes samples from manufacturing companies listed on the Indonesia Stock
Exchange (IDX) because manufacturing companies are large companies that support the
Indonesian economy. The difference between this research and previous research is that this
study uses additional independent variables of business strategy. Previous research which is a
reference in this study on average describes the effect of company characteristics on earnings
management, but in this study business strategy variables are added. Therefore, the authors
will make a study with the title "The Effect of Business Strategy and Company
Characteristics on Earnings Management".
2.0 Literature Review And Hypothesis Development:
2.1 The Effect of Business Strategy on Earnings Management:
The results of Miles and Snow's research (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector type of strategy are companies that are strategically
prospective continuously looking for new market opportunities by competing through new
products and market development and experimenting with potential responses to emerging
environmental trends. Usually companies find it difficult to seek maximum profit but always
avoid low profitability, because they are more concerned with effectiveness than efficiency
(Paylosa, 2014: 04). In order for the company to continue to be given confidence by investors
to continue investing their shares, the company will increase the company's profits. So, the
more the prospector strategy is implemented by a company, it will affect the increase in
companies doing earnings management. Therefore, the prospector strategy has a positive
effect on earnings management because if the company is doing tax avoidance, the company
tends to report lower profits to reduce the tax burden.
The results of Miles and Snow's (1978) research in Sistyan (2010: 31) defender
strategy, namely if the company operates in a relatively stable production area, thus the
company is more concerned with efforts to maintain a certain market share portion of the
overall market by creating certain products and services and a stable number of customers.
Therefore, the company does not spend much to meet its production needs, but still generates
stable profits, so the level of corporate earnings management actions is also reduced. Thus the
company does not need to manipulate its profits so that investors want to join the company,
so it is less likely that the company will carry out earnings management. So the more the
defender strategy is implemented by the company, there is only a small possibility that the
company will carry out earnings management.
2.2 The Effect of Leverage on Earnings Management:
Leverage is a measurement of the amount of assets financed by debt, where the debt
comes from creditors, not from shareholders or investors (Frans, 2015: 43). Debt policy is
another alternative to obtaining funds other than selling shares. In a debt agreement, there is a
company's interest in being positively assessed by creditors in terms of the ability to pay their
debts (Verawati and Muid, 2012: 10). Therefore, the company will commit fraud in the form
of earnings management, namely increasing reported earnings to increase the company's
bargaining power in debt negotiations, reduce creditor concerns and to obtain credit limit
concessions.
2.3 The Effect of Company Age on Earnings Management:
Company age is the age since the establishment of the company until the company has
been able to carry out its operations (Yatulhusna, 2015: 27). Companies that have been
around for a long time generally have more stable profitability than newly established
companies or those with a short time (Bestivano, 2013: 08). With relatively stable profits, the
company's actions in carrying out earnings management are also reduced. Thus, the longer a
company stands, the smaller the percentage of companies doing earnings management.
2.4 The Effect of Profitability on Earnings Management:
Profitability is the level of net profit that the company has managed to obtain in
carrying out its operations (Astuti, 2017: 04). When the profit generated by the company in
one period is very high, there is a possibility of a decrease in profit in the following period
(Yaulhusna, 2015: 73). Thus, managers manage their profits so that they are not too high, so
that excess profits that are not reported by the company can be presented for the earnings
report in the following period. Therefore, there are many possibilities for companies that have
high profitability to carry out earnings management. The greater the profitability of a
company, the higher the possibility of managers doing earnings management.
2.5 Business Strategy
The business strategy in this study uses two strategy variables, namely prospector and
defender strategies, because they are two typologies of strategies that are at two extremes
(Paylosa, 2014: 01). The main focus of prospectors is how to find and make the most of new
products, market areas and opportunities (Arieftiara, 2013: 07). The defender strategy is if the
company operates in a relatively stable production area, the products offered are limited
compared to its competitors and the company rarely makes adjustments in technology and the
structure or method of operation of the company and can be predicted in the direction of
future changes (Sistyan 2010: 31).
This study uses four proxies to measure the company's business strategy which are
designed to be assessed or given a score to reflect the business strategy used by the company
(Muhammad, 2012: 39). To obtain the STRATEGY score, this study uses measurements from
the research of Higgins, et al. (2010: 10), namely:
Ability to efficiently produce and distribute goods and services:
Thomas et al (1991) in Muhammad (2012: 39) state that the company's ability to
produce and distribute goods and services efficiently is very important for the company's
business strategy, especially for companies that focus on efficiency, because defender
companies have a large number of employees less than the company prospector.
CONCLUSIONS
Based on the findings and discussion in the previous chapter, the following conclusions
can be drawn:
Business strategy variables have no effect on earnings management. The results of this study
are in line with research conducted by Muhammad (2012: 63) which states that business
strategy has no effect on tax avoidance.
The company size variable has no significant effect on earnings management. The results of
this study are in line with research conducted by Yatulhusna (2015: 78), Mahiswari and
Nugroho (2014: 16) and Irawan (2013: 08).
The leverage variable has a significant positive effect on earnings management. The results of
this study are in line with research conducted by Wibisana and Ratnaningsih (2014: 10),
Yatulhusna (2014: 10) and Yatulhusna (2014: 10).
(2015:80) and Irawan (2013:07)
The company age variable has a significant negative effect on earnings management. These
results are in line with research conducted by Yatulhusna (2015: 76), Nurhasanah (2014: 60)
and Zen and Herman (2007: 60).
The profitability variable has no significant effect on earnings management. These results are
in line with research conducted by Astuti (2017: 07).
Financial reports are a communication medium used to connect parties with an interest
in the company and also to account for what managers do with the owner's resources (Prastiti,
2013: 1). PSAK No. 1 Year 2013 The purpose of financial statements is to provide
information about the financial position, financial performance and cash flows of a company
entity that is useful for a large number of users in making economic decisions and also shows
the results of management's responsibility for the use of resources (Dimercia and Krisnadewi,
2016: 2324). Financial statements also provide information about company profits. Profit is
an indicator used to measure company performance (Siallagan and Machfoedz, 2006: 1).
Therefore, management often takes action so that the financial statements presented look
good with the earnings management method. Management whose achievements are assessed
in generating profits will tend to manage profits opportunistically (Mahiswari and Nugroho,
2014: 01). Earnings management is defined as an attempt by company managers to intervene
or influence information in financial reports with the aim of deceiving stakeholders who want
to know financial performance and condition (Sulistyanto, 2008: 06).
There are various cases regarding earnings management, one of which is the case of
PT Indofarma. This case began with Bapepam's review of alleged violations of capital market
regulations, especially those related to the presentation of financial statements by PT
Indofarma. Bapepam found evidence, among others, that the value of work in process was
overvalued in the presentation of work in process inventory in 2001 by Rp 28.87 billion. As a
result, cost of goods sold was understated and net profit was overstated by the same amount.
Bapepam decided to impose an administrative sanction of Rp 500 million to the Board of
Directors of PT Indofarma who served during the period when the 2001 financial statements
were issued. BNI securities analysis also added that Indofarma's sales in 2002 only increased
by 12%, while production costs swelled by 82% and marketing costs rose by 41%. This case
illustrates that the implementation of management profit in a company will have a negative
impact on the company as well as on investors and creditors (detik.com, edition dated
November 08, 2004, accessed on June 10, 2004).
2017).
Agency theory explains a relationship that occurs between the owner (principal) and the
other party, namely the agent (Paramitha, 2014: 12). The relationship between the principal
and the agent can lead to conditions of information imbalance because the agent has a
position that has more information about the company than the principal (Verawati and Muid,
2012: 06). There is an information gap between managers and company owners, so
management has the opportunity to maximize their interests, one of which is earnings
management (Fauziah, 2014: 18).
There are various factors that influence earnings management practices, including
business strategy and company characteristics. Business strategy is an integrated plan by
considering strategic aspects within the company (Paylosa, 2014: 11). The company's
business strategy affects all company activities because all business process activities,
operational activities, and transactions carried out and all business decisions made by
managers must be in line with business strategy (Arieftiara et al., 2013: 2). Research on
business strategy is generally about the effect of business strategy on tax avoidance such as
research conducted by Arieftiara et al. in 2013. This study uses two types of business
strategies, namely prospector and defender from the Miles and Snow (1978) typology in
(Arieftiara et al., 2013: 6).
The results of research by Miles and Snow (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector strategy type are companies that continuously seek
new market opportunities by competing through new products and market development and
experimenting with potential responses to emerging environmental trends. Usually companies
find it difficult to seek maximum profit but always avoid low profitability, because it is more
profitable prioritizing effectiveness over efficiency (Paylosa, 2014: 04). In order for the
company to continue to be given the trust of investors to continue investing their shares, the
company increases the company's profits. Thus, it is likely that the company will carry out
earnings management.
The results of research by Miles and Snow (1978) in Sistyan (2010: 31) defender
strategy is if the company operates in a relatively stable production area, thus the company is
more concerned with efforts to maintain a certain market share portion of the overall market
by creating certain products and services and a stable number of customers. Technology
financing is done as efficiently as possible and efficiency is central to organizational
performance (Paylosa, 2014: 04). Therefore, the company does not spend much to meet its
production needs, but still generates stable profits, so the level of corporate earnings
management actions is also reduced. Thus the company does not need to manipulate its
profits so that investors want to join the company, so it is less likely that the company will
carry out earnings management.
Company characteristics in this study use company size, leverage, company age and
profitability. Company size is the total value of wealth owned by the company (Nurmalita,
2011: 03). Larger companies generally receive more attention from external parties such as
investors, analysts, and the government, so that companies are more careful in managing their
financial statements (Yatulhusna, 2015: 34). The presentation of earnings in large companies
is more accurate and more careful, because operating activities in large companies are more
complex. With a more accurate and careful presentation of earnings, there is a small
possibility that large companies will carry out earnings management. Research conducted by
Astuti (2017: 08) states that company size has a negative effect on earnings management. In
contrast to Bestivano's research (2013: 24) states that the larger the size of the company, the
positive effect on earnings smoothing.
Leverage is the ratio between total assets and total company assets (Irawan, 2013: 38).
Another opinion states that leverage is measurement of the amount of assets financed by
debt, where the debt comes from creditors, not from shareholders or investors (Frans, 2015:
43). Debt policy is another alternative to obtaining funds other than selling shares. In a debt
agreement, there is a company's interest in being positively assessed by creditors in terms of
the ability to pay their debts (Verawati and Muid, 2012: 10). Therefore, the company will
commit fraud in the form of earnings management, namely increasing reported profits to
increase bargaining power bargaining power company in debt negotiations, reduce creditor
concerns and to obtain credit limit concessions. Research Wibisana and Ratnaningsih,
(2014: 10) stated that leverage has a positive effect on earnings management. In contrast to
the research of Wardani et al. (2011:133) found that leverage has a negative effect on
earnings management. Company age is the age since the establishment of the company until
the company has been able to carry out its operations (Yatulhusna, 2015: 27). Companies that
have been around for a long time generally have more stable profitability than newly
established companies or those with a shorter time (Bestivano, 2013: 08). Therefore, it can be
said that companies that have been around for a long time have relatively stable profits. With
relatively stable profits, the company's actions in carrying out earnings management are also
more stable increasingly reduced. This is because long-established companies already know
condition financial condition of the company and the problems problems faced so that to deal
with problems regarding its finances company not experience difficulties. Research
conducted by Yatulhusna (2015: 79) states that company age has a significant negative effect
on earnings management. Astuti (2015: 11) states that company age has a positive effect on
earnings management.
Profitability is the level of net profit earned by the company in carrying out its
operations (Astuti, 2017: 04). When the profit generated by the company in one period is
very high, there is a possibility of a decrease in profit in the following period (Yaulhusna,
2015: 73). Thus, managers will manage their profits so that they are not too high so that
excess profits that are not reported by the company can be presented for the earnings report in
the following period. Research conducted by Wibisana and Ratnaningsih (2014: 11) states
that the level of profitability has a positive effect on earnings smoothing. This research is
supported by research, while Bestivano's research (2013: 23) states that profitability has no
effect on earnings management.
Based on previous research, there are several research gaps. The author aims to
conduct research again on business strategy (prospector and defender), company size,
leverage, company age, and profitability with the aim of proving the gaps that arise. The
author also takes samples from manufacturing companies listed on the Indonesia Stock
Exchange (IDX) because manufacturing companies are large companies that support the
Indonesian economy. The difference between this research and previous research is that this
study uses additional independent variables of business strategy. Previous research which is a
reference in this study on average describes the effect of company characteristics on earnings
management, but in this study business strategy variables are added. Therefore, the authors
will make a study with the title "The Effect of Business Strategy and Company
Characteristics on Earnings Management".
2.0 Literature Review And Hypothesis Development:
2.1 The Effect of Business Strategy on Earnings Management:
The results of Miles and Snow's research (1978) in Sistyan (2010: 30) state that
companies belonging to the prospector type of strategy are companies that are strategically
prospective continuously looking for new market opportunities by competing through new
products and market development and experimenting with potential responses to emerging
environmental trends. Usually companies find it difficult to seek maximum profit but always
avoid low profitability, because they are more concerned with effectiveness than efficiency
(Paylosa, 2014: 04). In order for the company to continue to be given confidence by investors
to continue investing their shares, the company will increase the company's profits. So, the
more the prospector strategy is implemented by a company, it will affect the increase in
companies doing earnings management. Therefore, the prospector strategy has a positive
effect on earnings management because if the company is doing tax avoidance, the company
tends to report lower profits to reduce the tax burden.
The results of Miles and Snow's (1978) research in Sistyan (2010: 31) defender
strategy, namely if the company operates in a relatively stable production area, thus the
company is more concerned with efforts to maintain a certain market share portion of the
overall market by creating certain products and services and a stable number of customers.
Therefore, the company does not spend much to meet its production needs, but still generates
stable profits, so the level of corporate earnings management actions is also reduced. Thus the
company does not need to manipulate its profits so that investors want to join the company,
so it is less likely that the company will carry out earnings management. So the more the
defender strategy is implemented by the company, there is only a small possibility that the
company will carry out earnings management.
2.2 The Effect of Leverage on Earnings Management:
Leverage is a measurement of the amount of assets financed by debt, where the debt
comes from creditors, not from shareholders or investors (Frans, 2015: 43). Debt policy is
another alternative to obtaining funds other than selling shares. In a debt agreement, there is a
company's interest in being positively assessed by creditors in terms of the ability to pay their
debts (Verawati and Muid, 2012: 10). Therefore, the company will commit fraud in the form
of earnings management, namely increasing reported earnings to increase the company's
bargaining power in debt negotiations, reduce creditor concerns and to obtain credit limit
concessions.
2.3 The Effect of Company Age on Earnings Management:
Company age is the age since the establishment of the company until the company has
been able to carry out its operations (Yatulhusna, 2015: 27). Companies that have been
around for a long time generally have more stable profitability than newly established
companies or those with a short time (Bestivano, 2013: 08). With relatively stable profits, the
company's actions in carrying out earnings management are also reduced. Thus, the longer a
company stands, the smaller the percentage of companies doing earnings management.
2.4 The Effect of Profitability on Earnings Management:
Profitability is the level of net profit that the company has managed to obtain in
carrying out its operations (Astuti, 2017: 04). When the profit generated by the company in
one period is very high, there is a possibility of a decrease in profit in the following period
(Yaulhusna, 2015: 73). Thus, managers manage their profits so that they are not too high, so
that excess profits that are not reported by the company can be presented for the earnings
report in the following period. Therefore, there are many possibilities for companies that have
high profitability to carry out earnings management. The greater the profitability of a
company, the higher the possibility of managers doing earnings management.
2.5 Business Strategy
The business strategy in this study uses two strategy variables, namely prospector and
defender strategies, because they are two typologies of strategies that are at two extremes
(Paylosa, 2014: 01). The main focus of prospectors is how to find and make the most of new
products, market areas and opportunities (Arieftiara, 2013: 07). The defender strategy is if the
company operates in a relatively stable production area, the products offered are limited
compared to its competitors and the company rarely makes adjustments in technology and the
structure or method of operation of the company and can be predicted in the direction of
future changes (Sistyan 2010: 31).
This study uses four proxies to measure the company's business strategy which are
designed to be assessed or given a score to reflect the business strategy used by the company
(Muhammad, 2012: 39). To obtain the STRATEGY score, this study uses measurements from
the research of Higgins, et al. (2010: 10), namely:
Ability to efficiently produce and distribute goods and services:
Thomas et al (1991) in Muhammad (2012: 39) state that the company's ability to
produce and distribute goods and services efficiently is very important for the company's
business strategy, especially for companies that focus on efficiency, because defender
companies have a large number of employees less than the company prospector.
3.0 Conclusions:
Based on the findings and discussion in the previous chapter, the following conclusions
can be drawn:
Business strategy variables have no effect on earnings management. The results of this study
are in line with research conducted by Muhammad (2012: 63) which states that business
strategy has no effect on tax avoidance.
The company size variable has no significant effect on earnings management. The results of
this study are in line with research conducted by Yatulhusna (2015: 78), Mahiswari and
Nugroho (2014: 16) and Irawan (2013: 08).
The leverage variable has a significant positive effect on earnings management. The results of
this study are in line with research conducted by Wibisana and Ratnaningsih (2014: 10),
Yatulhusna (2014: 10) and Yatulhusna (2014: 10).
(2015:80) and Irawan (2013:07)
The company age variable has a significant negative effect on earnings management. These
results are in line with research conducted by Yatulhusna (2015: 76), Nurhasanah (2014: 60)
and Zen and Herman (2007: 60).
The profitability variable has no significant effect on earnings management. These results are
in line with research conducted by Astuti (2017: 07).
