Are Corporate Governance Mechanisms, Corporate Strategy, and Corporate Financial Characteristics Related to Earnings Management?

Abstract

Objective – This study aims to examine the effect of corporate governance and several factors of corporate financial characteristics on earnings management. Corporate governance mechanisms such as an independent board, board size, and audit committee size are expected to be able to limit the ability of management to carry out earnings management. Meanwhile, a company's financial characteristics such as corporate strategy, company age, operating cash flow, company growth, profitability, company size and leverage are predicted to affect earnings management. Methodology/Technique – Many previous studies have involved the examination of corporate governance mechanisms and corporate financial characteristics of earnings management however, the results of those studies give rise to inconsistencies. Hence, this study seeks to re-examine the existence of corporate governance mechanisms and corporate financial characteristics of earnings management. The sample in this research is non-financial companies listed on the Indonesian Stock Exchange between 2016 and 2018. Findings – This data in this study is analysed using statistical methods such as multiple regression linear. The results of this study indicate that one mechanism of corporate governance, the size of the audit committee, has a positive effect on earnings management, while the financial characteristics of companies such as company size and operating cash flow negatively affect earnings management. Novelty – Other corporate financial characteristics such as corporate strategy, company age, operating cash flow, and profitability have a positive effect on earnings management. Meanwhile, the other variables such as board size, leverage, and company growth do not have an influence on earnings management. Type of Paper: Empirical. JEL Classification: G3, G34, G39. Keywords: Earnings Management; Corporate Strategy; Audit Committee Size; Company Age; Operating Cash Flows. Reference to this paper should be made as follows: Tonay, C; Sutrisno, P. 2020. Are Corporate Governance Mechanisms, Corporate Strategy, and Corporate Financial Characteristics Related to Earnings Management? J. Fin. Bank. Review, 5 (2): 48 – 57 https://doi.org/10.35609/jfbr.2020.5.2(2)