Corporate Governance, Firm Size, and Earning Management: Evidence in Indonesia Stock Exchange

Abstract

Purpose –Thepurpose of this paper is to evaluate the impact of the corporate governance regulationsimplementation and firm size onthe earning management for food and beverages companies in Indonesian Stock Exchange. Design/methodology/approach –The multiple regression is utilized to test this relationship at 95% confidence.Corporate governance was proxied by board of director, audit quality, and board independence. Firm size was represented by natural logarithm of total assets. Earning management was measured by Jones model withdiscretionary accruals. Findings – Using data from the year 2005 annual reports of 51 food and beverages listed companies,including the composite index, the results showed that twoof the corporate governance variables, namely board of director and audit quality, as well as firm size are statistically significant in explaining earning management measured bydiscretionary accruals. Research limitations/implications – The regulations on corporate governance were implementedin 2005, but not all of food and beverages listed companies implemented the regulations in 2005. Practical implications – An implication of this finding is that regulatory efforts initiated after the1997 financial crisis to enhance corporate transparency and accountability did not appear to result on better corporate performance. Originality/value – This is one of the few studies which investigates the impact of regulatory actionson corporate governance on earning management immediately after its implementation.