the effect of political connection on earnings...
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THE EFFECT OF POLITICAL CONNECTION
ON EARNINGS MANAGEMENT
UNDERGRADUATE THESIS
Submitted as Partial Requirement to Complete Undergraduate Thesis
Faculty of Economics and Business
Diponegoro University
Submitted by :
IDHAM IMARSHAN
12030112120014
FACULTY OF ECONOMICS AND BUSINESS
DIPONEGORO UNIVERSITY
SEMARANG
2017
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THESIS APPROVAL
Author Name : Idham Imarshan
Student Number : 12030112120014
Faculty/ Department : Economics and Business/ Accounting
Thesis Title : THE EFFECT OF POLITICAL
CONNECTION ON EARNINGS
MANAGEMENT
Supervisor : Agung Juliarto, S.E., M.Si., Akt., Ph.D.
Semarang, February 22nd, 2017
Supervisor,
(Agung Juliarto, S.E., M.Si., Akt., Ph.D.)
NIP. 19730722 200212 1002
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SUBMISSION
Author Name : Idham Imarshan
Student Number : 12030112120014
Faculty/ Department : Economics and Business/ Accounting
Thesis Title : THE EFFECT OF POLITICAL
CONNECTION ON EARNINGS
MANAGEMENT
Has been presented and defended in front of the Board of Reviewers on March 7th,
2017 for fulfilling the requirement to be accepted.
Reviewers Board :
1. Agung Juliarto, S.E., M.Si., Akt., Ph.D. (............................................)
2. Fuad, M.Si., Ph.D. (............................................)
3. Dwi Cahyo Utomo, S.E., M.A., Akt., Ph.D. (............................................)
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Declaration of Originality
I, Idham Imarshan, hereby state and declare that this thesis is true and accurate to
be my own work specially written for partial requirement to complete
Undergraduate Program of Accounting and has not initially been presented in any
other occasion. I bear full responsibility for my undergraduate thesis.
Idham Imarshan
February 22nd, 2017
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MOTTO AND DEDICATION
“Man Jadda Wajada – Whoever strives shall succeed”
(Arab Proverb)
“Every great dream begins with a dreamer. Always remember, you have within
you the strength, the patience, and the passion to reach for the stars to change the
world”
(Harriet Tubman)
“Live what you love, love what you live”
(Anonymous)
I dedicate this thesis for:
My beloved mom (Almh.), dad, and ummi
My beloved sister
My family
And all my dear friends
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ACKNOWLEDGEMENT
All praise is due to Allah SWT, Lord of the worlds, this thesis which entitled
“The Effect of Political Connection on Earnings Management” has been finally
presented to fulfill one of the requirements in accomplishing the Bachelor Degree
on Faculty of Economics and Business, Diponegoro University. I would like to
thank the Most Gracious and the Most Merciful, Allah SWT who always gives all
of His best to my life and there is no doubt about it.
I do realize that in accomplishing this thesis, there are many people who
give their help, support, wishes, time, and prayer for me. Therefore, I would gladly
thank to:
1. Dr. Suharnomo, S.E., M.Si., as the Dean of Faculty of Economics and
Business, Diponegoro University.
2. Fuad, Ph.D., as the Head of the Accounting Department, Faculty of
Economics and Business, Diponegoro University.
3. Agung Juliarto, S.E., M.Si., Akt., Ph.D., as my supervisor which constantly
support, guide, and given me all of the knowledge and suggestions.
4. Anis Chariri, S.E., M.Com., Akt., Ph.D., as my academic supervisor which
support and guide me during my study.
5. All the lecturers and staffs in Faculty of Economics and Business,
Diponegoro University who have given all the valuable knowledge and
experiences.
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6. My beloved parent, Djoko Kartiko, (Almh.) Endang Irianti, and Yekti
Mahanani, as the biggest and strongest motivation and supporter in my life,
with unconditional love to guide me to be a person as I am. Thank you for
trusting me in every single decision that I made. I love you.
7. My beloved sister, Citta Cendani, who always supports me and understands
me, with warm affection. Thank you for being a sweet sister, I love you.
8. Septian Adi W., Rangga Danang F., and Chyntia Tessa G., as my
extraordinary friends for the entire college life, even before it started, since
we were high school. Thank you for being such a supportive friends and
accepting me whoever I am.
9. Indonesian Cheer Association headquarter and Central Java, Kak Ade,
Amon, A Asa, A Gege, A Guntur, A Dede, Kak Sivli, Mbak Dani, Wiwit,
Pepi, Jenny, Dimas, Enggal, which taught me to never give up on dreams,
and made my college life is beyond academic study. Thank you for being
my second family.
10. Stars Allstar, another big family of mine that taught me to keep struggling
for everything that we wanted.
11. GGC Thunders, especially 02, where I found my passion and my love for
cheerleading, yet gave me a lot of lessons to be responsible and discipline.
12. University of the Ryukyus family, Magdalena, Vita, Ratna, Shely, Kak Egi,
Kylee, Tammy, Kin Ryoma, Mayu, Taro, Manami, Tsugiko, including all
sensei, URSEP and STRP friends, and all of my friends when I was in
Okinawa. Thank you for the greatest one year I ever had in my life!
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13. PPI Okinawa, Mbak Angka, Mbak Kristin, Mas Philip, Mbak Tya, Pak
Idham, Teh Tya, Mas Daniel, Mas Oscar, and all family, thank you for your
guidance and help when I was in Okinawa that taught me to be a better
person.
14. Sheyla Aviolanda, Dea Ananda, Alfi Rosa, Akhkim Kuncorojati, Dika Ardi,
Fadhila Chairunnisa, 9 Naga++, Mas Chris, Koh Nyonyo, Mas Bangun, for
accepting whoever I am and being such supportive and lovely friends. I
couldn’t imagine how I can struggle with everything I had without you!
15. All of my friends and classmates in Accounting batch 2012, thank you for
the memories, togetherness, and being such a supportive friends.
16. KKN Glagahwaru family, Hesti, Ira, Jamal, Momol, Ima, Liza, Marten, Mas
Em, Mbak Dewi, thank you for so much fun we had, yet a lot of lessons
from our family.
17. Les Miserables Wrecked Club, Widya, Namora, Ica, Achyar, Jovita, Imel,
Yunita, Jonas, Rio, thank you for accepting me as an outsider and letting me
share all of my thoughts.
18. Social United, my high school mates, thank you for staying there to support
me and even giving me surprise before I leave to Japan that time.
19. All committee of AIA 2014 and KKL Akundip 2012, especially Danus
Team, thank you for all of the hard work and strong friendship that we had
and giving colors in my college life. Amazing team!
20. All people who have helped me in accomplishing my thesis and bachelor
degree, which I could not mention them one by one.
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I do realize that the writing of this thesis may still have deficiencies caused by
limitations of the writer, both in terms of knowledge, experience, and others. I do
accept criticism and suggestions to overcome the limitations and improve the
quality of the study. Hopefully, this paper is useful and can be used as additional
information for all those in need.
Semarang, February 22nd, 2017
Idham Imarshan
NIM. 12030112120014
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ABSTRACT
This research aims to examine the effect of political connection on earnings
management. In this research, earnings management is measured by using
discretionary accruals. The first model use the value of discretionary accruals as a
measurement of earnings management, while the second model use dummy
variable to observe income-decreasing earnings management behavior.
The population of this research was all companies listed in Indonesian Stock
Exchange (IDX) in the year of 2014-2015. The samples of this research were listed
non-financial company which publishes annual report consecutively from 2014-
2015. Multivariate regression analysis and logistic regression analysis are used to
analyze data.
This research finds that politically-connected companies have a negative
effect on earnings management, indicating that company with political connection
tend to report lower income. However, state-controlled firms have no significant
effect on income-decreasing earnings management behavior. It can be concluded
that politically-connected firms in the form of state control not associated with
income-decreasing behavior.
Keywords: Political connection, earnings management, political connection, state-
controlled firms
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ABSTRAK
Penelitian ini bertujuan untuk menguji pengaruh antara koneksi politik
terhadap manajemen laba. Dalam penelitian ini, manajemen laba diukur
menggunakan discretionary accruals. Model pertama menggunakan nilai dari
discretionary accruals sebagai alat ukur manajemen laba, sedangkan model kedua
menggunakan variabel dummy untuk mengamati perilaku manajemen laba berupa
penurunan laba.
Populasi dalam penelitian ini adalah semua perusahaan yang terdaftar dalam
Bursa Efek Indonesia (BEI) pada tahun 2014-2015. Sampel penelitian yang
digunakan adalah perusahaan non-keuangan yang terdaftar pada bursa efek yang
melaporkan laporan tahunan berturut-turut dari tahun 2014-2015. Analisis yang
digunakan dalam penelitian ini adalah analisis regresi berganda dan analisis regresi
logistik.
Penelitian ini menemukan bahwa perusahaan yang memiliki koneksi politik
berpengaruh negatif terhadap manajamen laba, yang menandakan bahwa
perusahaan dengan koneksi politik cenderung melaporkan laba lebih rendah.
Sedangkan perusahaan yang dikontrol oleh negara atau pemerintah tidak memiliki
pengaruh signifikan terhadap perilaku manajemen laba dengan melaporkan laba
lebih rendah. Dapat disimpulkan bahwa perusahaan yang berkoneksi politik dalam
bentuk kontrol pemerintah atau negara tidak terkait dengan perilaku manajemen
laba berupa penurunan laba.
Kata kunci: Koneksi politik, manajemen laba, koneksi politik, perusahaan yang
dikontrol Negara
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TABLE OF CONTENTS
TITLE PAGE ........................................................................................................... i
THESIS APPROVAL ............................................................................................. ii
SUBMISSION ....................................................................................................... iii
DECLARATION OF ORIGINALITY .................................................................. iv
MOTTO AND DEDICATION ................................................................................ v
ACKNOWLEDGEMENT ..................................................................................... vi
ABSTRACT ............................................................................................................. x
ABSTRAK ............................................................................................................. xi
TABLE OF CONTENTS ...................................................................................... xii
LIST OF TABLES ............................................................................................... xvi
LIST OF FIGURES ............................................................................................ xvii
LIST OF APPENDICES .................................................................................... xviii
CHAPTER I INTRODUCTION
1.1 Background ............................................................................................ 1
1.2 Problem Formulation ............................................................................. 7
1.3 Research Objectives ............................................................................... 8
1.4 Contributions of Study ........................................................................... 8
1.5 Structure of Study .................................................................................. 9
CHAPTER II LITERATURE REVIEW
2.1 Underlying Theories............................................................................. 11
2.1.1 Agency Theory ...................................................................... 11
2.1.2 Earnings Management ........................................................... 12
2.1.3 Positive Accounting Theory .................................................. 15
2.1.4 Political Connection .............................................................. 17
2.1.5 State Ownership .................................................................... 18
2.2 Previous Research ................................................................................ 19
2.3 Theoretical Framework ........................................................................ 23
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2.4 Hypotheses Development..................................................................... 26
2.4.1 The Effect of Political Connection of Firms on Earnings
Management ................................................................................... 26
2.4.2 The Effect of State-Controlled Politically-Connected Firms
on Income-Decreasing Earnings Management .............................. 27
CHAPTER III RESEARCH METHODOLOGY
3.1 Operational Variables Definition and Measurement............................ 30
3.1.1 Earnings Management ........................................................... 30
3.1.2 Political Connection .............................................................. 32
3.1.3 State-Controlled Politically-Connected Firms ...................... 32
3.1.4 Company Size ....................................................................... 33
3.1.5 Company Leverage ............................................................... 33
3.1.6 Return On Assets .................................................................. 33
3.1.7 Audit Quality ......................................................................... 34
3.2 Population and Sample ......................................................................... 34
3.3 Data Source .......................................................................................... 35
3.4 Data Collection Method ....................................................................... 35
3.5 Analysis Method .................................................................................. 36
3.5.1 Descriptive Statistic .............................................................. 36
3.5.2 Classic Assumptions Tests .................................................... 36
3.5.2.1 Normality Test ....................................................... 36
3.5.2.2 Multicollinearity Test ............................................. 37
3.5.2.3 Heteroscedasticity Test .......................................... 38
3.5.2.4 Autocorrelation Test............................................... 38
3.5.3 Multivariate Regression Model Analysis .............................. 39
3.5.4 Logistic Regression Model Analysis .................................... 40
3.5.4.1 Overall Fit Model Test ........................................... 41
3.5.4.2 Goodness of Fit Test .............................................. 41
3.5.4.3 Coefficient of Determination (Nagelkerke’s R
Square) ............................................................................... 42
3.5.4.4 Sensitivity and Specificity Test .............................. 42
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3.5.5 Hypothesis Test ..................................................................... 43
3.5.5.1 F Test ...................................................................... 43
3.5.5.2 Coefficient of Determination ................................. 43
3.5.5.3 Individual Regression Coefficient Test .................. 44
CHAPTER IV RESULTS AND DISCUSSIONS
4.1 Description of Research Objects .......................................................... 45
4.2 Data Analysis ....................................................................................... 47
4.2.1 Descriptive Analysis ............................................................. 47
4.2.2 Classic Assumptions Tests .................................................... 50
4.2.2.1 Normality Test ....................................................... 50
4.2.2.2 Multicollinearity Test ............................................. 53
4.2.2.3 Heteroscedasticity Test .......................................... 53
4.2.2.4 Autocorrelation Test............................................... 54
4.2.3 Multivariate Regression Analysis (Model I) ......................... 55
4.2.3.1 F Test ...................................................................... 55
4.2.3.2 Coefficient of Determination ................................. 56
4.2.3.3 Hypothesis Test of H1 ............................................ 56
4.2.3.4 Control Variables Model I ..................................... 57
4.2.4 Logistic Regression Analysis (Model II) .............................. 58
4.2.4.1 Overall Fit Model Test ........................................... 59
4.2.4.2 Goodness of Fit Test .............................................. 60
4.2.4.3 Coefficient of Determination (Nagelkerke’s R
Square) ............................................................................... 60
4.2.4.4 Sensitivity and Specificity Test .............................. 60
4.2.4.5 Hypothesis Test of H2 ............................................ 61
4.2.4.6 Control Variables Model II .................................... 61
4.3 Discussion ............................................................................................ 62
4.3.1 The Effect of Political Connection of Firms on Earnings
Management ................................................................................... 63
4.3.2 The Effect of State-Controlled Politically-Connected Firms
on Income Decreasing Earnings Management ............................... 65
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CHAPTER V CONCLUSIONS AND SUGGESTIONS
5.1 Conclusions .......................................................................................... 67
5.2 Limitations ........................................................................................... 68
5.3 Suggestions .......................................................................................... 69
REFERENCES ....................................................................................................... 70
APPENDICES ....................................................................................................... 75
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LIST OF TABLES
Table 2.1 Previous Research Summary ................................................................. 21
Table 3.1 Decision Making Guidance of Autocorrelation Test ............................. 39
Table 4.1 Sampling ................................................................................................ 45
Table 4.2 Frequency Distribution .......................................................................... 46
Table 4.3 Descriptive Static Analysis .................................................................... 47
Table 4.4 Frequency Distribution of Politically-connected and Non-politically-
connected Firms .................................................................................................... 49
Table 4.5 Frequency Distribution of State-controlled and Non-state-controlled
Firms ...................................................................................................................... 50
Table 4.6 Kolmogorov-Smirnov Test .................................................................... 51
Table 4.7 Kolmogorov-Smirnov Test after Data Transformation ......................... 52
Table 4.8 Multicollinearity Test ............................................................................. 53
Table 4.9 Heteroscedasticity Test .......................................................................... 54
Table 4.10 Result of Multivariate Regression Summary ....................................... 55
Table 4.11 Result of Logistic Regression Summary .............................................. 58
Table 4.12 Overall Fit Model Test ......................................................................... 59
Table 4.13 Hypothesis Test Summary ................................................................... 63
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LIST OF FIGURES
Figure 2.1 The Research Framework ..................................................................... 25
Figure 4.1 P-P Plot of Normality Test ................................................................... 51
Figure 4.2 P-P Plot of Normality Test after Data Transformation ......................... 52
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LIST OF APPENDICES
APPENDIX A. List of Sample Companies............................................................ 75
APPENDIX B. List of Companies with Political Connection ............................... 84
APPENDIX C. List of Outlier Data ...................................................................... 87
APPENDIX D. Output Result of SPSS ................................................................. 90
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CHAPTER I
INTRODUCTION
1.1 Background
Tougher business competition nowadays and unpredictable country’s
condition forces management to work more efficient and effective in attempt to
maintain the existence of the company and increase management performance to
achieve an optimum result. Management performance reflected in company’s
financial report. The financial report provides information of company’s financial
condition to fulfill users need, including income information (Kasmir, 2011).
East Asian firms are perceived having low transparency and low reporting
quality. The compliance of international rules of reporting and adoption of
accounting standards are important to improving the region’s quality (World Bank,
1998). Investors remain skeptic about the quality of the reported accounting
numbers, even the adoption of stricter rules may have increased. Moreover,
previous studies show that reporting quality is also influenced by prepares’
reporting incentives (Ball et al., 2003).
Earnings management is also one of the issues in recent accounting studies
since investors have big consideration to earnings amount as a basis for the
important decision. Earnings management defined as the process of management
involvement in determining the amount of earnings which in line with the
desirable goals of management (Wild et al., 2005). Scott (2006) defined some
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techniques that common for earnings management, such as “Big Bath”, income
smoothing, income maximization or minimization.
Prior literatures show that institutional structures such as securities laws,
tax regime, judicial system, and political economy, along with market forces
create motives that affect the behavior of management, investors, and regulators,
in terms of financial reporting (Ball et al., 2003; Bushman et al., 2004; Gul, 2006).
The motives will form the properties of reported numbers through a complicated
interact of accounting standards, regulation, political pressures, legal, and
discretion conducted by managers (Bushman and Piotroski, 2006).
Positive accounting theory suggests that wealth distribution politics used
by political authorities affect firms’ accounting policies (Watts and Zimmerman,
1986). According to Attia et al. (2016), prior studies such as Daley and Vigeland
(1983) and McKee et al. (1984) provide information that big firms tend to use
accounting choices that able to reduce reported profits or make other disclosures
to reduce the political costs. Likewise, the political costs hypothesis assumes that
firms are manipulating accounting information in order to report lower incomes in
periods of increased political sensitivity (Watts and Zimmerman, 1986).
There are some studies conducted to find the relation between political
connection and earnings management. Sejati (2009) conduct research to find
whether the political connection is systematically associated with the quality of
accruals. Akhoondnejad, et al. (2013) test the effect of political costs on income
smoothing. Braam et al. (2015) investigate whether firms with political
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connection tend to use accrual-based earnings management than real earnings
management. In addition, Attia et al. (2016) use research model where politically
connected firms which are not controlled by the state are less motivated to engage
in income-decreasing earnings management than others.
Two proxies for political influence are the executive’s political connection
and the state control (Ding et al., 2014). Firms with top managers or shareholders
who have controls are belong to parliaments, government, or a party are
considered as having political connections (Faccio, 2006). Adhikari et al. (2006)
add that direct ownership by the government can be seen as a political connection.
Literature shows that firms with political connection have opportunities to gain a
lot (Faccio, 2010). The second stream of studies reports that government-
controlled firms are less effective and efficient than others firms because they
suffer from a heavy cost due to overstaffing and social actions imposed by the
state (Megginson and Netter, 2001; Dong and Putterman, 2003). Only private
firms with political connection enjoy tax benefits, while on the other hand, state-
owned firms are subject to more over-investment problems (Wu et al., 2012).
They also imply that the value of state-controlled firm’s managers may be
weakened by the government control. Thus, the role of managers that politically
connected in gaining benefits related to government is not very important. Morck
et al. (2000) suggest that the effect of firms’ political connection is more
significant in countries where corruption is high. Indonesia is one of the emerging
countries which has several problems related to economics and finance. Indonesia
ranked 88 in Corruption Perception Index published by Transparency
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International in 2015, shows that Indonesia is having corruption as a major
problem. Given the heterogeneity of emerging economies, a complete adoption of
several scientific theories to such contexts may be problematic (Wright et al.,
2005). In fact, there are several private companies in Indonesia that have political
connections. Attia et al. (2016) refer that the number of discretionary accruals of
private companies with the political connection is higher than those of other firms.
Similarly, Braam et al. (2015) reported that firms with political connection are
tend to use accrual-based earnings management as substitute to real earnings
management. Ball et al. (2003) imply that political connection have contributed
to the financial reporting quality, which considerably low, in East Asian countries.
Several companies in Indonesia also owned and controlled by state as the
political connection they have. According to Ministry of State Owned Enterprises
website, which the official website of Ministry of State Owned Enterprises,
provides information that there are several listed stock companies that owned by
the government. Attia et al. (2016) explained that state-controlled firm is more
likely to use negative discretionary accruals than other firms. They use
discretionary accruals to decrease earnings due to their high political cost.
Likewise, Xiongyuan and Shan (2013) refer that managers in these firms are
motivated to facilitate government priorities to earn more money and gain more
opportunities for promotion.
A study conducted by Mobarak and Purbasari (2006) provide that firms
which had connection with Soeharto regime enjoy easier import permission rather
than other firms. Literature shows that politically-connected firms, however, are
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also under high public attention and subject to extensive controls and monitoring
by public than non-politically-connected firms (Chaney et al., 2011). The cost
they face when other political parties or media reveal that a firm sets its earnings
may put aside the advantages from their connections (Faccio, 2006). Therefore,
politically-connected firms can lose their advantages as benefits from their
connections of politic. Moreover, Chen et al. (2010) prove that analyst’s
prediction will be less accurate on politically connected firms.
The main concern of the previous research topics related to political
connection is divided into some opinions. Attia et al. (2016) use political ties to
measure political cost, suitable with Tunisian condition where many large
companies are owned by the head of the state and his relatives. Sotartagam (2013)
conducted research about the effect of political connection on the value of firms,
but not extent to earnings management. There is lack evidence of research relating
political connection and earnings management in Indonesia. Political connection
is used instead of company size that commonly used as a proxy for political costs
in previous research, because it does not usually apply to emerging economies.
(Attia et al., 2016).
Attia et al. (2016) found that the amount of discretionary accruals of
private companies with the political connection is higher than other firms.
Another finding is that state-controlled firms are more likely to use negative
discretionary accruals than other firms. Accordingly, Akhoondnejad et al. (2015)
find a significant relation of political costs and income smoothing. Furthermore,
firms tend to use accrual-based earnings management as substitute strategies when
6
monitoring of public and the risk of detection increase, to manage and cover the
earnings that they gain from the political connections (Faccio, 2006). Political
connection plays an important part in explaining variance in firm’s choice on the
strategies of earnings management (Braam et al., 2015). On the other hand, Sejati
(2009) found that political connection has no relation with accruals quality.
The findings of prior researches may still vary because of some reasons.
First, some studies use cross-country data. A study conducted by Braam et al.,
2015 is using data from 47 countries, comprising 541 firms. The limitation of
cross-country studies is probability of the results driven by certain country.
Second, there are still limited researches use data in past 5 years, as Braam et al.
(2015) stated that there have been some changes in governance and accounting
over period that may moderate firms’ choice for earnings management strategies.
In Indonesia, government and political structure are changed every 5 years. In
addition, started from 2012, Indonesia is adopting IFRS standards, which leads to
some changes in accounting policy and results in firms’ strategies.
By looking on the previous studies, this research is focused on fulfilling
the research gap and provides an empirical study related to political connection
effect on earnings management by conducting the research in Indonesia as one of
emerging country. Fisman (2001) argues that political connection plays an
important role of companies’ profitability in Southeast Asia countries. There is
lack of empirical evidence of research to examine the effect of political
connection on earnings management. The population of this study is companies
listed on Indonesian Stock Exchange (IDX). Indonesia has transparency of
7
monitoring companies by publishing annual report. Companies with political
connections in countries with high level of public monitoring are tend to use
accrual-based as substitute from real earnings management (Braam et al., 2015).
Thus, Indonesian companies listed on IDX are fit to be examined.
This research also examines the relation of state-controlled firms with
negative discretionary accruals as a pattern. According to Attia et al. (2016),
previous research suggests dividing firms with politically connected executives in
two groups: private connected companies and state-controlled firms. State-
controlled firms use discretionary accruals to decrease their earnings due to their
high political cost.
1.2 Problem Formulation
Prior studies about political connection and earnings management have
been carried a lot in several countries, particularly emerging countries such as
Tunisia, Iraq, and Malaysia. Nevertheless, there is still lack of evidence regarding
the study of political cost and earnings management in Indonesia, in addition to
various results of previous studies. Chaney et al., (2011) stated that the political
exposure level is likely to vary across companies because politicians provide
protection to their related companies. Moreover, limited study has investigated
political connection as a proxy of political cost measurement before. Therefore, to
investigate this problem, this thesis will be formulated in following research
questions:
a. Does political connection affect firms to conduct earnings management?
8
b. Are state-controlled politically-connected firms more likely to conduct
income-decreasing earnings management than other firms?
1.3 Research Objectives
The objective of this study is to investigate the effect of political
connection on earnings management in Indonesian companies during 2014-2015.
To give detail explanation, the purpose of this study is explained in these two
objectives, which are:
a. To investigate the effect of political connection on earnings management
conducted by firm.
b. To investigate the likelihood of state-controlled firms to conduct income-
decreasing earnings management.
1.4 Contributions of Study
With the research objectives mentioned above, the results of this study
expected to be useful for a variety of aspects. Those contributions are:
1. For researchers, this research expand the recent studies that shows the
association between political connection and earnings management.
2. For companies, in case of having a political connection, earnings
management is might be easy to detect specific manipulations of
accounting earnings.
3. For investors, as one of the considerations in the decision-making process
regarding investment in politically connected firms.
9
4. For society, the findings of this study is expected to give knowledge in
order to monitor the firm that has a political connection.
1.5 Structure of Study
CHAPTER I: INTRODUCTION
This chapter explains the background, problem formulation, research
objectives, and structure of this research.
CHAPTER II: LITERATURE REVIEW
This chapter consists of theories and concepts underlying this research,
previous studies, and the hypothesis development in order to explain the theory
and concepts.
CHAPTER III: RESEARCH METHODS
This chapter explains the research variables, population and sample, data
source and collection method, and data analysis. This research uses regression
analysis as the approach of quantitative analysis.
CHAPTER IV: RESULT AND ANALYSIS
This chapter consists of the research object, data analysis that consists of
descriptive statistic, classic assumptions test, hypothesis test result, and
discussions.
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CHAPTER V: CONCLUSION
This chapter explains the conclusion from the analysis result, the
limitation of the study and suggestion for future research.