EXECUTIVE’S EARLY TENURE AND EARNINGS MANAGEMENT

Myria Rafiz KhasandyDesi Adhariani

Department of Accounting, Faculty of Economics and Business, Universitas Indonesiamyriarafiz@gmail.com, desi.adhariani@ui.ac.id

ABSTRACTThis research’s purpose is to determine the effect of CEO’s and CFO’s early tenure period to earning management behavior through accrual discretionary and real activity. CEO will earn good reputation if they can generate higher profits for the company during their tenure, so there are some indications that they will manage their earnings using their discretion as CEO in their early years of tenure, and so does CFO. This research uses manufacturing company listed in Indonesia Stock Exchange as the sample. The results show that CEO’s and CFO’s early years of tenure don’t have positive effect towards the earnings management behavior. This research also finds that institutional ownership can strengthen the positive effect of CEO’s early tenure period to earnings management behavior. Type of Paper: EmpiricalKeywords: CEO Tenure, CFO Tenure, Earnings Management, Monitoring System

1. IntroductionEarnings management is often associated with agency conflict issues arising from agency

relationships. The agency relationship is a contract between the owner (or shareholder) and the agent, with the intention that the agent can perform some services for the owner, one of which relates to the transfer of responsibility to the agency for decision making (Jensen and Meckling, 1976). Agent conflicts will arise if the agent does something against the interests of the owner (Ross, 1973).

The reputation of the Chief Executive Officer (CEO) is defined as the market perception of his ability (Zhang, 2009), which is often associated with success that emerged after his leadership in the company, such as an increase in market capitalization (shown through increasing stock prices), improvement in company financial ratios and also profit increasing. Individually, the reputation of the CEO will have a long term impact for themselves, such as reappointment at the Annual General Meeting and the acquisition of bonus compensation in the future. Therefore, the CEO has a strong incentive to maintain his reputation in the presence of market participants, in this case including shareholders (Zhang, 2009).

Indication of earnings management not only appears on the CEO, but also the Chief Financial Officer. Jiang et al. (2010) finds that the incentives of CFO will influence earnings management more than CEO’s incentives. CFO role right now is not only seen as a recorder of financial transactions only. Not only acting as one of the decision makers, the CFO also has the responsibility to present the correct information and can be used in the decision-making process (Arts, 2014). This is supported by Chava and Purnanandam (2010) which states that the risk CFO’s preference is more important than the CEO, especially in relation to financial decision making, including the choice of debt maturity and earnings management.

The CFO and the CEO may use their discretionary policy, for example by increasing costs which will decrease company’s profits in the first year of his tenure, such as sales, general and administrative expenses (Ali and Zhang, 2015). Such actions will make profits increase over the next year, so the CEO will be praised for doing so (Ali and Zhang, 2015). This action often referred as big bath accounting. By increasing company’s income, the market perceptions of the ability of the CEO’s in managing the company will also be increasing too, that will impact to the CEO’s reputation (Ali and Zhang, 2015).

Research related to tenure has not been done in Indonesia. Several previous studies have examined the impact of the change of term of office of CEO (Adiasih and Kusuma, 2012). Yuliana (2011) also found that the change of CEO had a positive effect on earnings management. The behavior of earnings management itself will tend to increase the company's profit by using management discretion, so it is not followed by improvement of company performance. Similar results were also found by Trisnantari (2012), which uses Tobin's Q to measure company performance.

The agency conflict causing incentives for management to perform earnings management can be overcome by several things, one of them through supervision. Ali and Zhang (2015) found that a good supervisory system can moderate the early influence of the CEO’s tenure on earnings management. Such supervisory systems can be done through institutional ownership and family ownership.

Koh (2003) states that companies with low institutional ownership have a tendency to do the discretionary accrual, and vice versa. Wang (2006) found that the higher the family ownership in a company, the higher the quality of the resulting profit. This is contrary to the research of Chi et al. (2015), Sanjaya (2010), and Razzaque et al. (2016) who found that there was a negative influence between family ownership and earnings management behavior. This is motivated by the theory of entrenchment effect that the concentrated shareholders will have the tendency to do their best to fulfill the interests of their group without considering the interests of other shareholders.

The research questions in this paper are:1. Is the Early Tenure of CEO and CFO have a positive effect on Earnings Management?2. Can high institutional ownership weaken the positive influence of the Early Position of

the CEO and the CFO on Earnings Management?3. Can Family Ownerships moderate the positive effect of CEO’s and CFO’s early tenure on

Earnings Management?This research found that the CEO’s and CFO’s early tenure had no effect on earnings

management. The results of this study are inconsistent with Ali and Zhang's research (2015), but consistent with several studies in Indonesia that examine the effect of the change of term of office of the CEO on earnings management, Adiasih and Kusuma (2012). The study also found that institutional ownership and family ownership cannot moderate the positive influence of the initial tenure of the CEO and the Finance Director on earnings management. In addition, from the additional analysis it is found that there is a tendency of the CEO to conduct earnings management in his fourth year of tenure, which is consistent with the research of Davidson III et al. (2007), who found that the executive (CEO or CFO) who are at the age of approaching retirement will be more focused on the company's current performance than the performance of the company to come.

2. Literature Review

The earnings management occurs when management uses judgment in financial reports and in the preparation of transactions to amend financial statements either in order to mislead some stakeholders about the company's economic performance or to influence contractual outcomes depending on the accounting figures reported (Healy and Wahlen, 1999 in Adiasih and Kusuma, 2012).

This research uses 2 models of the earnings management calculation. The first model used is similar to the model used in Ali and Zhang's journals (2015), using accrual quality referring to McNichols (2002) model, which is a combination of Jones (1991) and Dechow and Dichev (2002) models. This discretionary accrual shows the amount of accruals based on management considerations, so that the greater the discretionary accrual, the greater the indication of earnings management behavior by the CEO.

Management considerations can also be made through a cost discretion account. Management can 'manage' costs by reducing certain costs so that the company's profits in the period of the position increases. The statement is consistent with the results of Pan et al., 2013 (Ali and Zhang, 2015). Therefore, the second model to be used is Roychowdhurry’s Model (2006), which measures the earnings management through manipulation of real activities. The manipulation of the real activities can be done in several ways, for example by aggressively cutting prices for the purpose of increasing sales (Graham et al., 2005 in Roychowdhurry, 2006).

The second model is used for the purpose of catching the phenomenon of the earnings management that is commonly done by the CFO as stated by Roychowdhurry (2006) that the CFO has a tendency to perform certain actions with the aim that the target profit set can be achieved. Therefore, the behavior of the earnings management performed by the CFO is usually done through real activities, not by using accrual (Roychowdhurry, 2006). This can reduce the quality of the profit value itself, because reported profits do not match the performance of the company. The action of the Director of Finance may be due to pressure from the company to generate a 'high' profit, so that if it does not happen, the reputation of the CFO becomes bad (Arts, 2014).

There are several studies that link between the reputation of the CEO and the quality of the profits. The reputation of the CFO can be seen, one of them, through ‘never’ or ‘not’ accounting restatement is done. Mian (2001, in Arts, 2014) stated that the tenure of the CEO is inversely done to accounting restatement, where accounting restatement is referred to as one of the proxies indicating that the company's profit quality is poor. This is supported by Aier et al. (2005) stating that the CFO who has experience in the field of finance will have a tendency to rarely perform accounting restatement. Therefore, Matsunaga (2013, in Arts, 2014) stated that the CFO who cannot 'serve' the needs of the market (and investors) is more likely to have a short tenure. This is consistent with Beaudoin et al. (2012, in Rolf Arts, 2014) who stated that the quality of the CFO is in line to his/her tenure, the worse the quality of the CFO, the shorter his/her tenure at the company.

Research related to the tenure, both the CEO and the CFO, in Indonesia is limited. Most of the research related to the term of office of the Director only uses a specific sample year, such as at the change of the tenure either at the end of the tenure or at the beginning of tenure (Adiasih and Kusuma, 2012). Adiasih and Kusuma (2012) used a sample change of tenure by dividing it into 2, namely: routine and non-routine shifts. The results of Adiasih and Kusuma (2012) itself contradicted with Ali and Zhang (2015), that there is no proven earnings management either at the end of the tenure year and the early years of the tenure year on routine or non-routine shifts, but these results are consistent with Murphy's research results and Zimmerman (1993, in Adiasih

and Kusuma, 2012). Wandesca (2012) conducted a similar study, but using different samples of state-owned and Non-BUMN. The results of his research are consistent with Adiasih and Kusuma (2012), that the new CEO does not perform the earnings management at the turn of the position. This study also found that there is no indication of the earnings management in state-owned and non-state owned companies.

In contrast to Adhyatma (2014), he found that at a non-routine turn, there was a tendency that the CEO would undertake the earnings management by the big bath accounting method, that is by reducing early-year profits to boost profits over the next year. But in the first year before the change of tenure, both routine and non-routine, there is no indication of the earnings management, which is consistent with the research of Adiasih and Kusuma (2012).

The lack of research on the tenure and the change of the tenure of the CEOs in Indonesia and its relationship with the earnings management makes several areas that can be examined related to this matter. The results of the studies are also still inconsistent between one study and other studies, so it is hoped that this research can give a new picture on the practice of the earnings management in Indonesia and the timing trend of this practice by the Directors, both the CEO and the CFO. This is expected to provide a clearer picture so that investors can be more aware of the indication of the earnings management at certain times.

Hypothetical ReviewFama (1980) and Holmstrom (1982) stated that the market evaluates the ability of the

CEO in his tenure, both in his current position and previous performance (Zhang, 2009). This may be one of the CEO's motivations to maintain a good reputation, in the hope that in the future when his tenure is over, the market (in this case the shareholders through the GMS) may appoint the CEO to re-take the position, because of his background experience and reputation as CEO (Fama, 1980 in Francis et al., 2008).

Information related to such experience and reputation is not available when the new CEO is appointed within the company, so that the market can only use the current information to assess the new CEO's capabilities. The current information can only be seen through the performance of the new CEO during his current term (Ali and Zhang, 2015). Then, this encourages management to work hard at the beginning of his tenure to produce good performance (Holmstorm, 1982 in Zhang, 2009).

The statement of Holmstorm (1982) is then argued by Ali and Zhang (2009) by stating that it can also make the new CEO take instant action, that is overstate profits in order to improve his performance in front of the market. This contrasts with the research of Francis et al. (2008). Francis et al. (2008) argued that top reputed directors would be more likely to take the earnings management action because of greater pressure, especially those are related to the prospect of the analyst, rather than the non-reputed directors.

However, Jiang et al. (2010) state that although the CEO is the highest leader and the CFO is merely an 'agent' of the CEO, the results of research by Jiang et al. (2010) found that the CFO has a greater influence on the earnings management than the CEO. This is because the CFO has a responsibility to meet the target of profit and investor's desire to increase the value of the company, so the action of the CFO has more tendency to lead to the earnings management (Jiang et al., 2010). This behavior tends to be done at the early of their tenure. In between, this behavior tends to be avoided because the both CEO and CFO try to maintain their reputation, so that they will behave passively. This is also consistent with the findings of Ali and Zhang (2015), who

found that earnings management behavior tended to decline in the 3rd year and subsequent years. This leads to the following hypothesis:H1a = The CEO’s early tenure has positive effect on earnings management. H1b = The CFO’s early tenure has positive effect on earnings management.

Agency conflicts can be solved with several efforts, Scott (2012) mentions that one way to minimize agency conflict is to monitor, either directly or indirectly. Unfortunately, this supervision is directly proportional to agency costs, that is the more complex the structure of the company, the higher the agency cost is needed (Jensen, 1993).

Institutional Ownership can be used as an indicator that demonstrates a strong Monitoring System within a company. Institutions, as shareholders in large portions, will tend to supervise related companies, with a view to maintaining 'investments'. This is consistent with Koh's research (2003) which states that firms with low institutional ownership tend to make a discretionary accrual in order to increase profits, and vice versa. Unfortunately, this has not been proven in Indonesia as shown in Indriani’s (2010) study which found that institutional ownership is not related to profits. This is consistent with the research of Kazemian and Sanusi (2015) who found that institutional investors were unable to control management discretion behavior. Kazemian and Sanusi (2015) also point out that institutional investors often focus only to short-term financial results, so that it may cause pressure for management to meet short-term financial targets, which can create incentives for management to make earnings management.

Institutional Ownership is used as a Moderating Variable between the effect of CEO’s early tenure on Earnings Management only found in Ali and Zhang's research (2015), but previous research found a contradictory relationship between Institutional Ownership and Earnings Management. Bushee (1998) and Collins et al. (2003) found that Institutional Investors may influence audit committees to participate actively in developing appropriate internal control procedures, thereby enhancing the accuracy of financial statements (Ali and Zhang, 2015).

An effective Monitoring System should be able to reduce the earnings management behavior in the company. The CEO and the CFO will not be able to perform the earnings management at his / her early tenure if the surrounding environment has a good and supportive Monitoring System, thus it leads to the following hypothesis:H2a = High institutional ownership will weaken the positive effect of CEO’s early tenure on earnings management.H2b = High institutional ownership will weaken the positive effect of CFO’s early tenure on earnings management.

Agency issues can also be reduced by family ownership, but only on certain portion of ownership (Arifin, 2003). Yang (2010) mentions that there is a difference in earnings management behavior between the CEO who came from the family (Family CEO) with the Family Director who is not from the family (Non Family CEO). Yang (2010) finds that the CEO who is not from the family has the motivation to earn earnings management by manipulating it more than the CEO who comes from the family.

Wang (2006) found that the higher the family ownership in a company, the higher the earnings quality resulted. This arises because of the alignment effect, namely the alignment between the interests of the controlling shareholder and non-controller, which leads to better supervision of the controlling shareholder as a concentrated shareholder.

Chi et al. (2015) states that companies with high family ownership will tend to earn earnings management. This is motivated by the entrenchment effect, namely the actions of controlling shareholders who use the company to meet the interests of its group without

considering the interests of shareholders as a whole (Sanjaya, 2010). Sanjaya (2010) found that there is a positive influence of control rights on earnings management, which can then degrade the quality of financial statement information. This is consistent with Razzaque et al. (2016) which states that companies with high family ownership in Bangladesh tend to earn earnings management.

Family ownership can have a positive and negative impact on earnings management. The positive impact of family ownership on earnings management will be based on the existence of alignment effect, while the negative impact of family ownership will be motivated by entrenchment effect in the company. Due to the positive and negative impacts of Family Ownership on Profit Management, the final hypothesis is compiled without using a direction, i.e., two tail. Here is the final hypothesis:H3a = Family ownership moderates the positive effect of CEO’s early tenure on earnings management.H3b = Family ownership moderates the positive effect of CFO’s early tenure on earnings management.

3. RESEARCH METHODOLOGY3.1.1. Sample

This study uses purposive sampling method by taking samples from companies listed in Indonesia Stock Exchange, using sample year 2010 - 2014. Year 2010 is used as a database because based on data of Indonesia's gross domestic product (GDP) according to the World Bank, there is an increase in GDP from US $ 539 Billion Dollar in 2009 to US $ 755 in 2010, indicating an increase in economic growth following the economic crisis in 2008 (as indicated by the decline in the bearish period of the Indonesian stock market (Santoso, 2013)). The 6-year period itself is chosen in order to capture the difference in tenure within 5 years.3.1.2. Research Model

This research uses the same research model as Ali and Zhang (2015), by adding the CFO as a variable to be tested simultaneously with the CEO.M ¿=¿∝¿+β1 EYCE O¿+ β2 EYCF O¿+ β3 UmurCE O¿+ β4 UmurCF O¿+β5 OwnCE O¿+β6 OwnCF O¿+β7 GenderCEO¿+β8 GenderCF O¿+ β9 LnMVE q¿+ β10 MTBRati o¿+β 11 Leverage¿+β12 InstOw n¿+ β13 RO A ¿+ℇ ¿ ¿

(3.1)To answer the second & third research question, we use the following research model:

EM ¿=∝¿+ β1 EYCEO¿+β2 EYCF O¿+β3 UmurCEO¿+ β4UmurCF O¿+β5OwnCE O¿+β6 OwnCF O¿+β7GenderCE O¿+β8 GenderCFO¿+β9 LnMVE q¿+β10 MTBRati o¿+ β11≤verag e¿+β12 InstOwn¿+β13 RO A¿+γ 14 FamOw n¿+γ 15 InstOwn∗EYCE O ¿+γ 16 InstOwn∗EYCFO¿++γ 17 FamOwn∗EYCEO¿+γ18 FamOwn∗EYCFO¿ + ℇ ¿ (3.2)Note:EMit = Earnings Management EYCEOit = CEO’s early tenureEYCFOit = CFO’s early tenureUmurCEOit = CEO age during year tUmurCFOit = CFO age during year tOwnCEOit = CEO’s ownership at year t OwnCFOit = CFO’s ownership at year tGenderCEOit = CEO genderGenderCFOit = CFO genderLnMvEqit = Log of Market Value of Equity in year tMTBRatioit = Market to Book Ratio in year tLeverageit = Total Liability to Total Asset in year t

InstOwnit = Institutional OwnershipROAit = Earnings before Tax to Total Asset RatioFamOwnit = Family OwnershipInstOwn∗EYCEOit = Moderating variable of Institutional Ownership to the Positive Effect of CEO’s early tenure on earnings management.InstOwn∗EYCFOit = Moderating variable of Institutional Ownership to the Positive Effect of CFO’s early tenure on earnings management.FamOwn∗EYCEOit = Moderating variable of Family Ownership to the Positive Effect of CEO’s early tenure on earnings management.FamOwn∗EYCFOit = Moderating variable of Family Ownership to the Positive Effect of CFO’s early tenure on earnings management.Variable Operationalization

Earnings management is measured in two ways, through measurement of discretionary accrual and measurement of manipulation through real activity. Discretionary accrual is measured using a regression model from McNichols (2002), which combines accrual model from Jones (1991) and Dechow dan Dichev (2002) (Ali dan Zhang, 2015). ACC❑¿

A T ¿−1=θ0+

σ1CF O¿−1

A T ¿−2+

σ2CF O¿

A T ¿−1+

σ3 CF O¿+1

A T¿+

σ 4 ∆ℜV ¿

A T ¿−1+

σ5 PP E¿

A T ¿−1+ϵ 3.3

The above model is regressed using the cross-section method per year. The result of the discretionary accrual is the residual value of model 3.3, which is denoted in ε it. The residual value will be included as Earnings Management in models 3.1 and 3.2.

The second model is the manipulation of real activity using cost discretion, sales and production costs, introduced by Roychowdhurry (2006). This measurement model was chosen in order to capture the most commonly used earnings management phenomenon between discretionary accrual or manipulation of real activity. In addition, this measurement model has three methods of measuring the manipulation of real activity, all of which are highly likely to be made by manufacturing industries such as production costs. Here are three methods of measurement:CF Ot

A T t−1=α0+α 1

1A( t−1)

+ β1( St

At−1)+β2( ∆ S

A t−1 )+∈1 3.4

PRO Dt

A T t −1=α 0+α 1

1A (t−1)

+β1( S t

A t −1)+β2( ∆ S

At−1 )+ β3( ∆ S t−1

A t−1)+∈2 3.5

DISEXPA T t−1

=α 0+α 11

A (t−1)+β1( S t

A t−1)+ β2( ∆ S

At−1 )+∈3 3.6

All three residual values of the regression result 3.4, 3.5 and 3.6 are summed to be calculated as total real activity manipulation (REM):REM=(∈1∗−1 )+∈2+(∈3∗−1)REM=∈2−∈1−∈3 3.7

This study uses only two independent variables, EYCEO and EYCFO, which is an indicator of CEO’s and CFO’s early tenure. The EYCFO variable was taken from Jiang et al. (2010) stating that the Director of Finance has more influence on earnings management than the CEO. But for the measurement, the EYCFO variable will use the same basis as Ali and Zhang (2015) use. For the EYCEO variable, the median value is 7 so that if the sample period is the first year to third, the numbers entered as indicators are 1 and 0 otherwise. For the EYCFO

variable, the median value is 5 so that if the sample period is the first and second year, the numbers entered as indicators are 1 and 0 otherwise.

Below are the control variables used in this research:Proxy Variable Previous Research ExpectationCEO’s Age AgeCEOit Huang et al. (2012) (-)CFO’s Age AgeCFOit Ge et al. (2008) (-)CEO’s Stock Ownership OwnCEOit Ali and Zhang, 2015 (+)CFO’s Stock Ownership OwnCFOit Ali and Zhang, 2015 (+)CEO’s Gender GenderCEOit Arun et al. (2015)

Ya et al. (2010)Barua et al. (2010)

(-)CFO’s Gender GenderCFOit

Company Size - Market Value of Equityit Ali and Zhang, 2015 (-)- Book to Market Ratioit Ali and Zhang, 2015 (+)

Leverage Leverageit Ali and Zhang, 2015 (-)Company Profitability Return on Aset (ROA) it Ali and Zhang, 2015 (+)Institutional Ownership Inst_Ownit Ali and Zhang, 2015

Koh (2003)(-)

Family Ownership Fam_Ownit Arifin (2003)Chi et al. (2015)Razzaque et al. (2016)Wang (2006)

(-) / (+)

This research uses 4 moderating variables, representing 2 moderating variables namely Ownership Institutions and Family Ownership. The first moderating variables are InstOwn* EYCEO and InstOwn*EYCFO, which are used to view earnings management behavior in a well-supervised environment, which can be seen from its high institutional ownership. The second moderating variables are FamOwn*EYCEO and FamOwn* YCFO, which are used to view earnings management behavior in environments that have high/ low family ownership.

Institutional ownership is financial institutions who owns the company's shares, such as banks, insurance companies, investment banking and insurance companies (Siregar and Utama, 2008). The moderating variables on the CEO’s early tenure are taken from Ali and Zhang's research (2015), while moderation to the CFO’s early tenure is chosen as a variable to see the moderation effect of the institutional ownership, not only to the CEO but also for the CFO.

The second moderating variable is Family Ownership. This variable is used to look at the influence of firm characteristics, in this case family ownership, in moderating the positive effect of CEO’s and CFO’s early tenure on earnings management. Family Ownership is the single largest owner among registered individuals or companies, except public companies, state-owned enterprises, foreign companies, public and financial institutions (Arifin, 2003). There is no expectation of this variable, because hypothesis 3 will be tested in two directions (two tail).

3.1.3. Research and Analysis MethodSample data was treated using E-Views software, by using balanced panel data. The

significance test was done by using Likelihood Ratio and The Hausman Test in Fixed/Random Effect Testing. It aims to avoid statistic misspecification.

4. ANALYSIS OF RESULT4.1. RESULT4.1.1. DESCRIPTIVE ANALYSIS

Table 3.2 shows that 31,05% samples were CEOs in the early of tenure (first, second or third year of tenure) and 24,9% samples were CFOs in the early of tenure (first or second year of tenure). The table also shows the average of institutional ownership of manufacture company in Indonesia is 16,1%. Additional analysis also shows that the mean of CEO tenure is 10 years, and the mean of CFO tenure is 7 years.

Table 4.1. Descriptive StatisticsMean Median Max Min SD

DA1 -0.00367 -0.00219 0.42460 -0.768861 0.098591REMz 0.03623 0.16789 1.00780 -2.263793 0.472911EY_CEOit 0.31053 0 1 0 0.463116EY_CFOit 0.24912 0 1 0 0.432885OWN_CEOit 0.01398 0 0.6647 0 0.072042OWN_CFOit 0.00307 0 0.1113 0 0.014967G_CEOit 0.92807 1 1 0 0.258599G_CFOit 0.82983 1 1 0 0.376117UMUR_CEOit 55.09649 55 83 0 8.960536UMUR_CFOit 49.72105 50 71 27 7.27886INST_OWNit 0.16361 0 0.95 0 0.235492LEVERAGEit 0.50688 0.47500 3.36 -0.1 0.408396LNMVEQit 9.00526 9 12 7 0.999986MTBRATIOit 1.87580 1.03553 22.29148 -2.695203 2.413207FAM_OWNit 0.26716 0.18000 0.9867 0 0.279987ROAit 5.41754 4 45 -65 10.13916

The results of this study are inconsistent with the results of Ali and Zhang's research (2015). Ali and Zhang (2015) found that overstate earnings tended to be greater at the beginning of the tenure than the CEO's end of term. The result of regression Model 3.1 shows that there is no influence between earning management with the beginning of tenure of CEO and Finance Director. However, the results of this study have an adjusted R-squared number similar to Ali and Zhang's research (2015), i.e. 32.0% for measurement with discretionary accrual, while Ali and Zhang 29.6%.

Stock Ownership of CEOs is not proven to affect earnings management, either through discretion or through manipulation of real activity. This is contrary to Bregstresser and Philippon (2006) stating that there is a positive relationship between the financial incentives given to the CEO and the behavior of earnings management.

Table 4.2. Regression Result of H1a and H1b (Model 3.1)EM=∝+β1 EYCE O¿+β2 EYCF O¿+ β3 UmurCE O¿+β4 UmurCF O¿+β5OwnCE O¿+ β6 OwnCF O¿+β7 GE O¿+β8 GCF O¿+ β9 LnMVE q¿+β10 MTBRati o¿+β11 Leverage¿+β12 InstOw n¿+β13 RO A ¿+ℇ ¿

(3.1)

Dependent Var.DA REM

C Prob C ProbEY_CEOit 0.00 0.9995 0.00 0.912

EY_CFOit -0.01 0.4850 0.01 0.647Umur_CEOit 0.00 0.4202 0.00 0.120 **Umur_CFOit 0.00 0.2279 -0.01 0.074 **OWN_CEOit 0.00 0.9742 0.91 0.593OWN_CFOit 0.15 0.6896 0.19 0.956G_CEOit 0.01 0.6506 -0.02 0.851G_CFOit -0.02 0.1880 * 0.06 0.283LNMVEQit 0.01 0.1404 ** 0.03 0.301 **MTBRATIOit 0.00 0.2304 -0.01 0.421Leverageit -0.03 0.0549 ** 0.12 0.149 **INST_OWNit 0.02 0.4885 0.00 0.988ROAit 0.01 0.0000 *** 0.00 0.446 ***Adjusted R2 0.320048 0.80927

The same result is also seen in the CFO Stock Ownership, which also proved to have no effect on earnings management only through the manipulation of real activity. This contrasts with Jiang et al. (2010), which states that the incentives of the Finance Director's equity are more influential on earnings management compared to the CEO, especially when judging from the significant significance level at 5% level while the CEO is at 10% level.

Tabel 4.3. Hasil Regresi H2 & H3 (Model 3.2)E M ¿=¿ ∂¿ +γ1 EYCEO ¿+γ 2 EYCF O¿+ γ3 UmurCE O¿+ γ4 UmurCF O ¿+γ5 OwnCE O¿+ γ6 OwnCF O¿+ γ7 GCE O ¿

+γ 8G CFO¿+ γ9 LnMVE q¿+γ 10 MTBRati o¿+γ 11 Leverage ¿+γ 12 InstO wn¿+ γ13 RO A¿+γ 14 FamOw n¿ +γ15 InstOwn∗EYCE O¿+γ 16 InstOwn∗EYCFO ¿++γ 17 FamOwn∗EYCE O¿+ γ18 FamOwn∗EYCF O¿+ℇ ¿¿

3.2

Dependent Var.DA REM

C Prob C ProbEY_CEOit 0.00 0.812 -0.03 0.437EY_CFOit -0.01 0.242 0.02 0.563Umur_CEOit -0.00 0.436 0.00 0.158 *Umur_CFOit 0.00 0.222 0.00 0.091 **OWN_CEOit 0.00 0.984 0.71 0.686OWN_CFOit 0.13 0.731 -0.03 0.992G_CEOit 0.01 0.669 -0.02 0.865G_CFOit -0.02 0.181 ** 0.06 0.331LNMVEQit 0.01 0.160 * 0.03 0.350MTBRATIOit 0.00 0.186 * -0.01 0.381Leverageit -0.02 0.065 ** 0.12 0.160 *INST_OWNit 0.01 0.555 -0.07 0.716

ROAit 0.01 0.000*** 0.00 0.353

FAM_OWNit -0.01 0.686 -0.17 0.587Inst_Own*EY_CEOit 0.02 0.681 0.18 0.220Inst_Own*EY_CFOit -0.00 0.989 -0.01 0.923Fam_Own*EY_CEOit -0.02 0.493 0.04 0.695

Fam_Own*EY_CFOit 0.03 0.231 -0.04 0.652

Adjusted R2 0.3165470.80807

8Regression results of Model 3.2 can be seen in Table 4.3. The InstOwn*EYCEO variable

is not proven to weaken the positive effect of CEO’s early tenure on earnings management, as well as the InstOwn*EYCFO. This shows that hypotheses 2a & 2b are rejected, so that institutional ownership is not proven to be able to moderate the positive effect of CEO’s and CFO’s early tenure on earnings management.

Model 3.2 also shows that the Family Ownership variable is not proven to be able to moderate the positive effect of CEO’s and CFO’s early tenure on earnings management. Therefore, Hypothesis 2a, 2b, 3a and 3b are rejected.

5. DISCUSSIONThe result of the research shows that Hypothesis 1a & Hypothesis 1b is rejected, which

are there is no positive effect of CEO’s and CFO’s early tenure to Earnings Management. The results of this study are consistent to the study conducted by Adiasih and Kusuma (2012) and Wandesca (2012), who found that the new CEO did not perform earnings management at the change of tenure.

In Table 4.2 which is the result of regression model 3.1, it can be seen that EYCEO and EYCFO variables do not affect earnings management, either using discretionary accrual or real activity. The same result is also seen in the result of regression model 3.2 in Table 4.3. The results of this study are inconsistent with the research of Ali and Zhang (2015). To answer this phenomenon, additional testing is done by replacing the EYCEO with CEOTenure and EYCFO variables with CFOTenure, each using the proxy for the term of office of the CEO and the Finance Director. Additional test results can be seen in Table 4.8, showing that the CEOTenure variable has no effect on earnings management with p-value 0.3144 and 0.5339, while the CFOTenure variable also has no effect on earnings management with p-value 0.4642 and 0, 2922. This is consistent with Fama's (1980) study, which says that a reputable manager will not risk a reputation that has been built for so long just to take advantage of his own opportunistic actions, for example through earnings management.

The study also showed a negative relationship between the gender of the CFO and earnings management through the discretionary accrual, which is consistent with Barua et al. (2010) stating that companies with a female Finance Director tend to have good accrual quality.

The results show that Hypothesis 2a is not supported, i.e. Institutional Ownership cannot weaken the positive influence of the initial tenure of the CEO on Profit Management. Hypothesis 2b is also not proven, that Institutional Ownership is not proven to weaken the initial influence of tenure of Director of Finance to earnings management. The result of Equation 3.2 shows that the institutional ownership variable cannot moderate the initial influence of the tenure of the CEO to earnings management, so hypotheses 2a & 2b are rejected. This can be due to the relatively lower average institutional ownership in Indonesia compared to other research samples (Ali and Zhang, 2015). A small percentage of institutional ownership may not result in a lack of institutional influence in the company, thus not moderate the early influence of the tenure of the CEO and the Finance Director on earnings management.

In Table 4.3, family ownership cannot moderate the positive effect of either CEO’s or CFO’s early tenure to earnings management. Family ownership is not proven to be able to moderate the positive effect of both CEO’s and CFO’s early tenure on earnings management

through discretionary accrual and manipulation of real activity. The regression results show that Hypothesis 3a and Hypothesis 3b are not proven / rejected.

The results of this study are consistent with the results of Rezeki (2015), there is no relationship between family ownership with earnings management in companies in Indonesia. This may be because there is not necessarily a relationship between the owner and the CEO or the Finance Director so that although the selection of the board of directors is in the hands of the largest shareholders, the directors work professionally so that their performance is not affected by the amount of family ownership in the company. As for this is not the scope of research, so it can be investigated further about the effect of directors who have a relationship with the owner of earnings management behavior at the beginning of tenure.4.3. Sensitivity Analysis

To test the robustness of the research, robustness testing is conducted by using the term of office period from the first year to the fifth year as a proxy of term of office, both for the CEO and the Finance Director. The results showed that this study was robust when additional sensitivity tests were performed. The CEO is not proven to conduct earnings management in the first year up to the third year of his / her position, so it can be concluded that the initial term of the CEO does not affect the behavior of earnings management, either through discretionary accrual or manipulation of real activity. The same result is also shown in the Director of Finance.

However, the additional analysis results show that in the fourth year of his tenure, the CEO tends to earn earnings management through manipulation of real activity, at a 10% significance level. Additional analysis indicates that the CEO will tend to earn earnings management through manipulation of real activities by increasing the company's profits, using discretion, through discretion over production costs, operating cash flow and discretion costs. This result is inconsistent with Francis et al. (2008), stating that a reputable Director would tend to avoid earnings management behavior to avoid the risks that may arise if the behavior of earnings management is detected.

However, this study is consistent with the results of a study by Davidson III et al. (2007), who found that the executive (CEO or CFO) who are at the age of approaching retirement will be more focused on the company's current performance than the performance of the company to come, so there is a positive relationship between earnings management and executive term 2 years before pension. CEO who approached retirement age will tend to earn earnings management by increasing the company's profit, with the aim that the compensation to be obtained when the pension can increase.

6. CONCLUSIONSThe study found that the CEO’s and CFO’s early tenure did not have a positive effect on

earnings management. When observed from the average age of the CEO and the CFO who almost reached the age of retirement, this can be due to the need of the CEO and the CFO to maintain the reputation that has been fostered to date. In addition, additional analysis results show that the President Director is proven to make earnings management not at the beginning, but at the end of his term, i.e., in his fourth year of tenure. This is consistent with the study of Davidson III et al. (2007), that executives who are near the age of retirement will be more focused on short-term performance of the company, with the aim of obtaining high compensation at retirement.

The study also found that institutional ownership is not proven to weaken the positive effect of CEO’s and CFO’s early tenure on earnings management. The results show that institutional ownership has no effect to the positive effect of CEO’s and CFO’s early tenure on

earnings management, which may be due to the low average of institutional ownership in the sample. Low institutional ownership causes the institution to have a weak influence on the company, so they cannot moderate the positive influence of the CEO’s and CFO’s early tenure on earnings management.

The results of the study indicate that Family Ownership does not moderate the positive effect of the CEO’s and CFO’s on earnings management. This is contrary to the hypothesis. This can be motivated by the absence of a familial relationship between the owner and the President Director or the Finance Director. Although selected by the largest shareholder, the board of directors will work professionally so that its performance is not affected by the amount of family ownership in the company.

There are limitations in this study, one of which is the number of samples that are limited only by one industry i.e. manufacturing and a period of research that is only 6 years. It is expected that further research can examine the phenomenon of earnings management at the beginning of tenure of both to the President Director and the Director of Finance, to all companies listed on the Indonesia Stock Exchange. This is because research related to the beginning of tenure is still very minimal, so it is still open to test the association between the two in Indonesia.

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