i

THE EFFECT OF POLITICAL CONNECTION

ON EARNINGS MANAGEMENT

UNDERGRADUATE THESIS

Submitted as Partial Requirement to Complete Undergraduate Thesis

Faculty of Economics and Business

Diponegoro University

Submitted by :

IDHAM IMARSHAN

12030112120014

FACULTY OF ECONOMICS AND BUSINESS

DIPONEGORO UNIVERSITY

SEMARANG

2017

ii

THESIS APPROVAL

Author Name : Idham Imarshan

Student Number : 12030112120014

Faculty/ Department : Economics and Business/ Accounting

Thesis Title : THE EFFECT OF POLITICAL

CONNECTION ON EARNINGS

MANAGEMENT

Supervisor : Agung Juliarto, S.E., M.Si., Akt., Ph.D.

Semarang, February 22nd, 2017

Supervisor,

(Agung Juliarto, S.E., M.Si., Akt., Ph.D.)

NIP. 19730722 200212 1002

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SUBMISSION

Author Name : Idham Imarshan

Student Number : 12030112120014

Faculty/ Department : Economics and Business/ Accounting

Thesis Title : THE EFFECT OF POLITICAL

CONNECTION ON EARNINGS

MANAGEMENT

Has been presented and defended in front of the Board of Reviewers on March 7th,

2017 for fulfilling the requirement to be accepted.

Reviewers Board :

1. Agung Juliarto, S.E., M.Si., Akt., Ph.D. (............................................)

2. Fuad, M.Si., Ph.D. (............................................)

3. Dwi Cahyo Utomo, S.E., M.A., Akt., Ph.D. (............................................)

iv

Declaration of Originality

I, Idham Imarshan, hereby state and declare that this thesis is true and accurate to

be my own work specially written for partial requirement to complete

Undergraduate Program of Accounting and has not initially been presented in any

other occasion. I bear full responsibility for my undergraduate thesis.

Idham Imarshan

February 22nd, 2017

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MOTTO AND DEDICATION

“Man Jadda Wajada – Whoever strives shall succeed”

(Arab Proverb)

“Every great dream begins with a dreamer. Always remember, you have within

you the strength, the patience, and the passion to reach for the stars to change the

world”

(Harriet Tubman)

“Live what you love, love what you live”

(Anonymous)

I dedicate this thesis for:

My beloved mom (Almh.), dad, and ummi

My beloved sister

My family

And all my dear friends

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ACKNOWLEDGEMENT

All praise is due to Allah SWT, Lord of the worlds, this thesis which entitled

“The Effect of Political Connection on Earnings Management” has been finally

presented to fulfill one of the requirements in accomplishing the Bachelor Degree

on Faculty of Economics and Business, Diponegoro University. I would like to

thank the Most Gracious and the Most Merciful, Allah SWT who always gives all

of His best to my life and there is no doubt about it.

I do realize that in accomplishing this thesis, there are many people who

give their help, support, wishes, time, and prayer for me. Therefore, I would gladly

thank to:

1. Dr. Suharnomo, S.E., M.Si., as the Dean of Faculty of Economics and

Business, Diponegoro University.

2. Fuad, Ph.D., as the Head of the Accounting Department, Faculty of

Economics and Business, Diponegoro University.

3. Agung Juliarto, S.E., M.Si., Akt., Ph.D., as my supervisor which constantly

support, guide, and given me all of the knowledge and suggestions.

4. Anis Chariri, S.E., M.Com., Akt., Ph.D., as my academic supervisor which

support and guide me during my study.

5. All the lecturers and staffs in Faculty of Economics and Business,

Diponegoro University who have given all the valuable knowledge and

experiences.

vii

6. My beloved parent, Djoko Kartiko, (Almh.) Endang Irianti, and Yekti

Mahanani, as the biggest and strongest motivation and supporter in my life,

with unconditional love to guide me to be a person as I am. Thank you for

trusting me in every single decision that I made. I love you.

7. My beloved sister, Citta Cendani, who always supports me and understands

me, with warm affection. Thank you for being a sweet sister, I love you.

8. Septian Adi W., Rangga Danang F., and Chyntia Tessa G., as my

extraordinary friends for the entire college life, even before it started, since

we were high school. Thank you for being such a supportive friends and

accepting me whoever I am.

9. Indonesian Cheer Association headquarter and Central Java, Kak Ade,

Amon, A Asa, A Gege, A Guntur, A Dede, Kak Sivli, Mbak Dani, Wiwit,

Pepi, Jenny, Dimas, Enggal, which taught me to never give up on dreams,

and made my college life is beyond academic study. Thank you for being

my second family.

10. Stars Allstar, another big family of mine that taught me to keep struggling

for everything that we wanted.

11. GGC Thunders, especially 02, where I found my passion and my love for

cheerleading, yet gave me a lot of lessons to be responsible and discipline.

12. University of the Ryukyus family, Magdalena, Vita, Ratna, Shely, Kak Egi,

Kylee, Tammy, Kin Ryoma, Mayu, Taro, Manami, Tsugiko, including all

sensei, URSEP and STRP friends, and all of my friends when I was in

Okinawa. Thank you for the greatest one year I ever had in my life!

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13. PPI Okinawa, Mbak Angka, Mbak Kristin, Mas Philip, Mbak Tya, Pak

Idham, Teh Tya, Mas Daniel, Mas Oscar, and all family, thank you for your

guidance and help when I was in Okinawa that taught me to be a better

person.

14. Sheyla Aviolanda, Dea Ananda, Alfi Rosa, Akhkim Kuncorojati, Dika Ardi,

Fadhila Chairunnisa, 9 Naga++, Mas Chris, Koh Nyonyo, Mas Bangun, for

accepting whoever I am and being such supportive and lovely friends. I

couldn’t imagine how I can struggle with everything I had without you!

15. All of my friends and classmates in Accounting batch 2012, thank you for

the memories, togetherness, and being such a supportive friends.

16. KKN Glagahwaru family, Hesti, Ira, Jamal, Momol, Ima, Liza, Marten, Mas

Em, Mbak Dewi, thank you for so much fun we had, yet a lot of lessons

from our family.

17. Les Miserables Wrecked Club, Widya, Namora, Ica, Achyar, Jovita, Imel,

Yunita, Jonas, Rio, thank you for accepting me as an outsider and letting me

share all of my thoughts.

18. Social United, my high school mates, thank you for staying there to support

me and even giving me surprise before I leave to Japan that time.

19. All committee of AIA 2014 and KKL Akundip 2012, especially Danus

Team, thank you for all of the hard work and strong friendship that we had

and giving colors in my college life. Amazing team!

20. All people who have helped me in accomplishing my thesis and bachelor

degree, which I could not mention them one by one.

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I do realize that the writing of this thesis may still have deficiencies caused by

limitations of the writer, both in terms of knowledge, experience, and others. I do

accept criticism and suggestions to overcome the limitations and improve the

quality of the study. Hopefully, this paper is useful and can be used as additional

information for all those in need.

Semarang, February 22nd, 2017

Idham Imarshan

NIM. 12030112120014

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ABSTRACT

This research aims to examine the effect of political connection on earnings

management. In this research, earnings management is measured by using

discretionary accruals. The first model use the value of discretionary accruals as a

measurement of earnings management, while the second model use dummy

variable to observe income-decreasing earnings management behavior.

The population of this research was all companies listed in Indonesian Stock

Exchange (IDX) in the year of 2014-2015. The samples of this research were listed

non-financial company which publishes annual report consecutively from 2014-

2015. Multivariate regression analysis and logistic regression analysis are used to

analyze data.

This research finds that politically-connected companies have a negative

effect on earnings management, indicating that company with political connection

tend to report lower income. However, state-controlled firms have no significant

effect on income-decreasing earnings management behavior. It can be concluded

that politically-connected firms in the form of state control not associated with

income-decreasing behavior.

Keywords: Political connection, earnings management, political connection, state-

controlled firms

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ABSTRAK

Penelitian ini bertujuan untuk menguji pengaruh antara koneksi politik

terhadap manajemen laba. Dalam penelitian ini, manajemen laba diukur

menggunakan discretionary accruals. Model pertama menggunakan nilai dari

discretionary accruals sebagai alat ukur manajemen laba, sedangkan model kedua

menggunakan variabel dummy untuk mengamati perilaku manajemen laba berupa

penurunan laba.

Populasi dalam penelitian ini adalah semua perusahaan yang terdaftar dalam

Bursa Efek Indonesia (BEI) pada tahun 2014-2015. Sampel penelitian yang

digunakan adalah perusahaan non-keuangan yang terdaftar pada bursa efek yang

melaporkan laporan tahunan berturut-turut dari tahun 2014-2015. Analisis yang

digunakan dalam penelitian ini adalah analisis regresi berganda dan analisis regresi

logistik.

Penelitian ini menemukan bahwa perusahaan yang memiliki koneksi politik

berpengaruh negatif terhadap manajamen laba, yang menandakan bahwa

perusahaan dengan koneksi politik cenderung melaporkan laba lebih rendah.

Sedangkan perusahaan yang dikontrol oleh negara atau pemerintah tidak memiliki

pengaruh signifikan terhadap perilaku manajemen laba dengan melaporkan laba

lebih rendah. Dapat disimpulkan bahwa perusahaan yang berkoneksi politik dalam

bentuk kontrol pemerintah atau negara tidak terkait dengan perilaku manajemen

laba berupa penurunan laba.

Kata kunci: Koneksi politik, manajemen laba, koneksi politik, perusahaan yang

dikontrol Negara

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TABLE OF CONTENTS

TITLE PAGE ........................................................................................................... i

THESIS APPROVAL ............................................................................................. ii

SUBMISSION ....................................................................................................... iii

DECLARATION OF ORIGINALITY .................................................................. iv

MOTTO AND DEDICATION ................................................................................ v

ACKNOWLEDGEMENT ..................................................................................... vi

ABSTRACT ............................................................................................................. x

ABSTRAK ............................................................................................................. xi

TABLE OF CONTENTS ...................................................................................... xii

LIST OF TABLES ............................................................................................... xvi

LIST OF FIGURES ............................................................................................ xvii

LIST OF APPENDICES .................................................................................... xviii

CHAPTER I INTRODUCTION

1.1 Background ............................................................................................ 1

1.2 Problem Formulation ............................................................................. 7

1.3 Research Objectives ............................................................................... 8

1.4 Contributions of Study ........................................................................... 8

1.5 Structure of Study .................................................................................. 9

CHAPTER II LITERATURE REVIEW

2.1 Underlying Theories............................................................................. 11

2.1.1 Agency Theory ...................................................................... 11

2.1.2 Earnings Management ........................................................... 12

2.1.3 Positive Accounting Theory .................................................. 15

2.1.4 Political Connection .............................................................. 17

2.1.5 State Ownership .................................................................... 18

2.2 Previous Research ................................................................................ 19

2.3 Theoretical Framework ........................................................................ 23

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2.4 Hypotheses Development..................................................................... 26

2.4.1 The Effect of Political Connection of Firms on Earnings

Management ................................................................................... 26

2.4.2 The Effect of State-Controlled Politically-Connected Firms

on Income-Decreasing Earnings Management .............................. 27

CHAPTER III RESEARCH METHODOLOGY

3.1 Operational Variables Definition and Measurement............................ 30

3.1.1 Earnings Management ........................................................... 30

3.1.2 Political Connection .............................................................. 32

3.1.3 State-Controlled Politically-Connected Firms ...................... 32

3.1.4 Company Size ....................................................................... 33

3.1.5 Company Leverage ............................................................... 33

3.1.6 Return On Assets .................................................................. 33

3.1.7 Audit Quality ......................................................................... 34

3.2 Population and Sample ......................................................................... 34

3.3 Data Source .......................................................................................... 35

3.4 Data Collection Method ....................................................................... 35

3.5 Analysis Method .................................................................................. 36

3.5.1 Descriptive Statistic .............................................................. 36

3.5.2 Classic Assumptions Tests .................................................... 36

3.5.2.1 Normality Test ....................................................... 36

3.5.2.2 Multicollinearity Test ............................................. 37

3.5.2.3 Heteroscedasticity Test .......................................... 38

3.5.2.4 Autocorrelation Test............................................... 38

3.5.3 Multivariate Regression Model Analysis .............................. 39

3.5.4 Logistic Regression Model Analysis .................................... 40

3.5.4.1 Overall Fit Model Test ........................................... 41

3.5.4.2 Goodness of Fit Test .............................................. 41

3.5.4.3 Coefficient of Determination (Nagelkerke’s R

Square) ............................................................................... 42

3.5.4.4 Sensitivity and Specificity Test .............................. 42

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3.5.5 Hypothesis Test ..................................................................... 43

3.5.5.1 F Test ...................................................................... 43

3.5.5.2 Coefficient of Determination ................................. 43

3.5.5.3 Individual Regression Coefficient Test .................. 44

CHAPTER IV RESULTS AND DISCUSSIONS

4.1 Description of Research Objects .......................................................... 45

4.2 Data Analysis ....................................................................................... 47

4.2.1 Descriptive Analysis ............................................................. 47

4.2.2 Classic Assumptions Tests .................................................... 50

4.2.2.1 Normality Test ....................................................... 50

4.2.2.2 Multicollinearity Test ............................................. 53

4.2.2.3 Heteroscedasticity Test .......................................... 53

4.2.2.4 Autocorrelation Test............................................... 54

4.2.3 Multivariate Regression Analysis (Model I) ......................... 55

4.2.3.1 F Test ...................................................................... 55

4.2.3.2 Coefficient of Determination ................................. 56

4.2.3.3 Hypothesis Test of H1 ............................................ 56

4.2.3.4 Control Variables Model I ..................................... 57

4.2.4 Logistic Regression Analysis (Model II) .............................. 58

4.2.4.1 Overall Fit Model Test ........................................... 59

4.2.4.2 Goodness of Fit Test .............................................. 60

4.2.4.3 Coefficient of Determination (Nagelkerke’s R

Square) ............................................................................... 60

4.2.4.4 Sensitivity and Specificity Test .............................. 60

4.2.4.5 Hypothesis Test of H2 ............................................ 61

4.2.4.6 Control Variables Model II .................................... 61

4.3 Discussion ............................................................................................ 62

4.3.1 The Effect of Political Connection of Firms on Earnings

Management ................................................................................... 63

4.3.2 The Effect of State-Controlled Politically-Connected Firms

on Income Decreasing Earnings Management ............................... 65

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CHAPTER V CONCLUSIONS AND SUGGESTIONS

5.1 Conclusions .......................................................................................... 67

5.2 Limitations ........................................................................................... 68

5.3 Suggestions .......................................................................................... 69

REFERENCES ....................................................................................................... 70

APPENDICES ....................................................................................................... 75

xvi

LIST OF TABLES

Table 2.1 Previous Research Summary ................................................................. 21

Table 3.1 Decision Making Guidance of Autocorrelation Test ............................. 39

Table 4.1 Sampling ................................................................................................ 45

Table 4.2 Frequency Distribution .......................................................................... 46

Table 4.3 Descriptive Static Analysis .................................................................... 47

Table 4.4 Frequency Distribution of Politically-connected and Non-politically-

connected Firms .................................................................................................... 49

Table 4.5 Frequency Distribution of State-controlled and Non-state-controlled

Firms ...................................................................................................................... 50

Table 4.6 Kolmogorov-Smirnov Test .................................................................... 51

Table 4.7 Kolmogorov-Smirnov Test after Data Transformation ......................... 52

Table 4.8 Multicollinearity Test ............................................................................. 53

Table 4.9 Heteroscedasticity Test .......................................................................... 54

Table 4.10 Result of Multivariate Regression Summary ....................................... 55

Table 4.11 Result of Logistic Regression Summary .............................................. 58

Table 4.12 Overall Fit Model Test ......................................................................... 59

Table 4.13 Hypothesis Test Summary ................................................................... 63

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LIST OF FIGURES

Figure 2.1 The Research Framework ..................................................................... 25

Figure 4.1 P-P Plot of Normality Test ................................................................... 51

Figure 4.2 P-P Plot of Normality Test after Data Transformation ......................... 52

xviii

LIST OF APPENDICES

APPENDIX A. List of Sample Companies............................................................ 75

APPENDIX B. List of Companies with Political Connection ............................... 84

APPENDIX C. List of Outlier Data ...................................................................... 87

APPENDIX D. Output Result of SPSS ................................................................. 90

1

CHAPTER I

INTRODUCTION

1.1 Background

Tougher business competition nowadays and unpredictable country’s

condition forces management to work more efficient and effective in attempt to

maintain the existence of the company and increase management performance to

achieve an optimum result. Management performance reflected in company’s

financial report. The financial report provides information of company’s financial

condition to fulfill users need, including income information (Kasmir, 2011).

East Asian firms are perceived having low transparency and low reporting

quality. The compliance of international rules of reporting and adoption of

accounting standards are important to improving the region’s quality (World Bank,

1998). Investors remain skeptic about the quality of the reported accounting

numbers, even the adoption of stricter rules may have increased. Moreover,

previous studies show that reporting quality is also influenced by prepares’

reporting incentives (Ball et al., 2003).

Earnings management is also one of the issues in recent accounting studies

since investors have big consideration to earnings amount as a basis for the

important decision. Earnings management defined as the process of management

involvement in determining the amount of earnings which in line with the

desirable goals of management (Wild et al., 2005). Scott (2006) defined some

2

techniques that common for earnings management, such as “Big Bath”, income

smoothing, income maximization or minimization.

Prior literatures show that institutional structures such as securities laws,

tax regime, judicial system, and political economy, along with market forces

create motives that affect the behavior of management, investors, and regulators,

in terms of financial reporting (Ball et al., 2003; Bushman et al., 2004; Gul, 2006).

The motives will form the properties of reported numbers through a complicated

interact of accounting standards, regulation, political pressures, legal, and

discretion conducted by managers (Bushman and Piotroski, 2006).

Positive accounting theory suggests that wealth distribution politics used

by political authorities affect firms’ accounting policies (Watts and Zimmerman,

1986). According to Attia et al. (2016), prior studies such as Daley and Vigeland

(1983) and McKee et al. (1984) provide information that big firms tend to use

accounting choices that able to reduce reported profits or make other disclosures

to reduce the political costs. Likewise, the political costs hypothesis assumes that

firms are manipulating accounting information in order to report lower incomes in

periods of increased political sensitivity (Watts and Zimmerman, 1986).

There are some studies conducted to find the relation between political

connection and earnings management. Sejati (2009) conduct research to find

whether the political connection is systematically associated with the quality of

accruals. Akhoondnejad, et al. (2013) test the effect of political costs on income

smoothing. Braam et al. (2015) investigate whether firms with political

3

connection tend to use accrual-based earnings management than real earnings

management. In addition, Attia et al. (2016) use research model where politically

connected firms which are not controlled by the state are less motivated to engage

in income-decreasing earnings management than others.

Two proxies for political influence are the executive’s political connection

and the state control (Ding et al., 2014). Firms with top managers or shareholders

who have controls are belong to parliaments, government, or a party are

considered as having political connections (Faccio, 2006). Adhikari et al. (2006)

add that direct ownership by the government can be seen as a political connection.

Literature shows that firms with political connection have opportunities to gain a

lot (Faccio, 2010). The second stream of studies reports that government-

controlled firms are less effective and efficient than others firms because they

suffer from a heavy cost due to overstaffing and social actions imposed by the

state (Megginson and Netter, 2001; Dong and Putterman, 2003). Only private

firms with political connection enjoy tax benefits, while on the other hand, state-

owned firms are subject to more over-investment problems (Wu et al., 2012).

They also imply that the value of state-controlled firm’s managers may be

weakened by the government control. Thus, the role of managers that politically

connected in gaining benefits related to government is not very important. Morck

et al. (2000) suggest that the effect of firms’ political connection is more

significant in countries where corruption is high. Indonesia is one of the emerging

countries which has several problems related to economics and finance. Indonesia

ranked 88 in Corruption Perception Index published by Transparency

4

International in 2015, shows that Indonesia is having corruption as a major

problem. Given the heterogeneity of emerging economies, a complete adoption of

several scientific theories to such contexts may be problematic (Wright et al.,

2005). In fact, there are several private companies in Indonesia that have political

connections. Attia et al. (2016) refer that the number of discretionary accruals of

private companies with the political connection is higher than those of other firms.

Similarly, Braam et al. (2015) reported that firms with political connection are

tend to use accrual-based earnings management as substitute to real earnings

management. Ball et al. (2003) imply that political connection have contributed

to the financial reporting quality, which considerably low, in East Asian countries.

Several companies in Indonesia also owned and controlled by state as the

political connection they have. According to Ministry of State Owned Enterprises

website, which the official website of Ministry of State Owned Enterprises,

provides information that there are several listed stock companies that owned by

the government. Attia et al. (2016) explained that state-controlled firm is more

likely to use negative discretionary accruals than other firms. They use

discretionary accruals to decrease earnings due to their high political cost.

Likewise, Xiongyuan and Shan (2013) refer that managers in these firms are

motivated to facilitate government priorities to earn more money and gain more

opportunities for promotion.

A study conducted by Mobarak and Purbasari (2006) provide that firms

which had connection with Soeharto regime enjoy easier import permission rather

than other firms. Literature shows that politically-connected firms, however, are

5

also under high public attention and subject to extensive controls and monitoring

by public than non-politically-connected firms (Chaney et al., 2011). The cost

they face when other political parties or media reveal that a firm sets its earnings

may put aside the advantages from their connections (Faccio, 2006). Therefore,

politically-connected firms can lose their advantages as benefits from their

connections of politic. Moreover, Chen et al. (2010) prove that analyst’s

prediction will be less accurate on politically connected firms.

The main concern of the previous research topics related to political

connection is divided into some opinions. Attia et al. (2016) use political ties to

measure political cost, suitable with Tunisian condition where many large

companies are owned by the head of the state and his relatives. Sotartagam (2013)

conducted research about the effect of political connection on the value of firms,

but not extent to earnings management. There is lack evidence of research relating

political connection and earnings management in Indonesia. Political connection

is used instead of company size that commonly used as a proxy for political costs

in previous research, because it does not usually apply to emerging economies.

(Attia et al., 2016).

Attia et al. (2016) found that the amount of discretionary accruals of

private companies with the political connection is higher than other firms.

Another finding is that state-controlled firms are more likely to use negative

discretionary accruals than other firms. Accordingly, Akhoondnejad et al. (2015)

find a significant relation of political costs and income smoothing. Furthermore,

firms tend to use accrual-based earnings management as substitute strategies when

6

monitoring of public and the risk of detection increase, to manage and cover the

earnings that they gain from the political connections (Faccio, 2006). Political

connection plays an important part in explaining variance in firm’s choice on the

strategies of earnings management (Braam et al., 2015). On the other hand, Sejati

(2009) found that political connection has no relation with accruals quality.

The findings of prior researches may still vary because of some reasons.

First, some studies use cross-country data. A study conducted by Braam et al.,

2015 is using data from 47 countries, comprising 541 firms. The limitation of

cross-country studies is probability of the results driven by certain country.

Second, there are still limited researches use data in past 5 years, as Braam et al.

(2015) stated that there have been some changes in governance and accounting

over period that may moderate firms’ choice for earnings management strategies.

In Indonesia, government and political structure are changed every 5 years. In

addition, started from 2012, Indonesia is adopting IFRS standards, which leads to

some changes in accounting policy and results in firms’ strategies.

By looking on the previous studies, this research is focused on fulfilling

the research gap and provides an empirical study related to political connection

effect on earnings management by conducting the research in Indonesia as one of

emerging country. Fisman (2001) argues that political connection plays an

important role of companies’ profitability in Southeast Asia countries. There is

lack of empirical evidence of research to examine the effect of political

connection on earnings management. The population of this study is companies

listed on Indonesian Stock Exchange (IDX). Indonesia has transparency of

7

monitoring companies by publishing annual report. Companies with political

connections in countries with high level of public monitoring are tend to use

accrual-based as substitute from real earnings management (Braam et al., 2015).

Thus, Indonesian companies listed on IDX are fit to be examined.

This research also examines the relation of state-controlled firms with

negative discretionary accruals as a pattern. According to Attia et al. (2016),

previous research suggests dividing firms with politically connected executives in

two groups: private connected companies and state-controlled firms. State-

controlled firms use discretionary accruals to decrease their earnings due to their

high political cost.

1.2 Problem Formulation

Prior studies about political connection and earnings management have

been carried a lot in several countries, particularly emerging countries such as

Tunisia, Iraq, and Malaysia. Nevertheless, there is still lack of evidence regarding

the study of political cost and earnings management in Indonesia, in addition to

various results of previous studies. Chaney et al., (2011) stated that the political

exposure level is likely to vary across companies because politicians provide

protection to their related companies. Moreover, limited study has investigated

political connection as a proxy of political cost measurement before. Therefore, to

investigate this problem, this thesis will be formulated in following research

questions:

a. Does political connection affect firms to conduct earnings management?

8

b. Are state-controlled politically-connected firms more likely to conduct

income-decreasing earnings management than other firms?

1.3 Research Objectives

The objective of this study is to investigate the effect of political

connection on earnings management in Indonesian companies during 2014-2015.

To give detail explanation, the purpose of this study is explained in these two

objectives, which are:

a. To investigate the effect of political connection on earnings management

conducted by firm.

b. To investigate the likelihood of state-controlled firms to conduct income-

decreasing earnings management.

1.4 Contributions of Study

With the research objectives mentioned above, the results of this study

expected to be useful for a variety of aspects. Those contributions are:

1. For researchers, this research expand the recent studies that shows the

association between political connection and earnings management.

2. For companies, in case of having a political connection, earnings

management is might be easy to detect specific manipulations of

accounting earnings.

3. For investors, as one of the considerations in the decision-making process

regarding investment in politically connected firms.

9

4. For society, the findings of this study is expected to give knowledge in

order to monitor the firm that has a political connection.

1.5 Structure of Study

CHAPTER I: INTRODUCTION

This chapter explains the background, problem formulation, research

objectives, and structure of this research.

CHAPTER II: LITERATURE REVIEW

This chapter consists of theories and concepts underlying this research,

previous studies, and the hypothesis development in order to explain the theory

and concepts.

CHAPTER III: RESEARCH METHODS

This chapter explains the research variables, population and sample, data

source and collection method, and data analysis. This research uses regression

analysis as the approach of quantitative analysis.

CHAPTER IV: RESULT AND ANALYSIS

This chapter consists of the research object, data analysis that consists of

descriptive statistic, classic assumptions test, hypothesis test result, and

discussions.

10

CHAPTER V: CONCLUSION

This chapter explains the conclusion from the analysis result, the

limitation of the study and suggestion for future research.