The Moderating Effects of Managerial Ownership on Accounting Conservatism and Quality of Earnings

By Utomo, St Dwiarso; Pamungkas, Imang Dapit et al. | Academy of Accounting and Financial Studies Journal, December 2018 | Go to article overview

The Moderating Effects of Managerial Ownership on Accounting Conservatism and Quality of Earnings


Utomo, St Dwiarso, Pamungkas, Imang Dapit, Machmuddah, Zaky, Academy of Accounting and Financial Studies Journal


INTRODUCTION

Earning is considered as the most significant information that can guide the decision making process by interested parties. Given the importance of earnings information contained in the company's financial statements, it causes managers to try in all ways to prepare financial statements that are good in the eyes of internal parties and external parties. This has triggered the emergence of information asymmetry between the management of the company and the principal known as agency conflict. According Basu (2009), accounting conservatism is a practice that reduces earning when the company faces bad news and does not increase earning when the company faces good news. Companies with good corporate governance use accounting conservatism to protect investors by providing information about bad news at the right time (Lara et al., 2009).

Companies that have good corporate governance are expected to be able to present information in an accurate, relevant and timely manner so that every information conveyed by the company, especially earning, will be trusted by investors. Generally, good corporate governance mechanisms can be classified into two groups. First is the company's specific internal mechanism which consists of ownership structure and management structure. Second is a country-specific external mechanism that consists of the rule of law and the corporate control market. This study will incorporate the company's specific internal mechanism as a moderating variable.

For the ownership structure, the managerial ownership variable will be used with the thought that management's sensitivity to the influence of shareholders will depend on the level of management ownership control. For the management structure, the independent commissioner variable will be used. Among the various factors that can encourage the creation of effective corporate management, independent commissioners and audit committees are the main factors that influence the behaviour of managers in managing the company, including in the application of accounting conservatism policies. For the management structure in Indonesia this function tends to be more run by the board of commissioners based on their proximity to information sources. Accounting conservatism has a positive and significant effect on quality of earnings (Veronica, 2013). Independent commissioners have a positive effect on quality of earnings (Riswandi, 2013). Managerial ownership has a positive effect on quality of earnings (Muid, 2009). Febiani (2012) managerial ownership partially has a positive effect on quality of earnings. However, managerial ownership has a negative effect on quality of earnings (Veronica, 2013).

Based on inconsistencies in research results and previous research gaps related to the influence of accounting conservatism on quality of earnings, further research is needed to overcome these problems. The purpose of this study was to examine the effect of accounting conservatism on quality of earnings and to examine the moderating effects of managerial ownership, independent commissioners and audit committees on the relationship between accounting conservatism and quality of earnings.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Literature Review

Jensen & Meckling (1976) stated that ownership managerial will reduce agency problems because more and more shares are owned by the management, the stronger their motivation to work in improving the value of the company's stock. Based on agency theory, the greater ownership by the inside directors (affiliated commissioners/commissioners other than independent commissioners) will direct on the suitability of objectives between management and shareholders. However, on the other hand as the owner of an inside directors can use the power of his voting to do expropriation of the company.

In the context of conservatism, managerial ownership has two different arguments. …

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