MANAGER’S INCENTIVE AND EARNINGS MANAGEMENT: THE CASE OF INDONESIAN IPO FIRMS

Abstract

This study focuses on the investigation of factors that motivate the Indonesian IPO managers to engage in accrual and earnings management. It particularly examines the influences of close to loss and high leverage conditions on managers’ behaviour towards accrual and real earnings management around the IPOs. Moreover, this study explores the impact of earnings management that is conducted during the IPO on firms’ operating performance within five years after the IPO. Through the combined lenses of legitimacy theory, opportunistic behaviour and monitoring hypothesis, this research portrays the existence of earnings management around the IPOs in Indonesia by using 125 IPO firms administering IPOs between 2000 and 2013 as sample. After controlling for some firm characteristics and corporate governance variables, the findings generally indicate that the IPO firms engage in both income increasing accrual and real earnings management during the IPO. In addition, firms that are close to experience losses engage in both earnings management method prior to the IPO. Moreover, the results show that highly leverage firms are less likely to manage their earnings upward through real earnings management. As a result of earnings management conducted during the IPO, firms’ operating performance deteriorates following the IPO. Aggressive earnings management firms experience worse performance that the conservative ones. This study contribute in explaining factors that may influence earnings management practice in an emerging country.