The Influence of

Earnings Management
and
Information Asymmetry
towards
Cost of Equity Capital
(Case: IDX Property Sector Listed
Period 2008-2011)

Present by:
Candy Gloria
2121 0516

Research Background

Research Probles and Objectives

Research Problem
1. Does earnings management influence
cost of equity capital?
2. Does information asymmetry
influence cost of equity capital?
3. Do earnings management and
information asymmetry influence cost
of equity capital?

Research Objectives
1. Examine and obtain influence of
earnings management towards cost of
equity capital.
2. Examine and obtain influence of
information asymmetry towards cost of
equity capital.
3. Examine and obtain influence of
earnings management and information
asymmetry towards cost of equity
capital.

Research Framework and Hypothesis

Hypothesis

Earnings
Management

Cost of Equity
Capital

Information
Asymmetry

H1

: Earnings management
influences cost of equity capital.

H2

: Information asymmetry
influences cost of equity capital.

H3

: Earnings management and

information asymmetry
influence cost of equity capital.

Research Method

Objects
Property companies listed in IDX
period 2008-2011.

Table 1. Criteria of Sample

Criteria
Companies which listed in property sector

Types and Sources of Data

Data type used is secondary data from
IDX i.e. annual data report of property
companies listed in IDX period 20082011.

Criteria violations:

Total
46

1. Companies which do not publish complete

annual reports during period 2008-2012

22

2. Companies which do not have consistent

profits experience during the period 20082011

10

Methods of Data Collection

Sampling is done by using purposive
sampling method with some criteria.

3. Companies which do not perform earnings

management

4. Companies which have negative book value

of equity

Analysis Method
This research used panel data
regression by fixed effect model (panel
data with dummy)

Property companies which meet the criteria

Property companies which selected randomly

14
8

Research Method

Operational Variable

Independent Variable and

Measurement

Earnings Management
This variable is measured by using
specific accruals model namely working
capital accruals and sales as the deflator
expressed by the equation:

Information Asymmetry
This variable is measured by using
relative bid-ask spreads as the following
equation:
, =

(, , )
(, , )/2

100%

Dependent Variable and

Measurement

Cost of Equity Capital

This variable is measured by using
Ohlson model (1995) which has
been simplified by Utami (2005) as
the following equation:
=

( + +1 )

Results and Discussion

Descriptive Statistics

The maximum value of 1,826276 indicates the highest earnings management of

COWL and the minimum value of -0,997320 indicates the lowest earnings
management of CTRP.
The maximum value of 1,500867 indicates the highest information asymmetry of
CTRS and the minimum value of 0,211180 indicates the lowest information
asymmetry DUTI.
The maximum value of 1,883938 indicates the highest cost of equity capital of
GMTD and the minimum value of -0,548528 indicates the lowest cost of equity
capital of COWL.

Results and Discussion (Cont.)

Simultaneously Testing (F-Test)

In the table above, there is a comparison between 1st model (enter method) and
8th model (backward method) as the fit model. The table shows the F coefficient is
21,780 has a significance level of 0.000.

It means both of the independent variables (earnings management and

information asymmetry) simultaneously have a significant influence to cost of
equity capital at the 5% significance level.

Results and Discussion (Cont.)

Partially Testing (t-Test)

t count value of earnings

management variable is -0.353
with a significance of 0,727 > 0,05.
t count value of information
asymmetry variable is 2,479 with a
significance value of 0.010 < 0,05.
t count value of D4 variable (CTRP)
is equal to 2,460 with a
significance value of 0,020 < 0,05.
t count value of D8 variable
(GMTD) is equal to 4,774 with a
significance value of 0,000 < 0,05.

Y = 0,332X2 + 0,270D4 + 0,548D8 +

Results and Discussion (Cont.)

Hypothesis Testing

The table above shows the value of the adjusted R-square values (coefficient of
determination) is in amount of 0,661.

It indicates that the ability of independent variables in explaining the variance of

the dependent variable is equal to 66,1% and there is still 33,9% variance of
dependent variable which can not be explained by independent variables.

Results and Discussion (Cont.)

Analysis of Fit Model (Summary)
General Model

Fit Model
Sig

EM

-0,039

0,353

0,727

EM

AI

0,366

1,292

0,210

AI

D1 (BAPA)

0,015

0,114

0,910

D2 (COWL)

-0,125

-0,848

D3 (CTRP)

0,259

D4 (CTRS)

Sig

0,322

2,749

0,10

D1 (BAPA)

0,406

D2 (COWL)

1,854

0,077

D3 (CTRP)

0,270

2,460

0,20

0,138

0,957

0,349

D4 (CTRS)

D5 (DILD)

-0,080

-0,493

0,627

D5 (DILD)

D6 (DUTI)

0,088

0,723

0,427

D6 (DUTI)

D7 (GMTD)

0,533

3,340

0,003

D7 (GMTD)

0,548

4,774

0,000

D8 (GPRA)

-0,043

-0,334

0,742

D8 (GPRA)

F Annova

6,510

0,000

F Annova

21,780

0,000

0,865

0,832

R Adjusted

0,633

R Adjusted

0,661

F coefficient is increase from

6,510 with a significance level
of 0,000 to 20,780 with a
significance level of 0.000. This
suggests that the 8th model is
the most fit model .
The value of R changes from
0,865 to 0,832. It indicates
83.2% of the independent
variables can predict the
dependent variable.
The value of R adjusted changes
from 0,633 to 0,661 which
means it has high accuracy in
describing the sample.

Results and Discussion (Cont.)

Hypothesis 1 (X1) earnings management influences cost of equity capital is rejected (significant
value of 0,727 > 0,05).
This is consistent with researches conducted by Regina (2012), Agus Purwanto (2012), and Seny
Selpiani (2013). It indicates that the company's cost of equity capital will not be increase by the
increasing earnings management.

Hypothesis 2 (X2) information asymmetry influences cost of equity capital is received

(significance value of 0,010 < 0,05).
This is consistent with researches conducted by Komalasari (2000), Khomsiyah (2005), and
Adriani (2006). If information asymmetry increases, the market becomes less liquid. The decline
of liquidity and the increase of information asymmetry will lead to higher securities prices so
that cost of equity capital will also increase.

Hypothesis 3 (X3) earnings management and information asymmetry influence cost of equity
capital is received (significance value of 0,000 < 0,05).
When the companies manipulate their accounts and perform earnings management
automatically it causes information asymmetry. So that both of earnings management and
information asymmetry simultaneously will increase cost of equity capital.

Conclusion and Recommendation

Conclusion
1. Based on the results of F test, earnings
management and information asymmetry
influence cost of equity capital simultaneously.
2. Based on the results of t test, earnings
management does not influence cost of equity
capital.
3. Based on the results of t test, information
asymmetry significantly influences cost of
equity capital.

Limitations
1. The number of samples used only eight
property companies listed in Indonesia Stock
Exchange during the period 2008-2011.
2. The independent variables used only two
variables, such as earnings management and
information asymmetry.

Recommendation
1. Use a larger number of samples that are
better able to represent the influence of
independent variables on the dependent
variable.
2. Use other independent variables, such as
voluntary disclosure, financial performance,
and so on.
3. Use Model-Based Aggregate Accrual and
Model-Based Distributin of Earnings After
Management
to
detect
earnings
management.
4. Use an alternative assessment model of other
companies, such as Gordon model and the
CAPM to determine cost of equity capital.