EARNINGS MANAGEMENT MOTIVES, IDIOSYNCRATIC RISK AND CORPORATE SOCIAL RESPONSIBILITY IN AN EMERGING MARKET

Abstract

This research investigates the impact of the three earnings management methods according to Dechow and Skinner (2000) and Gunny (2005), i.e., accrual earnings management (AEM), real earnings management (REM), and fraudulent accounting (FRA), on idiosyncratic risk. This research also examines the moderating effect of corporate social responsibility (CSR) disclosure on these associations. This research employs balance panel data consisting of 492 observations from 2016 to 2019. This research obtains 123 companies listed under the manufacturing industry of the Indonesia Stock Exchange (IDX) through purposive sampling. To test the hypotheses, this research uses multiple linear regression models. This research finds that all three earnings management methods are positively associated with idiosyncratic risk. Furthermore, CSR disclosure is proven to weaken the effect of accrual earnings management and fraudulent accounting on idiosyncratic risk, but this does not apply to real earnings management. These results are robust after a sensitivity test. This research fills the existing gap within idiosyncratic risk study. Among similar studies, this research is the first to investigate the effect of fraudulent accounting on idiosyncratic risk and the moderating effect of CSR disclosure. This research also raises awareness of the cost of idiosyncratic risk, especially in emerging markets with relatively smaller stock markets, which makes diversification more challenging. It provides insights to market regulators on how investors can benefit from more disclosures.