The influence of intellectual capital on earnings management through real activities manipulation in Indonesian manufacturing companies

Abstract

This study examines the influence of intellectual capital (IC) on earnings management through real activities (EMTRA) manipulation in Indonesian manufacturing companies. This study measured IC elements by employing the value added intellectual capital (VAIC™) model developed by Pulic (1998) that consists of human capital, structural capital, and capital employed efficiencies. Meanwhile, earnings management was measured by employing the Roychowdhury' model (2006), which is known as EMTRA manipulation. EMTRA manipulation is conducted on activities of sales operation, reduction of cost discretion, and over-production. This study analysed data from 69 financial statements of Indonesian manufacturing companies that are listed on the Indonesia Stock Exchange in 2016. The result shows that the integration of intellectual capital elements can reduce earnings management behaviour through sales operation activity manipulation. Moreover, partially, the intellectual capital of capital employed and structural capital efficiencies can lower the practice of EMTRA of cost discretion.