THE INFLUENCE OF ULTIMATE OWNERSHIP ON EARNINGS MANAGEMENT: EVIDENCE FROM INDONESIA

I Putu Sugiartha Sanjaya

Global Journal of Business Research, 2011, vol. 5, issue 5, 61-69

Abstract: Governance of public companies in Indonesia is concentrated in a particular group of controlling shareholder. The group is constituted in various ways like family, government, widely owned financial institutions, widely owned companies or others as a controlling shareholder. The controlling shareholder has two rights, control rights and cash flow rights. Differences between the two rights affect agency problems. Siregar documents that 99% of public companies in Indonesia have a concentrated ownership structure with a cut off of 10% control rights. Febrianto (2005) suggests that 92% of public companies have concentrated ownership structures in Indonesia at a cut off of 20%. Based on this phenomenon, the objective of this study is to investigate whether cash flow rights and leverage influence earnings management. This study collected data from Indonesian Stock Exchange regarding manufacturing companies during the period 2001-2007. There are 786 firms year at a cut off of 10% control rights. The results suggest that the cash flow leverage rights positively influence earnings management. The result indicates that larger differences between control rights and cash flow rights, imply it is easier for the controlling shareholder to manage earnings for his/her personal benefit. The controlling shareholder manipulates earnings to hide the acquired private benefits through expropriation.

Keywords: Ultimate Ownership; Control Rights; Cash Flow Rights; Cash Flow Right Leverage; and Earnings Management (search for similar items in EconPapers)
JEL-codes: G32 M41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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