30 With regards to the various methods to measure discretionary accruals, in this study, it uses Modified Jones Model (1995) model. First of all, the test on modified Jones model or Dechow et al. (1995) model showed that it was statistically significant in relations to the incidence of fraudulent activities, where earnings management will occur (Jones, Krishnan, and Melendrez, 2008). Furthermore, the modified Jones model was said to be the most relevant in the context of Malaysia and Thailand (Selahudin, Zakaria, Sanusi, and Budsaratnagoon, 2014). Given that Indonesian economy quite resembles Malaysia and Thailand where (1) family-controlled firms are prevalent, (2) political connections are common and (3) the three countries are considered as emerging economies, the same line of argument on the appropriateness of the modified Jones model should hold for Indonesia.
31 the authorities. Furthermore, many prior studies were mostly conducted in the developed market setting, such that this study which uses the setting of an emerging market can contribute in terms of whether the impact of multiple directorships is similar across various market setting. Only a few studies have been conducted in similar markets as Indonesia, like in Malaysia and Thailand, thus this study should further enrich the knowledge regarding the multiple directors and their impacts on various business aspects.
Table 2.2
Summary of Previous Studies on Multiple Directorships No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
1 Too Busy to Mind the Business?
Monitoring by directors with Multiple Board
Appointment.
Ferris, S.P., Jagannatahan , M., and Pritchard, A.C, (2003)
The sample are US firms with total asset above
$100 Million
Uses Multiple Directorship as variable
Multiple
Directorship and Board Monitoring did not support the idea of limiting the
number of
directors‘
appointment for any individual director.
2 Board Interlocks and Earnings Management Contagion, Accounting Review, 88(3), 915- 944. Chiu, P.C., Teoh, S.H., and Tian, F.
(2013)
The samples are 118 US firms from 1997 to 2001
Uses Multiple Directorship as variable
Positive
correlation among variables and it is stronger when the interlocked director holds leadership or accounting related position
32 Table 2.2 (continued)
No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
3 Board of Directors and Firms
Performances : the Effect of Multiple Directorships Spanish Journal of Finance and Accounting, 43(2), 177- 92. Iturriaga F.J.L., and Rodriguez, I.M. (2014)
The samples are 311 firm in Spain from 2007 to 2009
Uses Multiple Directorship as variable
Multiple
Directorships and Firm Performance At low level of multiple directorship (below four), the variable correlates positively with firm‘s
performance.
4 Multiple Directorships and
Corporate Performance in Australian Listed Companies.
Kiel, G C., and
Nicholson, G.
J. (2006)
The samples are 1250 Australian firms as of 20 June 2003
Uses Multiple Directorship as variable
Multiple
Directorships and Firm Performance Multiple
directorships did not appear to be related with the firm‘s financial performance.
5 Board External Connectedne ss and Earnings Management.
Shu, P.G., Chu,S.-B., and Yang, Y,-W. (2015)
5940 firm-year observations in Taiwan from 2007-2011
Uses Multiple Directorship as variable
Board External Connectedness and Earnings Management Negative
correlation among variables and it is more significant when the board is connected in the same industry.
33 Table 2.2 (continued)
No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
6 Multiple Directorship, Board
Characteristic s, and Firm Performance in Malaysia.
Latif R.A., Kamardin, H., Mohd, K.N.T (2013)
The samples are 132 Malaysian firms in 2008
Uses Multiple Directorship as variable
Multiple
Directorships and Firm Performance had a positive relation but not significant correlation between multiple directorships and firm‘s market performance.
7 Multiple Directorships and the Monitoring Role of the Board of Directors:
Evidence from Malaysia.
Kamardin, H., Latif, R.A., Mohd, K.N.T (2014)
The samples are 134 Malaysian firms in 2008
Uses Multiple Directorship as variable
Multiple
Directorships and Monitoring Role of Directors No association observed between two variables.
Sources: modified and adopted from Ferris et al. (2003); Chie et al. (2013); Iturriaga and Rodriguez (2014); Kiel and Nicholson (2006); Shu et al. (2015); Latif et al. (2013);
Kamardian et al. (2014) by the author.
Similar situation exists for the study of political connections where it has been explored in various ways with the use of cross-country data. The contribution for this study comes from the fact that it focuses on the individual country in which the role of politics in the business arena is strong.
This is despite the similar variables involved in the investigation which are
34 political connections and earnings management. Table 2.3 summarises prior studies linked to this research.
Table 2.3
Summary of Previous Studies on Political Connections
No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
1 Accrual- Based and Real Earnings Management and Political Connections.
Braam, G., Nandy, M., Weitzel, U., and Lodh, S.
(2015)
The samples are 5493 companies in 30 countries from 1997 to 2001
Uses political connection as variable and uses Accrual based as proxy of earnings management.
P olitical
Connections and Earnings
Management Higher incidence of real earnings management due to substitution from accrual earnings management in politically- connected firms.
2 The impact of Political Connections on Firms‘
Operating Performance and
Financing Decisions.
Boubakri, N., Cosset, J.C., and Saffar, W. (2012)
The samples are 234 business entities in 12 developed and 11 developing countries from
Uses political connection as variable
Political
Connections and Operating Performance as well as Financing Decisions
Positive
correlations among variables, proving the argument that political
3 The Quality of
Accounting Information in Politically Connected Firms.
Chaney, P.K., Faccio, M., -
The samples are 4954 firms in 19 countries from 2001 to 2005 and 4308 firms in 19 countries from 1996 to 2005.
Uses political connection as variable
Political
Connection and Earnings Quality Negative
correlations
between political connections and earnings quality.
35 Table 2.3 (continued)
No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
and Parsley, D. (2011) 4 Politically-
Connected Firms: Are They
Connected to Earnings Opacity?.
Journal of Accounting and
Economics.
Research in Accounting Regulation, 17, 25-38.
Riahi-
Belkaoui, A.
(2004)
The samples are 532 firms from 32 countries.
Uses political connection as variable
Political
Connections and Earnings
Opacity Had a positive correlations between two variables and that political connections drive accounting quality more than accounting rules
5 Political Connections and
Operational Performance of Non- Financial Firms: New Evidence from Poland.
Emerging Markets Review.
Jackowiz, K., Kozlowski, L., and Mielcarz, P . (2014)
The samples are 316 Polandian non-financial companies in 2001-2011
Political
Connections and Firm‘s
Operational Performance Negative correlation between firm‘s performance and profitability
6 Earnings Conservation Perspective:
The samples are 427 Chinese firms from 2004
Political
Connections and Earnings
36 Table 2.3 (continued)
No
Title (Researcher,
year)
Research Methodology
Research Result Differentiation Similarities
Political Connections and Earnings Quality- Evidence from China‘s Private Listed Companies.
Paper presented at the M and D forum Zhaoming, Z., Xinyi, L., and Hong, Y.
(2010)
To 2009 Quality
Politically- connected private listed firms have poorer earnings quality (negative correlations)
Sources: modified and adopted from Braam et al. (2015); Boubakri et al. (2012); Chaney et al. (2011); Riahi-Belkaoui (2004); Jackowicz, Kozłowski, and Mielcarz (2014); Zhaoming et al. (2010) by the author
As the purpose of this research is to find out the relationship between multiple directorships and earnings management and between political connections and earnings management, multiple directorships and political connections are treated as separate independent variables. Previous study found that multiple directorships are related negatively with earnings management (Shu et al., 2015). Also, political connections are related negatively with earnings quality (Chaney et al., 2011; Riahi-Belkaoui, 2004; Zhaoming et al., 2010). Since it is possible that lower earnings quality is due to high incidence of earnings management, the relationship between political connections and
37 earnings management can be investigated as well. The summary of the conceptual framework is visualised below.
Table 2.4
Conceptual Framework