The influence of firm's related party on earnings management: The Indonesian Case*

By Rahmat Febrianto On Kamis, 01 Januari 2009 At 10.25

Working paper by:
Rahmat Febrianto (FE Andalas, Mahasiswa Doktor FEB UGM)
Hari Eldita (Alumni FE Andalas)
Erna Widiastuty (FE Univ Mataram)


We investigate the relationship between firm’s related parties and earnings management. Having a related party is a normal and legal, especially when it comes to operational decision. Related party may help firm to secure raw materials, to guarantee product selling, and to have cheaper fund, among other benefits. However, the motive behind having related party can also be of personal benefit. Public corporations in Indonesia are characterized by concentrated ownership where shares are held by members of founding family, individually or through other firms. An affiliated firm act not only as a shareholder alone but also as a related party to the main corporations. As related parties, both firms can transact and when it applies to Indonesian corporations, an empirical answer needs to be answered is whether the existence of related parties are related to earnings management.

We posit that the involvement of related parties will influence earnings management. We divide related parties into two levels, i.e. primary and secondary related parties. Using Jones model to estimate accruals, we find that interaction of primary related parties and earnings is not related to earnings management while the other is true for secondary related parties and for the sum of both related parties. These findings prove that the existence of related parties in Indonesian corporations is not merely based on operational decisions. The significance of secondary related parties, not the primary, is also an interesting finding since it may relates to the effort to mislead outsiders from earnings management.

*Paper ini diundang untuk dipresentasikan di Annual Conference 2009: Financial & Management Accounting, Auditing & Corporate Governance, February 5-7, 2009, University Munich, Munich School of Management

Label: , , , , ,

for this post

Leave a Reply