ANALYSIS THE FACTORS THAT INFLUENCE EARNINGS RESPONSE

COEFFICIENT (ERC) IN THE MANUFACTURING COMPANY LISTED IN

INDONESIA STOCK EXCHANGE

Rekyan Shinta HapsariAirlangga Univesity SurabayaEmail: rekyanshinta@gmail.com

Abstract

This research is aimed to analyze the factors that influence Earnings Response Coefficient (ERC) in the manufacturing company listed in Indonesia Stock Exchange. This research used seven factors which are firm size, beta risk, earnings persistence, growth opportunities, capital structure, board composition and audit quality. It based on the different market response toward earnings information of some companies over the others. The sample of this research is 132 companies selected by using purposive sampling method. This research tested the hypotheses by using multiple regression analysis models.

The result of this research found that firm size gives no significant influence because it also used as the proxy for other firm characteristics. Beta risk gives negative significant influence toward ERC because higher beta risk will increase the portfolio risk. Earnings persistence gives no significant influence toward ERC because the investors less response the persistence in earnings change and consider the others information to make investment decision. Growth opportunities give positive significant influence toward ERC because it indicate other success in future project and easy to attract capital. Capital structure gives negative significant influence toward ERC because the good news in high leverage company will give benefit to the debtholders over the stockholders. Board composition gives negative significant influence toward ERC because the investors doubt about the ability of independent directors in monitoring the management and decrease the financial statement fraud. The audit quality gives no

significant influence toward ERC because the investors only concern to the amount earnings number rather than the accuracy of the earnings.

Keywords: Earnings Response Coefficient (ERC), firm size, beta risk, earnings persistence, growth opportunities, capital structure, board composition, audit quality.

1. INTRODUCTION

1.1 Background

Financial statements contain information that will

be response by the investors as consideration for

decision making. Information which is responses by the

investors has quality of value relevant which is capable

to make different in decision. The investors’ response

toward earnings information will be different for some

company over the others company. Then it leads to the

study called earnings response coefficient (ERC) which is

identify and explain the different market response toward

earnings information.

Traditional empirical research by Ball and Brown

(1968) measured the information content of earnings by

classifying the reported earnings into good news (GN) if

greater than the market expectation and bad news (BN) if

less than expectation. They found that stock return

response to the information content in financial

statements. Lev (1989) in Scott (2009:196) found that the

market response to bad news and good news is really

quite. It means most of the variability of security

return due to factors other than the change in earnings.

Then this finding led to the studies called value

relevant of financial information.

The value relevance theory then led to the next

important direction of Ball and Brown’s study called as

earnings response coefficient (ERC) theory. For a given

amount of unexpected earnings, the security market

response will greater for some company than the others.

Earnings response coefficient (ERC) explained and

identified the difference market response toward earnings

information.

There were many researchers that analyze the factors

that caused the different in market response by using

earnings response coefficient (ERC), such as Earnings

Persistency (Kormendi and Lipe, 1987 and Collins and

Kothari, 1989), growth opportunities (Collins and

Kothari, 1989); beta risk (Collins and Kothari, 1989;

Chambers et al., 2005 and Dhaliwal and Reynolds, 1994),

capital structure (Dhaliwal et al., 1991), firm size

(Chaney and Jeter, 1991), auditor quality (Teoh and Wong,

1993), board composition (Petra, 2005), industry effect

(Biddle and Seow, 1991), timeliness (Jaswadi, 2004),

accounting method (Chandrarin, 2003).

The motivations of this paper referred to the

possibility of other factors other than change in

earnings that can cause different market response toward

earnings information. This paper will combine the factors

that used in previous research which are firm size, beta

risk, earning persistence, growth opportunities, capital

structure, and audit quality. Second motivation is expand

the previous research by analyzing one of corporate

governance mechanism which is board composition, since

the corporate governance became crucial issue relating

the responsibility of management in providing financial

information. The third motivation is relating to the

inconsistencies result in previous earnings response

coefficient research such as firm size (Easton Zmijewsky,

1989; Chaney and Jeter, 2005; Collins and Khotari, 1989)

and earnings persistence (Kormedi and Lipe, 1987; Ali

Zarowin, 1992).

This different of ERC research from previous ERC

research is that the ERC research expands the previous

research by using value relevant method which is extent

the observation period. Based on value relevant theory,

the timeliness is not the main issue. The research still

examine the relation between stock price and accounting

information, but the research identify the drivers of

value that may be reflected in price over a longer time

period (Beaver, 2002).

This research will analyze the influence of each

independent which are firm size, beta risk, earning

persistence, growth opportunities, capital structure,

board composition and audit quality toward dependent

variable which is earnings response coefficient (ERC) in

the manufacturing company listed in Indonesia Stock

Exchange (IDX) through multiple regression analysis by

using Eviews 4.0.

1.2 Problem Statement

According to the research background elaborated

above, the problem of this research is relating to the

factors that influence earnings response coefficient

(ERC) and how far those factors give influence to ERC.

The problem statement in this research is:

“Do firm size, beta risk, earnings persistence, growth

opportunities, capital structure, board composition and

audit quality influence earnings response coefficient

(ERC)?”

1.3 Research Contributions

The contributions of this research consist of

contribution for theory, empirical and policy. This

research hopefully can enrich the concept and theories

that support the development of science relating the

research of the earnings response coefficient and the

factors that influence it. The empirical contribution of

this research is to give direction for the management and

accountant to improve the usefulness of financial

statements information so that the investors can use the

information as consideration for decision making. The

contribution of this research to the policy making is the

result of this research can give consideration and

feedback for the standard setters of accounting policy to

evaluate and make the standard that can improve the

usefulness of financial statements.

2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

2.1 Value Relevant Theory

SFAC 2 defines value relevance as the information

that can help the users of financial statement to form

their own predictions of event. According to Scott

(2009:196) value relevance is closely related to the

concept of earnings quality, since it uses security

market reaction to measure the extent to which financial

statements information assist investors to predict future

performance of the company. That theory opens the

possibility for other factors other than change in

earnings to influence market response.

The focus of value relevant study is the variable

that asses the valuation characteristics of particular

accounting amount. In the other hand it was assess about

how well the accounting number reflect the information

used by investors in valuing the economics performance of

the company. Beaver (2002) explained two major

characteristics of value relevance research that

distinguish from other capital market research. The first

is that, value relevance research demands an in-depth

knowledge of accounting institutions, accounting

standards, and the specific features of the reported

numbers more than the other research area. A second

distinguishing characteristic is that timeliness of

information is the main issue in value relevance

research. Value relevance research still includes studies

examine the relation between the level of stock price and

accounting data, but it’s not encompasses in event study.

In contrast to event study, value relevance studies

identify the drivers of value that may be reflected in

price over a longer time period than assumed in event

study.

2.2 Earnings Response Coefficient Theory

Earnings Response coefficient (ERC) is the reaction

of earnings that announced by the company. Collins and

Kothari (1989) defined earnings response coefficient as,

“The price change including by one-dollar stock to

current earnings and is equal to one plus the present

value of the revisions in expected future earnings caused

by this stock.”. ERC is one important direction from the

research by Ball and Brown (1968) that can identify and

explain the different market response toward earnings

information.

The principal of ERC is that the investors have

expectation before the company announced their earnings.

When the annual earnings announced, if the actual

earnings higher than the investors’ expectation it become

good news (GN), so the investors will revise upward their

expectation toward earnings and performance of the

company and decide to buy the stock of the company. The

opposite, if the expectation is higher than the actual

earnings, it becomes bad news (BN), so the investor will

revise downward their expectation toward earnings and

performance of the company and decides to sell their

stock. The increasing and decreasing of the stock price

will accumulate in the cumulative abnormal return (CAR)

for each company. Expectation of future earnings can be

based on information of current earnings, but the

accuracy of the prediction depends on the earnings

behavior.

2.3 Determinant of Earnings Response Coefficient and

Hypotheses Development

For a given amount of unexpected net income, the

extent of security price or abnormal return depends on

some factors; those factors are called as determinant of

ERC. Those factors can influence the magnitude of ERC.

The determinants of ERC that will be reviewed in this

research are firm size, beta risk, earnings persistence,

growth opportunities, capital structure, board

composition and audit quality.

2.3.1Firm size

Firm size in ERC research is used as a proxy for the

informativeness of stock price (Scoot, 2009:158).

Research by Atiase (1985) in Chaney and Jeter (2005)

found that firm size is negatively related with ERC

because the big company disclosed much information

relating earnings throughout the year, so when the

earnings announcement release the information become less

informative for investor. Research by Mulyani et al.

(2007) and Easton and Zmijewski (1989) found that firm

size is not significant variable in explaining earnings

response coefficient. The reason is probably, the size of

the firm also used as the proxy for others

characteristics of the company, such as profitability,

risk and growth. Different result found by Chaney and

Jeter (2005) and Susilawati (2008). They found that firm

size is positively related with the magnitude of Earnings

response coefficient.

Larger the size of the firm, the ability to generate

future return trough its subdivision will be higher. Good

news for larger company size, the investors will respond

by buying the stock of the company. Higher demand of

company stock implies higher increase in market price and

shares return in response to the GN, hence, a higher ERC.

H1: firm size of the company has positive influence

toward ERC

2.3.2 Beta risk

Every company has systematic risk which is risk that

influences a large number of assets and cannot be

diversified. Assumed that the investors are typical of

risk-averse, rational investors will increase the

expected value and decrease the risk of return of

portfolio. Higher beta of the company will increase

portfolio risk, consequently the investor would not buy

as much more as if the security was has low beta,

although the company has good news. The demand of GN

company stock will be lower for the higher beta, other

things equal. Lower demand implies lower increase in

market price and stock return in response to GN, hence,

lower ERC.

The previous researches by Collins and Kothari

(1989) found that high-risk companies have lower ERC than

low-risk companies. Research results by Dhaliwal and

Reynold (1994), Willing (1999), and Mulyani et al. (2007)

also found that beta risk is negatively related with the

earnings response coefficient (ERC).

H2: Beta risk of the company has negative influence

toward ERC

2.3.3 Earnings persistence

The earnings persistency can be seen from the

earnings innovation in current year related to the stock

price changing (Scott, 2009:155). The investor would

expect the companies that have steady changes from year

to year. Study by Kormedi and Lipe (1987) and Mulyani et

al. (2007) found that earnings persistence has positively

influence the earnings response coefficient. Different

with Ali and Zarowin (1992) found that ERC has negative

correlation the earnings persistence.

Earnings persistence explains the ability of the

company to persist the earnings that earn in current

period until next period. Steady GN of a company, the

investors will react by buying the stock of the company.

Higher demand of the company stock implies higher

increase in market price and stock return in response to

the GN, hence, higher ERC.

H3: earnings persistence of the company has positive

influence toward ERC

2.3.4 Growth opportunities

The company with higher opportunity to growth will

have more ability to generate earnings and increase the

earnings in the future because they have bigger

opportunity to invest in the next period (Scoot,

2009:158). Study by Collins and Kothari (1989) and

Mulyani et al. (2007) found growth opportunities has

positively influence the earnings response coefficient.

Growth opportunities include existing project or

opportunities to invest in project that are expected to

yield rates of return that exceed the risk adjusted rate

of return. High investment opportunities make company can

increase the value of the company. Such company can

easily attract capital and additional sources of growth.

Thus the stock demand of GN company stock will be

higher for growth company. Higher demand implies higher

increase in market price and stock return in response to

GN in response to GN, hence, higher ERC.

H4: growth opportunities of the company has positive

influence toward ERC

2.3.5 Capital structure

Capital structure is defined as that mix of debt,

preferred, and common equity that causes its stock price

to be maximized. In this research, capital structure is

proxy by leverage. Leverage refers to the extent to which

a firm relies on debt (Ross et al., 2008:553). Study by

Dhaliwal et al. (1991) and Mulyani et al. (2007) found

that capital structure that proxied by leverage has

negatively influence with earnings response coefficient.

The company which have higher leverage will have

lower earnings response coefficient. The good news of

highly leverage company will adds strength and safety to

bonds and other outstanding debt. As much as the GN of

highly leveraged company, the earnings will goes to

debtholders rather than shareholders.

H5: Leverage level of the company has negative influence

to ERC

2.3.6 Board composition

Board composition deals with the proportion of

independent directors compare with the total number of

directors on the board. Higher number of independent

board of directors hypothesized to increase the integrity

of financial information by limiting management’s ability

to manipulate earnings. Independent directors are seen as

a mean for monitoring management and for ensuring that

management decision are aligned with the best interest of

the shareholders. Independent directors have no

contractual relationships with the companies are free

from relationships which could interfere with their

capacity to act in an independent manner.

The demand of the GN company stock will be higher

for the company that has higher proportion of independent

board of directors. Higher demands of stock imply higher

market price and stock return response to the GN, hence,

higher ERC. Study by Petra (2005) resulted that

proportion of independent directors has positive

influence to earnings informativeness.

H6: Boards composition positive influence toward ERC

2.3.6 Audit quality

Auditor function is as a party that gives assurance

toward the accounting number and assurance the fairness

of accounting number in financial statement. Higher

quality of audit that proxied by size of audit firm will

increase the accuracy of financial statement. The reason

is that the big-four audit firm will give the best effort

to audit the financial statement of the company in order

to defense their reputation. The previous research

conduct by Teoh and Wong (1993) resulted the audit

quality has positive relation with the earnings response

coefficient.

H7: Audit quality has positive influence toward ERC

3 RESEARCH DESIGN

3.1 Data and Sample of Research

The type of data that used in this research is

secondary data that obtain from Indonesia stock exchange

(www.idx.com), Indonesia Capital Market Directory and

Central Data of Business and Economics of Gajahmada

University (www.pdbe.com). Data that used in this

research is consists of:

1. Financial statement of the manufacturing company for

year 2004-2008

2. The company profile of the manufacturing company in

year 2008

3. Stock exchange trading that consists of daily

abnormal return, closing price and beta correction

for year 2004-2008.

The population of this research is manufacturing

company that listed in Indonesia stock exchange. Sampling

technique that used in this research is purposive

sampling technique that draws the sample according to

certain criteria as follows:

1. Manufacturing company in Indonesia stock exchange

that reports their financial statement for year 2004

– 2008.

2. The information about company’s daily abnormal

returns is available continuously in year 2004-2008.

3. The financial statements are representing in Rupiah.

4. The company profiles are available in Indonesia

Stock Exchange website.

The sample of this research is consists 132

manufacturing company listed in Indonesia Stock exchange.

The sample selection procedure is depicted in table 1.

3.3 Operational Definition and Variable Measurement.

Operational definition and variable measurement of the

variables can be seen in table 2.

3.4 Data Technique Analysis

This research is attempted to analyze the factors

that influence earnings response coefficient by using

regression analysis as the research conducted. This

research is using Eviews4.0 software to process the data

and analyze the hypothesis. The hypotheses in this

research are tested by the following regression.

....(11)

ERCit : Earnings response coefficient company i period t

SIZEit: Firm size of company i in period t

BETAit: Beta risk of company i in period t

PERSit: Earnings persistence of company i in period t

GRTHit: Earnings growth of company i in period t

LEVit : Capital structure of company i in period t

BRDCit: Percentage of independent board of directors of company i in period t

AUDQit: Audit quality of company i in period t

4 RESULT AND DISCUSSION

4.1 Statistics Descriptive

The dependent variable is the earnings response

coefficient, while the independent variables are firm

size, beta risk, earnings persistence, growth

opportunities, capital structure, board composition and

audit quality. The statistic descriptive is depicted in

table 4.1.

4.2 Classical Assumption Testing

The test for the factors that influence earnings

response coefficient (ERC) used multiple regression

analysis models. It needs to know the relationship

between the dependent variable and independent variable

in the multiple linear regression models in order to

achieve the best linear unbiased estimator (BLUE). The

relationship between dependent variable and independent

variable is tested by classic assumption test. The

classic assumption tests consist of normality test,

autocorrelation test, heteroscedasticity test and

multicolinearity test.

The normality is tested by using Histogram Normality

test, autocorrelation is tested by using Breusch-Godfrey

method (Widarjono, 2009:147), heteroscedasticity is

tested by using White method (Widarjono, 2009:128) and

the multicolinearity is tested by analyze the correlation

matrix of independent variables (Ghozali, 2001:95).

4.3 Hypotheses Testing

The factors that analyze in this research are firm

size, beta risk, earnings persistence, growth

opportunities, capital structure, board composition, and

audit quality. Table 4 will present the test result of

the factors that influence earnings response coefficient.

This research used seven variables as the factors

that influence earnings response coefficient. Those

factors are firm size, beta risk, earning persistence,

growth opportunities, capital structure, board

composition and audit quality. From the result test,

variables of beta risk, growth opportunities, capital

structure and board composition have significant

influence toward earnings response coefficient. Firm

size, earnings persistence, and audit quality gives no

significant influence toward earnings response

coefficient. The detail explanation will be discussed as

follows:

4.4 DISCUSSION

4.4.1 Firm size

The result of this research found that firm size has

no significant influence toward earnings response

coefficient. Larger the size of the company does not make

the ERC higher. This finding supported the previous

research by Easton and Zmijewski (1989) and contrary with

the research by Chaney and Jeter (2005) and Mulyani et

al. (2007) that found significant influence of firm size

toward ERC. Scoot (2009:153) used the firm size as the

proxy for the informativeness of earnings. The firm size

has no significant influence toward ERC probably because

the firm size also used as the proxy for others firm

characteristics, such as growth and risk (Easton and

Zmijewski, 1989).

4.4.2 Beta risk

This research found that beta risk has negative

significant influence toward earnings response

coefficient (ERC). It means that higher beta risk will

cause lower earnings response coefficient (ERC). This

finding supported the previous research by Collins and

Kothari (1989), Dhaliwal and Reynold (1994) and Mulyani

et al. (2007). This finding gives evidence that market

will response negatively to the company that has higher

beta risk. Higher beta of the company will increase

portfolio risk, consequently the investors will not buy

the stock as much as the company that have lower beta.

4.4.3 Earnings persistence

This research found that earnings persistence have

no significant influence toward earnings response

coefficient. It means that earnings persistence does not

influence the earnings response coefficient. This finding

supported the previous research by Harahap (2004) and

contrary with the research by Collins and Kothari (1989)

and Mulyani et al. (2007) that found significant

influence of earnings persistence toward ERC.

This result gives evidence that investors less

response the information earnings change although the

company can persist the earnings for the future period.

This indicated that in making economic decision, the

investors not only considered the earnings information,

but they also use others information to support their

economic decision

4.4.4 Growth opportunities

This research found that growth opportunities have

positive influence toward earnings response. This finding

supported pervious research by Collins and Khotari

(1989), Mulyani et al. (2007). The positive influence of

growth opportunities implied that the investors will

response more to the earnings information that released

by the company that have higher opportunities to growth

than non-growth company. Company that success in the

project and labeled as growth company will easily to

attract capital for additional sources of growth. Growth

because of investing in projects that yield above normal

rates of return in generally referred to as economic

growth.

4.4.5 Capital structure

In this research, leverage has negative influence

toward earnings response coefficient. It means the higher

leverage level, the earnings response coefficient (ERC)

will be lower. This finding support the previous research

by Dhaliwal et al. (1991), Billings (1999), Setiati

(2004), Mulyani et al. (2007).

Leverage ratio reflect the amount of debt that used

by the company to fund the business activities. The

reaction of stock prices to unexpected earnings will be

affected by liability risk. This is because the liability

risk that determined the mechanism for allocating of

wealth change due to unexpected earnings among the

stockholders and debtholders. High leverage ratio

indicates that the source of fund is dominated by the

debt over the equity. Much of the good news in earnings

goes to debtholders rather than stockholders (Scoot,

2009:154).

4.4.6 Board composition

Board composition in this research was proxied by

the proportion of independent directors that served in

the board of directors. The result is the board

compositions have negative significant influence toward

earnings response coefficient. This finding is contrary

with the previous research by Petra (2005) and Ahmed et

al. (2006) that found no significant influence of board

composition toward ERC.

Independent directors limited in the involvement of

company activities and day-to-day operation of the

company’s business (Ahmed, 2006). This characteristic

makes the market doubtful whether the independent

directors are able to provide any significant business

advice to increase the performance of the company.

4.4.7 Audit quality

In this research Audit quality has no significant

influence toward earnings response coefficient. This

finding supported the previous research by Mulyani et al.

(2007) and Riyatno (2007). This result gives finding that

the quality of the audit did not influence the investors’

response toward earnings announcement. The investors only

concern about the earnings reported in the financial

statement without pay attention to the accuracy of the

earnings (Mulyani et al., 2007).

5 CONCLUSION, LIMITATIONS, SUGGESTIONS and

IMPLICATIONS

The result of this research find that beta risk,

growth opportunities, capital structure, and board

composition give significant influence toward earnings

response coefficient while firm size, earning

persistence, and audit quality have no significant

influence toward earnings response coefficient.

The limitations of this research are the variables

in this research have more than one measurement and this

research did not consider the economic event that can

caused strong response from the market such as merger.

Based on the limitation, this research suggests for

the next researchers to use others measurement of

variables and adding the economic event to the model to

be analyzed.

The implication of this research are the management

and accountant profession can increase the quality and

credibility of financial statement so that the investors

can make investment decision more accurately by using

those information.

REFERENCES

Ahmed, K., M. Hossain, and M.B. Adams. 2006. The Effect of Board Composition and Board Size on the Informativeness of Annual Accounting Earnings. Corporate Governance Journal 14, No.5 : 418-431.

Ali, A. Dan P. Zarowin, 1992, ”Permanent vs. Transitory Components of Annual Earnings and Estimation Error in Earning Response Coefficients”. Journal of Accounting and Economics, 15, 249-64

Ball, R. dan P. Brown. 1968. An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research 6 (Autumn).

Beaver, W.H. 2002. Perspectives on Recent Capital Market Research. The Accounting Review. Vol 77 No 2 (April): 453-474

Billings, Bruce K. 1999. Revisiting the Relation between the Default Risk of Debt and the Earnings Response Coefficient. The Accounting Review. Vol. 74 No. 4. October (p. 509—522)

Bungin, B. 2001. Metodologu Penelitian Sosial: Format-format Kuantitative dan Kualitaive. Airlangga Univercity Press: Surabaya.

Chandrarin, G., 2003. The Impact of Accounting Methods of Translation Gains (Losses) on the Earnings Response Coefficients. Proceeding Articles on SNA 5, 24-35.

Chaney, P.K. dan D.C. Jeter, 1991, The Effect of Size on the Magnitude of Long Window Earnings Response Coefficients", Contemporary Accounting Research. Vol 8 No.2 : 540-560.

Collin, D.W. dan S.P. Khotari. 1989. An Analysis of Intertemporal and Cross Sectional Determinants of Earnings Response Coefficients. Journal of Accounting and Economics. Vo. 11 (p. 143—181)

Dhaliwal, D.S, K.J. Lee dan S.S. Reynolds, 1994, “The Effect of the Default Risk of Debt on the Earnings Response Coefficients, ” The Accounting Review 69, No. 2 (April): 412-419.

Dhaliwal, D.S., K.J. Lee dan N.L. Farger, 1991, “The assosiation between Unexpected Earnings and Abnormal Security Returns in the Presence of Financial Leverage”, Contemporary Accounting Research 8, No. 1: 20-41.

Donnely, R. 2002. Earnings Persisrence, Losses and The estimation of Earnings Response Coefficient. ABACUS. Vol. 38 No.1.

Easton, P.D. dan M. Zmijewski. 1989. Cross-sectional Variation in the Stock Market Response to Accounting Earnings Announcements. Journal of Accounting and Economics 11:117-141.

El-Mahdy, D.F. and A.A. Abdou. 2007. Trends of the Return- Earnings Association Over the Last Three Decades. Journal of Focus on Finance and Accounting Research. 117-145.

Esme, F. 2007. All About Stock, 3E. McGraw-Hill Proffesional.

Eugene, F.B. and M.C. Ehrhardt. 2008. Financial Management: Theory and Practice. Cengage Learning.

Financial Accounting Standard Board. 1996/97. Statements of Financial Accounting Concepts: Accounting Standards. John Wiley & Sons, Inc. New York.

Freeman, R., and S. Tse. 1992. An Earnings Prediction Approach to examining intercompany Information Transfer. Journal of Accounting and Economics. Vol 15 (p: 509-523).

Ghozali, I., (2001), “Aplikasi Analisis Multivariat: dengan Program SPSS,” Badan Penerbit Universitas Diponegoro, Semarang.

Godfrey, J et al. 2010. Accounting Theory. 7th Edition. John Wiley & Sons, Inc. Australia.

Gujarati, D., 1995,”Basic Econometrics”, 3th Ed., Mc-Grawhill, New York.

Harahap, K., 2004. Asosiasi Antara Praktik Perataan Laba Dengan Koefisien Respon Laba. Makalah. Simposium Nasional Akuntansi VII. Bali: 1-14.

Hebert, B.M. 2007. Investment: an introduction. Chengage Learning.

Ikatan Akuntan Indonesia. 2004. Standar Akuntansi Keuangan. Salemba Empat, Jakarta

Jaswadi. 2004. Dampak Earnings Reporting Lags terhadap Koefisien Respon Laba. Jurnal Riset Akuntansi Indonesia. Vol 8, No.3 : 295-315

Kam. V. 1990. Accounting Theory. 2th Edition. John Wiley & Sons, Inc. Canada

Kieso, D.E., J.J. Weygandt, dan T.D. Warfield, 2007. Intermediate Accounting. 12th Edition, FASB Update. John Wiley & Sons, Inc

Kormendi, R dan R. Lipe, 1987, “Earnings Innovations, Earnings Persistance, and Stock Return”, Journal of Business 60:323-345.

Lev, dan P. Zarowin. 1999. The Boundaries of Financial Reporting and How To Extend Them. Journal of Accounting Research 37: 353-385.

Mike, W.P. 2008. Global Business. Cengage Learning.

Mulyani, S., N.F. Asyik, and Andayani. 2007.Faktor-faktor yang Mempengaruhi Earnings Response Coefficient pada Perusahaan yang Terdaftar di Bursa Efek Jakarta. JAAI 11, No. 1 : 35-45.

Murwaningsari, E. 2008. Pengujian Simultan: Beberapa Faktor yang mempengaruhi Earnings Response

Coefficient (ERC). Doctoral Thesis. Trisakti University.

Naimah, Z. dan U. Sidharta. 2006. Pengaruh Ukuran Perusahaan, Pertumbuhan, dan Profitabilitas Perusahaan Terhadap Koefisien Respon Laba dan Koefisien Respon Nilai Buku Ekuitas: Studi Pada Perusahaan Manufaktur Di Bursa Efek Jakarta. Makalah. Simposium Nasional Akuntansi 9 Padang. K-AKPM 12: 1-26.

Palupi, M. J. 2006. Analisis Faktor-faktor yang Mempengaruhi Koefisien Respon Laba: Bukti Empiris pada Bursa Efek Jakarta. Jurnal EKUBANK. Vol 3.

Panikkos, P., K. Smyrnios and Sabine, K. 2006. Handbook of Research on Family Business. Edward Elgar Publishing.

Riduwan, A. 2004. Pengaruh Alokasi antar perioda Berdasarkan PSAK No.46 terhadap Koefisien Respon Laba Akuntansi. Journal Simposium Nasional Akuntansi VII. Denpasar.

Riyatno. 2007. Pengaruh Ukuran Kantor Akuntan Oublik terhadap Earnings Response Coefficients. Jurnal Keuangan dan Bisnis 5, No.2 : 148-162.

Ross, S.A., R.W. Westerfield and B.D. Jordan. 2008. Corporate Financial Fundamenta. Eight Edition. McGraw-Hill: America.

Sawyer, M.C. 1985. The economics of Industry and Firm. Routledge.

Scott, William R. 2009. Financial Accounting Theory, fifth edition. Prentice Hall Canada Inc. Scarborough, Ontario.

Sekaran, Uma. (2003). Research Methods for Business: A Skill Building Approach, 4th Ed. New York : John Wiley & Sons.

Steven, T.P. 2006. The Effect of corporate governance on the informativeness of earnings. Journal of Economics and Governance 8:129-152

Susilawati, C.D. 2008. Faktor-faktor penentu ERC. Jurnal Ilmiah Akuntansi 7, No.2 : 146-161.

Teets, W.R. dan C.E. Wasley. 1996. Estimating Earning Response Coefficients: Pooled versus Firm Specific Models. Journal of Accounting and Economics. 21, 279-295

Teoh, S.H., and T.J., Wong. 1993. Perceived Auditor Quality and Earning Response Coefficients. The Accounting Review. 68, April: 346-366

Vishnani, S. and B.K. Shah. 2008. Value Relevance of Published Financial Statement with Special Emphasis on Impact of Cash Flow Reporting. International Research Journal of Finance and Economics. (p: 84-90)

Wallison, P.J. 2006. All the Rage: Will Independent Directors Produce Good Corporate Governance?American Enterprise Institute for Public Policy Research.www.aei.org.

Widarjono. A. 2005. Ekonometrika: Teori dan Aplikasi Untuk Ekonomi dan Bisnis. Penerbit Ekonesia. Fakultas Ekonomi UII. Yograkarta

www.icmd.com

www.idx.com

www.pdbe.feugm.ac.id

ATTACHMENTS

Table 1 Sample Selection Procedure

Sample Criteria Total

1) Company that listed in Indonesia Stock Exchange year 2004

330

2) Non-manufacture companies (127)

3) Company that have no stock trading data continuously from year 2004-2008

(68)

4) Company that have no company profile in year 2008

(3)

Total 132

Source: Processed secondary data

Table 2 Operational Definition and Measurement

No Variable Definition Measurement

1 Earnings Response Coefficient (ERC)

the response of the market toward the earnings information that released by the company

CARit : cumulative

abnormal return company i

in period t

UEit : Unexpected

earnings

β : ERC

εit : Component of error

in the model of company i

in period t

CAR : Cummulative

abnormal return

company i in reseach

period five years

2004-2008

ARit : Abnormal return

company i in year t

UEit : Unexpected

earnings company i in

period (year) t

Eit : Accounting

earnings company i in

period (year ) t

Eit-1 : Accounting

earnings company i in

period (year) before (t-

1)

2 Firm Size (SIZE)

Firm size is the total asset that own by the company which reflects the ability for the company to generate earnings (Susilawati,

2008)

3 Beta Risk (BETA)

Beta coefficient, or beta for short define as the amount systematic risk present in a particular risky asset relative to that in average risky asset (Ross et al., 2008:418)

market model by using CAPM formula

Rit : return of company

i in year t

Rmt : market return in

year t

4 Earnings Persistence (PERS)

Earnings persistence is a measurement that explains the ability of the company to persist the earnings that earn in current period until next period (Jaswadi, 2004).

regression slope of the differences between current earnings and previous earnings (Chandrarin, 2003)

Xit : Earnings of

company i in year t

Xit-1 : Earnings of

company i in year t-1

5 Growth Opportunities (GRTH)

Growth opportunity is the level

market-to-book value ratio

of earnings growth of the company in one period to next period (Jaswadi, 2004)

Equity book value =

total equity/ outstanding

stock

Equity market value =

average closing price x

outstanding stock

6 Capital Structure (LEV)

Capital structure represents the combination of fund for the company to run their business (Ross et al., 2008)

Capital structure in this research is proxied by leverage ratio using the formula of company’s total debt to its total assets of company i in year t (Petra, 2005)

TL= Total liabilities

TA = Total asset

7 Board Composition (BRDC)

Board composition is the mix between insider and outsider board of directors. Inside

percentage of independent directors compare with the total number of directors on the board of company i for year t

director is a member of the boards who is as top executive of the company while outside director is the non-management member of the board (Peng, 2008)

8 Audit Quality (AUDQ)

audit quality is often related to the ability of the auditor to detect material misstatement of the financial statements (competence) and his/her willingness to issue an appropriate audit report based on audit findings (independence)

size of the audit firm whether form big four (B4) or non-big four (NB4) and measured by dummy variable (1,0).

1 : For the company

audited by big four audit

firm

0 : For the company

audited by others audit

firm

Table 3

Statistic Descriptive of Research VariablesVariables Min Max Range Average Median Std.Dev

Earnings Response Coefficient (ERC)

-2.3092 1.1526 3.4618 -0.0411 0.0001 0.3566

Firm Size (SIZE)

21.2205 32.0223 10.8017 27.3944 27.3883 1.8167

Beta Risk (BETA)

0.0412 0.1446 0.1034 0.0847 0.0842 0.0206

Earnings Persistence (PERS)

-3.1238 11.2865 14.4103 0.4746 0.2559 1.4599

Growth Opportunities (GRTH)

-2.6971 1306.161 1308.858 25.1901 0.1028 150.9070

Capital Ratio (LEV)

0 72.73 72.73 1.1805 0.56 6.3163

Board Composition (BRDC)

0 1 1 0.1484 0 0.2688

Audit Quality (AUDQ)

0 1 1 0.3893 0 0.4895

Source: Processed secondary data

Table 4

The Result Test of the Factors that Influence Earnings Response Coefficient

Variable Prediction

Coefficient

Std. Error

t-Statist

ic

Prob.

           Constanta   0.082266 0.1194

770.68855

20.492

6Firm Size (SIZE) + 0.0000238 0.0042

480.00560

60.995

5Beta Risk (BETA) - -0.838593 0.3421

76-

2.450766

0.0159

Earnings Persistence

(PERS)

+ -0.000564 0.013172

-0.12407

3

0.9015

Growth Opportunities

(GRTH)

+ 0.000159 0.000044

3.620689

0.0005

Capital Structure (LEV)

- -0.002287 0.001112

-2.05650

8

0.0422

Board Composition (BRDC)

+ -0.054861 0.029634

-1.85132

2

0.0669

Audit Quality (AUDQ)

+ -0.00577 0.015255

-0.37823

0.706

F-statistic 4.826986         Prob. (F-statistic)

0.000095        

R-squared 0.241714        

Source: Processed secondary data