Abstract
This study aims to examine the effect of corporate governance and political connection on earnings management. The corporate governance variable was reviewed using four proxies: bonus compensation, institutional ownership, independent commissioners, and financial expertise of audit committees. The study was conducted on 183 manufacturing companies on the Indonesian Stock Exchange for three research periods, namely 2017-2019. This study uses multiple linear regression to test the research hypotheses. The results prove that bonus compensation improves earnings management, while institutional ownership is proven to reduce earnings management. However, the other three variables, namely independent board of commissioners, financial expertise of audit committee, and political connections, do not affect earnings management practices.
Highlights
Earnings information is one of the indicators to assess management performance.Performance appraisal based on earnings information motivates management to meet the targeted profit value
This study explores the role of corporate governance and the political connection to earnings management
This study aims to examine the effect of corporate governance and political connection on earnings management
Summary
Performance appraisal based on earnings information motivates management to meet the targeted profit value. Profit shows management's achievement and becomes a means to maintain management's position in the company (Mardjono & Chen, 2020). This condition triggers management to make all efforts to meet management's expectations (Dalia et al, 2021; Yustiningarti & Asyik, 2017). One of the earnings management cases that occurred in Indonesia was carried out by the airline company PT Garuda Indonesia Tbk. In 2017, the company claimed a company loss of US$ 216.58 million. There was a significant increase in profit due to the company's overstatement of revenue recording (Cnbcindonesia.com, 2019) This case raises public questions about corporate governance's role in the financial information reporting process. This study explores the role of corporate governance and the political connection to earnings management
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