1

THE EFFECT OF GOOD CORPORATE GOVERNANCE, LEVERAGE AND

PROFITABILITY TO PROFIT MANAGEMENT WITH SIZE AS A VARIABLE
MODERATING (EMPIRICAL STUDY ON MANUFACTURING COMPANY
REGISTERED IN IDX)

Manahan Sinaga
Ilmu Akutansi University of North Sumatra

ABSTRACT
The objective of the research is to find out and to test the influence of corporate
governance authorized by the institutional ownership, managerial ownership, independent
commissioner, auditing committee, leverage, and profitability on profit management
partially and simultaneously at the manufacturing companies registered at the Indonesia
Stock Exchange (BEI). Besides, it is also to find out whether the company size can
moderate the correlation of corporate governance authorized by the institutional
ownership managerial ownership, independent commissioner, auditing committee,
leverage, and profitability with profit management. This is casual research using
secondary data. The population is 144 manufacturing companies registered at the
Indonesian Stock Exchange (BEI) in 2012-2015. The sample are 59 manufacturing
companies determined by using Slovin’s formulae. The data are analyzed using multiple
regression analysis with the application of SPSS.
Based on the test, simultaneously the independent variables, institutional ownership,
managerial ownership, independent commissioner, auditing committee, leverage, and
profitability have a significant influence on the profit management. Partially, the
institutional ownership and profitability variables have a significant influence on profit
management, whereas managerial ownership, independent commissioner, auditing
committee, and leverage do not have an influence on the profit management. For
moderating test, it is found out that company size is not the variable that can moderate the
correlation between the institutional ownership, managerial ownership, independent
commissioner, auditing committee, leverage and profitability with the profit management.

Keywords : Profit management, Institutional Ownership, Managerial Ownership,

Independent Commissioner, Auditing Committee, Leverage, Profitability, Company Size.
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Introduction
As a means of information, financial statements can provide accurate information for
its users. One of the information contained in the financial statements is information about
the company's earnings. The reported profit companies is used as a signal to investors to see
the company's performance. Profit as a measure of financial performance is measured on an
accrual basis. Through the selection of accrual accounting methods are freely determined by
the management, raise concerns about the accuracy of earnings. Profit inaccuracies caused by
the desire of management to meet their own interests are called earnings management
practices.
Earnings management has led to several cases of accounting reporting scandals were
widely known, including Enron, Merck, World Com and the majority of other companies in
the United States (Cornett and Saunders, 2006). Some of the cases occurred in Indonesia,
such as PT. Lippo Tbk. and PT. Kimia Farma Tbk also involves financial reporting that starts
from the detected manipulation (Boediono and Gideon, 2005).
Corporate governance is the key company in managing the company so that the
resulting financial statements are guaranteed quality. GCG mechanisms used in independent
variables are intitusional ownership, managerial ownership, independent commissioners and
audit committees and use leverage and profitability to measure its effect on earnings
management as a dependent variable.
The size of the firm is used as a moderating variable because with the reason that
large firms have large incentives for earnings management, because one of the main reasons
is that large companies must be able to meet the expectations of investors or shareholders,
Halim (2005).
Literature survey
Jensen and Meckling (1976) argue that agency relationships are a contract between
the management (agent) and the investor (principal). The asymmetry between agent and
principal provides an opportunity for managers to act opportunistically.
Purwanto (2012), the theory of signal (signaling theory) explained that the company
had every incentive to provide financial information to external parties. The impetus arises
because of asymmetric information between management and outsiders. Financial statements
that reflect the ability to gain good profitability is a signal that the company has been
operating well. Good signal will be responded well by outsiders.
Earnings management. The emergence of earnings management can be explained by
agency theory. Agency theory assumes that every individual is solely motivated by his or her
own interests, resulting in a conflict of interest between principal and agent. The shareholder
as a principal party contracts to maximize his own welfare with ever increasing profitability
while the manager as an agent is motivated to maximize the fulfillment of his economic and
psychological needs such as in obtaining investment, loan, and compensation contract (Arif,
2007). The agency problem arises because of the opportunistic behavior of agents, enabling
agents to practice earnings management.
GCG Mechanism. The agency theory was first introduced by Jensen and Meckling
(1976) describing the contractual relationship between the party delegating a particular
decision (principal / owner) to the party receiving the delegation (agent / management). There
are four GCG mechanisms used in this study that aim to reduce agency conflicts and their
relation to earnings management practices, namely institutional ownership, managerial
ownership, and independent board of commissioners and audit committees.
Leverage. Prastowo (2011) states that leverage is a measure of the amount of assets financed
by debt. Debts used to finance the assets come from creditors, not from shareholders or
investors. This ratio can be calculated from long-term items such as fixed assets and long-
term debt.
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Profitability. According to Harahap (2007) profitability in the company describes the

ability of companies to earn profits through all capabilities, and existing sources such as sales
activities, cash, capital, number of employees, number of branches, and so forth. Profitability
is often used to measure the efficiency of capital use in a company by comparing profit with
capital used in operations.
Company Size. The size of a company is a large company that can be measured by the
logarithm of natural total assets. (Handayani, 2009). Watts and Zimmerman (1986) explained
through Positive Accounting Theory (PAT) in the political cost hypothesis that firm size is
used as a guide to political costs and political costs will increase as the size of the firm
increases.
Conceptual Framework

Institutional investors often referred to as a sophisticated investor that should be able

to use the current period information in predicting future earnings compared to non-
institutional investors (Herath, 2008). Institutional investors with large shareholdings will
have a strong enough drive to gather information, and tighten the oversight to minimize
earnings management practices.
Managerial ownership is a remuneration policy program to reduce agency problems in
minimizing opportunistic action from management as agent. Boediono (2005), explains
earnings management is largely determined by the motivation of corporate managers.
Different motivations will result in different levels of earnings management.
An independent board of commissioners is a part of the board of commissioners,
which generally serves to oversee the management of the company. With the presence of
independent commissioners is expected to conduct more effective supervision, so as to
reduce the practice of earnings management.
Audit Committee is a committee established by the board of commissioners to
perform the task of supervising the management of the company. The audit committee has
the primary responsibility to assist the board of commissioners in carrying out supervisory
responsibilities so that the existence of the audit committee can minimize earnings
management practices.
Profitability will affect managers in the conduct of earnings management
(Rahmawati, 2008) because the principal tends to demand management to achieve high
profitability. If management is able to achieve the target of the principal, management will be
considered to have good performance. Gunawan (2015) explains that companies with low
profitability tend to make income smoothing. This income smoothing is one form of earnings
management.
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Wildarman (2015) states that high leverage levels will improve earnings management
to avoid possible breach of debt agreement. If a company has a high leverage, then the
possibility to make earnings management is very large, and the company also has a greater
obligation in public disclosure. The results of research by Bokiu (2015), concluded that
leverage has a significant positive effect on earnings management activities.
Large companies have the motivation to earn earnings management by lowering
profits to lower political costs. In contrast, small companies seek to increase profits
(Sulistyanto, 2009). Therefore, the researcher will test how firm size can memoderating
independent variable to the dependent variable in this research.
Hypothesis
Based on the formulation of the problem and conceptual framework, the hypothesis of
this research is as follows:
H1 : Good corporate governance that is proxied with institutional ownership, managerial
ownership, independent board of commissioner and audit committee, and leverage and
profitability influence simultaneously and partially to earnings management.
H2 : Firm size can moderate good governance mechanism relationships proxied with
institutional ownership, managerial ownership, independent board of commissioner and
audit committee, and leverage and profitability with earnings management.
Methodology
The type of research used in this study is a comparative causal research that shows the
direction of the relationship between independent variables with dependent variables in
addition to measuring the strength of the relationship (Ghozali, 2011). This research is
conducted at Indonesia Stock Exchange which provides audited financial statement data by
accessing and downloading financial report. The population in this study is a manufacturing
company listed on the Indonesia Stock Exchange. The type of data used in this study is
secondary data while the method or technique of data collection used is documentation
technique.
Operational Definition and Variable Measurement
Accrual profit management is measured using the modified Jones model by Dechow
with the following formula : DAit = TAit/Ait-1 - NDAit
Institutional ownership is the ownership of shares owned by institutions or institutions such
as insurance companies, banks, investment companies and other institutional ownership.
Intitutional Ownership = Number of Intitutional Shares X 100%
Total Number of Shares
Managerial ownership is the amount of share ownership by the management of all
share capital in the management.
Managerial Ownership = Number of Managerial Shares X 100%
Total Number of Shares
The Independent board of commissioners is the number of members of the board of
commissioners who are not affiliated with the management and the controlling shareholder.
Independent board of commissioner = Number of independent Board of Commissioners
Number of Board of Commissioners
The audit committee is a committee established by and responsible to the board of
commissioners in assisting with the duties and functions of the board of commissioners. This
variable shows the number of audit committees in the company between the period of 2012-
2015
Leverage is the ratio used to see the ratio of liabilities and equity that a company uses to
finance its operations. Leverage is measured by Debt to Equity Ratio (DER), the formula is
DER = Total Liability X 100%
Total equity
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Profitability ratios used in this study is the ratio of Net Profit Margin with the formula
NPM = Net Profit X 100%
Sell
Company size is a measure that shows the size of the company measured from total
assets. Measurement of firm size variables is based on the total assets of the firm with the
total assets (Ln) equation.
Data Analysis Method
Data analysis method used in this research is multiple regression analysis and residual
test for moderating variable. This research data is processed by using Statistical Package for
Social Science (SPSS)
Classic assumption test is needed to perform multiple regression analysis as requirement in
analysis so that data can be meaningful and useful. The test of classical assumption used in
this research include normality test, Heterokedqasticity Test (Ghozali, 2011).
Multiple regression analysis intends to predict how the state of the dependent variable when
associated with two or more independent variables.The multiple regression equation used is
as follows:
Y = b0 - b1 X1 - b2 X2 - b3 X3- b4 X4 + b5 X5 - b6 X6 +e
Hypothesis Testing Research
The coefficient of determination (R2) measures how far the model's ability to explain the
variation of the dependent variable.
Test Statistic F basically shows whether all the independent variables included in the
model have simultaneous effect on the dependent variable.
The statistical test t basically indicates how far one independent variable individually or
partially can explain the variation of the dependent variable.
The residual test tests the effect of the deviation of a regression model by looking at the
Lack of Fit shown by the residual value. The regression equation for the residual test is as
follows:
Z = b0 + b1X1 + b2X2 + b3X3+ b4 X4+ b5 X5 + b6 X6 + + b7 X7+ e …………(1)
| e | = b0 + b7 Y …………………………………………….……..………...(2)

Research Results and Discussion

Descriptive statistics
The standard deviation (σ) describes the possible value of the data obtained deviating
from the expected value.

The table above shows that the standard deviation of each variable has a value smaller than

the average of the variables studied, indicating that the data has been normally distributed.
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Normality test

Based on the above is known that the residuals are normally distributed and symmetric
shaped not menceng to the right and to the left.
Heterocedasticity Test

If there is no clear pattern and the spots spread above and below the number 0 on the Y axis,
there is no heteroscedasticity.
Test Coefficient of determination

Adjusted R-Square value is 0.283. This means 28.3% dependent variable Earnings
management can be explained by independent variable while the rest 71.7% is explained by
other variables not included in this research model.
Statistical test F

Based on the test results in the above table obtained significant value obtained by 0.074
smaller than 0.1, indicating the independent variable (X) significant effect on the dependent
variable (Y). It can be concluded that simultaneously institutional ownership, managerial
ownership, independent commissioner, audit committee, leverage, and profitability have
significant effect to earnings management.
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Test t

Based on the test results in table. then the regression equation for earnings quality as the
dependent variable that can be formed is:
Y = 1.678+1.906X1+0.022X2+1.273X3+0.697X4+0.483X5+1.246X6
or Profit Management = 1.678 + 1.906 Institutional Ownership + 0.022 Managerial
Ownership + 1,273 Independent Commissioners + 0.483 Leverage + 1,246 Profitability
Residual Test

Z = 1.385 + 0.014 X1 + 0,004 X2 + 0.023 X3 + 0.078 X.4 + 0.009 X5 + 0.001 X6

| e | = 0.218 –0.123 Y
Describing a significant value of 0.249 greater than alpha 0.10 with negative
parameter coefficient value is -0.123, then the variable size of the company is not a
moderating variable.
From the research results, it can be concluded: (1) Corporate governance mechanism
(measured through institutional ownership, managerial ownership, independent
commissioner, audit committee), leverage, and profitability simultaneously have significant
effect on earnings management practice. (2) Partially, there are two influential variables:
institutional ownership and profitability while other variables that have no effect. (3) The
firm size variable is not able to moderate the relationship between institutional ownership,
managerial ownership, independent commissioner, audit committee, leverage, and
profitability with management profit.
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