Do audit quality, political connection, and institutional ownership increase real earnings management? Evidence from Indonesia

Abstract

The objectives of this study are to evaluate the influence of audit quality (auditor size and auditor tenure), political connections, and institutional ownership toward real earnings management. In this research, real earnings management was determined by abnormal cash flow from operations. Purposive sampling was conducted and 83 manufacturing companies registered in Indonesian Stock Exchange during 2010-2014 (415 firm-years) were acquired as the samples. For testing the hypotheses, panel data regression with random effect model was used. The findings showed that auditor size and institutional ownership had a positive influence toward real earnings management, while auditor tenure and political connections did not influence real earnings management. The control variables testing showed that firms' leverage and firms' loss had negative influence toward real earnings management. On the other hand, cash ratio had a positive effect toward real earnings management.