The Influence Of Earnings Quality In Institutional Investors’ Decision Making In Indonesian Family Owned Business
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Date
2016-09
Authors
Latif, Dini Verdania
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Abstract
Earnings are considered by many investors to be the important criteria to assess the stock. However, to meet investors' earnings expectations manager could manipulate reported earnings by using specific accounting methods without violating Generally AcceptedAccounting Principles (GAAP). To avoid investors from the opportunistic behavior of firms’ managers, Investors can rely on earnings quality. Higher earnings quality represents the operating fundamentals of the firm. The two primary characteristics of higher earnings quality are relevance and reliability. This study examines the relationship between earnings quality and investors' decision of buying and selling Indonesian family firms' stock. Logistic regression was used to analyze the relationship. The analysis of this study is based on a sample from 2000 to 2009 which covers 1450 firm-years observations for earnings quality value and sample from 2007–2010 which covers 50,688 observations for investors’ decision making. The result shows that there is a significant relationship between reliable earnings quality and investors’ decision to buy and sell family firms’ stock. This study failed to prove the relationship between the investor's decision to buy or sell stock and relevant earnings quality. Reliable earnings quality assists investors’ decision making because reliable earnings quality emphasizes reducing measurement error by the magnitude of estimation error in accrual. Relevant earnings quality is not a determinant of investors’
decision because those current earnings understate to predict cash flow. This is due to the accrual volatility. Overall, it is concluded that reliable eranings quality is more important than relevant earnings quality for investors in decision-making, because the goal of investors is to maximize their expected return due to reducing its related risks. However, the adjusted coefficient determination of of buy decision model and sell decision model are very low (between 12.7 and 13.6 percent). Therefore, further research on behavior of investors’ decision-making should be developed with a variable on a broader spectrum of earnings quality such as non-financial information, short term capital gains and tend to be speculative or irrational for unusual events.
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The relationship between earnings quality and investors' decision , of buying and selling Indonesian family firms' stock.