DEBT RATIO, RETURN ON ASSET, FIRM SIZE AND EARNINGS MANAGEMENT: AGE MODERATION

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JAM

J u r n a l A p l i k a s i M a n a j e m e n J o u r n a l o f A p p l i e d M a n a g e m e n t

V o l u m e 2 1 I s s u e 2 J u n e 2 0 2 3

2 1 | 2 | 2 0 2 3

R e c e i v e d J a n u a r y ‘ 2 3

R e v i s e d M a rc h ‘ 2 3

A c c e p t e d M a y ‘ 2 3

DEBT RATIO, RETURN ON ASSET, FIRM SIZE AND EARNINGS MANAGEMENT: AGE

MODERATION

Yuli Soesetio Subagyo Lulu Nurul Istanti

Fadia Zen

Universitas Negeri Malang, Indonesia

Abstract: Earnings management still become a phenomenon both in Indonesia and abroad. Many cases of earnings management practices have occurred and the company's amount of leverage is one of the drivers of earnings management practices. This research aims to examine and describe the relationship between various debt policy, profitability, and company size on earning management moderated by firm age. The selected samples were 102 companies listed on the Indonesia Stock Exchange (IDX) in 2010-2018. The independent variables in this study include DER, bank debt, short-term debt and long-term debt, age, and company size. Earnings management as the dependent variable in this study uses the Modified Jones Model. The results of the regression equation analysis show that all debt policy proxies consistently have a negative and significant effect on earnings management. Furthermore, the company's experience as a proxy for firm age strengthens the relationship between debt policy and earnings management practices. More interestingly, specifically among the three debt policies, bank debt is the policy that is most able to rep- resent the influence on earnings management practices. This indicates that the most effective monitoring of earnings management practices comes from banking institutions. Overall, the profit information shown in financial statements is the product of earnings management, so the level of quality of financial reports is deserving of close inspection and prudence when making decisions based simply on profit information.

Keywords: Earnings Management, Debt to Equity Ratio, Bank Debt, Short Debt, Long Debt, Non-Financial Firms

CITATION

Soesetio, Y., Subagyo, Istanti, L. N., and Zen, F. 2023. Debt Ratio, Return on Asset, Firm Size and Earnings Management: Age Moderation. Jurnal Aplikasi Manajemen, Volume 21, Issue 2, Pages 331–345. Malang: Universitas Brawijaya. DOI: http://dx.doi.org/10.21776/ub.jam.2023.021.02.0 5.

I N D E X E D I N

D O A J - D i r e c t o r y o f O p e n A c c e s s J o u r n a l s

A C I - A S E A N C i t a t i o n I n d e x S I N T A - S c i e n c e a n d T e c h n o l o g y I n d e x

D i m e n s i o n s G o o g l e S c h o l a r R e s e a c h G a t e G a r u d a

I P I - I n d o n e s i a n P u b l i c a t i o n I n d e x

I n d o n e s i a n O N E S e a r c h

C O R R E S P O ND I N G A U T H O R

Y u l i S o e s e t i o

U n i v e r s i t a s N e g e r i M a l a n g , I n d o n e s i a

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OPEN ACCESS

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332 INTRODUCTION

Until now, the practice of earnings management has become one of the phenomena that have received a lot of attention from all parties, both practitioners and academics, related to its activities, including management assessments to capture net income. Managers' practice of earnings management has several motives: better pricing of sto- cks and bonds, tax evasion, bonus compensation of managers, concealment of poor performance, and favorable contracts from suppliers, customers, lenders, and employees. The other motives are avoiding technical default on debt covenants, beating analysts' expectations, avoiding negative earnings, showing better performance than before, and external finance attraction. Another dimensi- on of earnings management is the stress level of managers builds up due to expectations of better performance by stakeholders (Strakova, 2021; Fo- gel-Yaari and Ronen, 2020; Thoharo et al., 2021).

In the early 2000s, an American energy company rocked the world due to accounting manipulation and crimes. Enron and the accounting firm Arthur Andersen were found inflating their financial results. Enron's financial performance in the range of 1998 to 2000 looked outstanding, even though Enron had inflated its revenues to 586 million dol- lars since 1997 (Khotimah, 2021). In Indonesia, cases of earnings management practices were found at PT. Kimia Farma Tbk. in 2002. PT. Ki- mia Farma Tbk made an error in the valuation of finished goods inventory and an error in recording sales for the financial statements for the December 2001 period, which resulted in an overstated net profit of IDR 32.7 billion (which was initially re- ported as a net profit of IDR 132 billion) (Syahrul, 2003). In 2006 PT KAI was also involved in ma- nipulating the financial statements of the previous period, in which the company's financial statements made a profit of IDR 6.9 billion when the company should have lost IDR 63 billion. Hekinus Manao as commissioner of PT KAI stated that there were three errors in PT KAI's financial statements. First, the company's obligation to pay tax assessments for value added tax of IDR 95.2 billion is presented in the financial statements as re- ceivable. Second, there was a decrease in the value of inventories of spare parts and equipment of around Rp. 24 billion which was discovered at the time the inventory was carried out in 2002, recog-

nition as a loss was carried out in stages (amor- tized) by management over 5 years. The third is government assistance whose status has not been determined in the amount of Rp. 674.5 billion and state equity participation of Rp. 70 billion presented in the December 31 2005 balance sheet which is consistent with previous years as part of debt (Sandria, 2021).

Then in 2018, regarding the odd recording of PT. Garuda Indonesia Tbk, which managed to score a net profit of up to Rp. 11.33 billion from previous period, which suffered a loss. Two com- missioners of PT. Garuda Indonesia Tbk, Chairul Tanjung, and Dony Oskaria refused to sign Garu- da's 2018 financial statements (NN, 2018). They disagreed on a cooperation transaction with PT.

Mahata Aero Teknologi, which is recorded as rev- enue by the management because the company has not received payment from PT. Mahata Aero Tek- nologi for the cooperation, but the management still writes it down as income. The large number of earnings management cases makes the study of earnings management still important and relevant.

Studies of earnings management in the non-financial companies have received significant attention from researchers.

Earnings management practices can be carried out in every industrial sector. However, the level of ease of managing earnings in each industry is not the same as one another. One of the most challenging earnings management practices in the banking industry is because apart from the rules in the accounting recording system, it also has to fol- low the ratio standards issued by Bank Indonesia (Fricilia and Lukman, 2015). Therefore, the auth- ors only focus on earnings management practices in non-financial companies.

One of the drivers of earnings management practices is the company's level of leverage. The leverage ratio measures how much a company is financed with debt (Soesetio et al., 2022a). Using too high debt will endanger the company because it will enter the extreme leverage category, in which the company is trapped in a high level of debt, and it is difficult to release the debt burden (Sunardi et al., 2020). Companies with extreme debt levels have weak governance mechanisms that can affect incentives to manage earnings through accruals (Fung and Goodwin, 2013). Many studies have reviewed the effect of leverage on

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earnings management, but still show various results, such as the study by Susanto and Agness (2019), Vakilifard and Mortazavi (2016), Zamri et al. (2013), which found that financial leverage has a negative effect on earnings management. Using debt to total asset ratio as a proxy for leverage, Su- santo and Agness (2019) found that leverage has a negative impact on earnings management. Vakili- fard and Mortazavi (2016) studied the practice of earnings management in firms listed on the Tokyo Stock Exchange (TSE) during 2008-2013. They found that leverage is the main factor of earnings management practices. On the other side, Ghazali et al. (2015) examined the effect of leverage on earnings management in publicly listed companies in Bursa Malaysia covering the period of 2010 to 2012. They found a positive relationship between the leverage and earnings management. In addition, Das et al. (2018), Mahawyahrti and Budiasih (2016), and Octavia (2017) also prove that leverage has a positive effect on earnings management.

Using debt to total asset ratio as a proxy for leverage, Das et al. (2018) found that leverage positively affects earnings management.

Previous studies still show inconsistent results. Therefore, as a novelty, this study aims to analyze the effect of each type of debt, i.e., total debt, bank loans, short-term debt, and long-term debt, on earnings management practices. And how the effect of firm age strengthens or weakens the relationship, so it was expected to obtain more detailed and accurate findings related to debt policies that are the main triggers for managers to make earnings management. In addition, an extended study period was used to provide a more general conclusion of previous studies with a limited period and mixed results. Thus, this research can contribute practically and theoretically to the company's debt management policies and their varie- ties as a basis for management to perform earnings management actions. Meanwhile, public policy- makers can make mutually beneficial regulations between entrepreneurs and the government.

LITERATURE REVIEW Agency Theory

Agency theory studies agency relationships that occur because one or more people (principals) hire another person (agent) to provide a service

and then delegate decision-making authority to the agent (Jensen and Meckling, 1976). Both the principal and the agent have a bargaining position.

Principals, as owners of company capital, have access rights to the internal company information.

Meanwhile, the agent, as the party that operates the company's operations, has real and comprehensive information about the company's operations and performance. However, agents do not have absolute authority in making decisions, especially regarding strategic, long-term, and global decisions. It is because these decisions are still under the principal's authority as the company's owner.

In practice, different positions, functions, interests,andbackgroundswillleadtoinformation asymmetry between principals and agents. When information asymmetry occurs, managers will have more opportunities to take advantage of this information advantage (Andreas and Zarefar, 2022).

In practice, agents may only be concerned with their own interests to increase their utility through earnings management practices because of their self-interest (Firnanti et al., 2019; Said et al., 2017;

Worokinasih et al., 2020).

Asymmetric Information

Asymmetric information is not balanced due to the unequal distribution of information between principals and agents (Bergh et al., 2019).

Managers, who are directly involved in the business activities, have a vital information advantage, whereas shareholders cannot accurately judge managers' choices (Barako et al., 2006; Vitolla et al., 2020). The agent, as the company's manager, kno- ws better about the condition of the company and the company's future prospects than the principal.

In the context of information asymmetry, management can easily act in ways that conflict with the interests of shareholders (Donnelly and Mulcahy, 2008). Management aims to maximize the company's current value, while shareholders are inter- ested in the long-term value of the company (Hea- ly and Palepu, 2001). When information asymmetry is high, stakeholders do not have sufficient re- sources for relevant information. As a result, it be- comes more difficult for principals to monitor and control agents' actions (Mahawyahrti and Budia- sih, 2016).

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334 Figure 1. Conceptual Framework

HYPOTHESIS DEVELOPMENT

Leverage and Earnings Management Practices Banks have a clear advantage over the other lenders in monitoring borrowers to prevent the companies from engaging in opportunistic earnings management behavior (Palumbo and Rosati, 2022). Companies with high leverage ratios make supervision by the company's creditors more strin- gent, reducing management's flexibility to manage earnings. Thus, the higher the leverage ratio, the lower the possibility of management managing earnings (Harahap, 2021) because the management will be more careful in preparing their financial statements (Puspitosari, 2015). However, high debt can benefit the tax debt shield, strengthening earnings management efforts for tax avoidance motives. Companies with extreme debt levels may also have weak governance mechanisms that can affect incentives to manage earnings through accruals (Fung and Goodwin, 2013).

Besides, Ahn and Choi (2009); García-Te- ruel et al. (2014); Palumbo and Rosati (2022) through their paper they found that companies with higher bank debt increased supervision carried out by banks so that earnings management became lower. The debt financing the company's operational activities will generate interest expenses. The greater the company's interest expense, the less the tax burden that the company must pay. Previous studies from Harahap (2021) prove the negative effect of leverage on earnings management.

H1a : Debt to equity ratio affects earnings management.

H1b : Bank debt to equity ratio affects earnings management.

H1c : Short-term debt to equity ratio affects earnings management.

H1d : Long-term debt to equity ratio affects earnings management.

Moderation Role of Firm Age

Generally, companies that are financed mainly by debt have high agency costs. The existence of companies that have been listed for a long time makes it easier to obtain debt from creditors because of their survival in business competition. The age of the company, which is calculated from the length of time the company was founded until the time of this study period, provides an overview of how companies grow, learn, adapt, survive, and develop in the business competition so that it be- comes an essential indicator in making investment decisions (Agustia and Suryani, 2018; Hamzah et al., 2022; Suryani and Khafid, 2021). According to the agency theory view, Jensen and Meckling (1976) explained that older companies have more experience, which will impact reputation and high performance. Lower agency costs because shareholders also can act to supervise managers (Vitolla et al., 2020), and disclosure of information will be complete and comprehensive to reduce information asymmetry (Apriliani and Dewayanto, 2018;

Wallace et al., 1994). Furthermore, companies that have been listed on the stock exchange for a long time have had long and valuable experience in preparing financial statements. Thus, companies will

Firm Age Debt

Earnings Management Return on Asset

Firm Size

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be more careful in financial reporting by making adjustments to various accounting policies and re- gulators to minimize earnings management practices so that their reputation and good image in the market are maintained (Akhtaruddin, 2005; Alsa- eed, 2006; Bassiouny, 2016).

H2a : Debt to equity ratio affects earnings management and firm age as a moderating variable.

H2b : Bank debt affects earnings management and firm age as a moderating variable.

H2c : Short-term debt affects earnings management and firm age as a moderating variable.

H2d : Long-term debt affects earnings management and firm age as a moderating variable.

Return on Assets and Earnings Management Practices

Return on assets shows how much net profit can be created from the total assets owned (Soese- tio et al., 2022b). Companies with high profits will increase the taxes that must be paid. Therefore, companies tend to manage earnings with income minimization (Purnama, 2017) to reduce the tax that must be paid to the state (Puspitosari, 2015).

In addition, managers more effectively carry out earnings management when company profits are higher. The higher the level of company profitability, the more likely the company will experience a decline in profitability in the future, causing the company'sincometobecomeunstable.Asaresult, the greater the company's profitability, the greater the company's earnings management practices to maintain consistency in the company decision- making (Purnama and Nurdiniah, 2019). Ulya and Khairunnisa (2015) concluded that profitability positively impacts the earnings management. The study by Firnanti et al. (2019), Harahap (2021), and Puspitosari (2015) found that return on assets (ROA) has a positive effect on earnings management.

H3 : Profitability affects earnings management.

Firm Size and Earnings Management Practices Large companies have a reputation for pro- tecting people, so companies are aware of the rules they must comply with. Therefore, large companies tend to be more careful in their financial reporting. Based on the information asymmetry the-

ory, Bassiouny (2016); Meek et al. (2007) argued that large companies have lower information asymmetry because they have strong governance and control, which results in reduced earnings management practices. As Ahmad et al. (2014); Kim et al. (2003) explain, several reasons support a negative relationship between firm size and earnings management. Larger companies may have stronger internal control systems and more competent internal auditors than smaller companies. Therefore, an effective internal control system can produce reliable financial information for the public, reducing management's ability to manipulate earnings (Bassiouny, 2016; Firnanti et al., 2019). Large companies are also usually audited by one of the big four audit firms, which helps prevent earnings manipulation due to efficient and effective audits.

A study by Ahmad et al. (2014) proved that firm size has a negative and significant effect of earnings management.

H4 : Firm size affects earnings management.

METHOD

This study is quantitative because it refers to numerical data in numbers. This study is also included in the causal relationship (causal), which explains the relationship influencing two or more variables. The samples used in this study were 102 non-financial companies listed on the Indonesia Stock Exchange for 2010-2018. The sample in this study was selected using a purposive sampling method. The sample selection criteria are (1) non- financial companies listed on the Indonesia Stock Exchange in 2010-2018; (2) the company presents annual financial reports consistently during the study period, that is, 2010-2018, and uses IDR as a currency; (3) non-financial companies that pre- sent data that supports the variables used, i.e., bank debt, short-term debt, and long-term debt.

The dependent variable in this study is earnings management which is proxied by discretionary accruals using the Modified Jones Model. Ac- cording to Dechow et al. (1995), this model is better than the standard Jones model in measuring earnings management cases, while the total debt ratio, bank debt ratio, short debt ratio, and long debt ratio were used as independent variables. Me- asurements of each variable are detailed and presented in Table 1.

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336 Table 1. Variable Operational Definitions

Variables Symbol Description Measurement Dependent variable

Earnings Man-

agement EM

Measure accrual discretion or find out the in- tervention of information in financial statements

TACit = NIit - CFOit

TACit / TAit-1 = α1 (1 / TAit-1) + β1i ((∆ REVit / ∆ TAit-1) + β2i (PPEit / TAit-1) + ε

NDTACit = α1 (1 / TAit-1) + β1i ((∆ REVit / ∆ RECit) / TAit-1) + β2i (PPEit / TAit-1) + ε DTACit = (TACit / TACit-1) - NDTACit

Where:

TACCit = Total Accrual i in year t TAit-1 = Total Assets i in year t-1

∆REVit = Change in net income of firm i between year t and year t-1

∆RECit = Change in the receivables of the company i between year t and year t-1

PPEit = The acquisition value of fixed assets at the company i in year t

ε = Error term

The Ordinary Least Square (OLS) method esti- mated the total accrual equation. Estimates of α, β1, and β2 were obtained from the OLS regression and used to calculate the Non-Discretionary Ac- crual.

Independent variables

Debt to Equity

Ratio DER

Measures how much debt is secured by a company's equity

Total debt Total equity Bank Debt to

Equity Ratio BDEBT

Measures how much bank debt is secured by a company's equity

Bank debt Total equity Short Debt to

Equity Ratio SDEBT

Measures how much short debt is secured by a company's equity

Short debt Total equity Long Debt to

Equity Ratio LDEBT

Measures how much long debt is secured by a company's equity

Long debt Total equity Firm Age AGE Measures how long the

company established

Ln (year of the study period - the year the company was established)

Firm Size SIZE

Measures the size of the company through the total assets owned

Natural logarithm of total asset Source: Processed Data (2023)

Multiple stepwise regression and pure moderated regression analysis were used as analytical

tools to answer hypotheses. The regression model used:

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𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐷𝐸𝑅_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+ 𝜀_𝑖,𝑡 (1) 𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐵𝐷𝐸𝐵𝑇_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+

𝜀_𝑖,𝑡 (2)

𝐸𝑀𝑖,𝑡= 𝛼𝑖,𝑡+ 𝑆𝐷𝐸𝐵𝑇𝑖,𝑡+ 𝑅𝑂𝐴𝑖,𝑡+ 𝑆𝐼𝑍𝐸𝑖,𝑡+

𝜀_𝑖,𝑡 (3)

𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐿𝐷𝐸𝐵𝑇_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+

𝜀_𝑖,𝑡 (4)

𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐷𝐸𝑅_𝑖,𝑡+ 𝐷𝐸𝑅 ∗ 𝐴𝐺𝐸_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+ 𝜀_𝑖,𝑡 (5) 𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐵𝐷𝐸𝐵𝑇_𝑖,𝑡+ 𝐵𝐷𝐸𝐵𝑇 ∗ 𝐴𝐺𝐸_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+ 𝜀_𝑖,𝑡 (6) 𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝑆𝐷𝐸𝐵𝑇_𝑖,𝑡+ 𝑆𝐷𝐸𝐵𝑇 ∗ 𝐴𝐺𝐸_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+ 𝜀_𝑖,𝑡 (7) 𝐸𝑀_𝑖,𝑡= 𝛼_𝑖,𝑡+ 𝐿𝐷𝐸𝐵𝑇_𝑖,𝑡+ 𝐿𝐷𝐸𝐵𝑇 ∗ 𝐴𝐺𝐸_𝑖,𝑡+ 𝑅𝑂𝐴_𝑖,𝑡+ 𝑆𝐼𝑍𝐸_𝑖,𝑡+ 𝜀_𝑖,𝑡 (8)

RESULTS

Descriptive Statistics

Based on the results of output table 2, which has passed all the classic assumption tests, it can be concluded as follows. The average value of the earningsmanagement(EM)variableis0.05,which means that the EM of non-financial companies in this period tends to be small. Still, the minimum value of the EM variable is - 1.26, owned by PT Indospring Tbk in 2010. The negative EM value illustrates that PT Indospring Tbk carried out the most extreme income depreciation in 2010. The maximum value of EM is 1.72, which was owned by PT First Media Tbk in 2014. EM value illustrates that PT First Media Tbk carried out the most

extreme income maximization in 2014. The minimum value of the variable debt-to-equity ratio (DER) is 0.04, and the maximum value is 9.36, with an average value of 1.37, which means a non- financial company listed on the IDX as having 1.37 times more debt than equity.

The minimum value of the variable bank debt to equity ratio (BDEBT) is 0.001, and the maximum value is 7.89, with an average value of 0.62, which means that bank debt fulfills 62 percent of the company's equity. The minimum value of the short debt to equity ratio (SDEBT) variable is 0.003, and the maximum value is 8.45, with an average value of 0.53, which means that short- term debt benefits 53 percent of the company's equity. The extended variable debt to equity ratio (LDEBT) minimum value is 0.003. The maximum value is 2.13 with an average value of 0.22, which means that the company's long-term debt is the company's last choice to fund the company because it has the lowest value of 22 percent compared to other types of debt. It explains that companies rely more on debt as a medium to obtain financing than financing from within the company. In addition, funding for non-financial companies in this period mainly came from bank loans.

The minimum return on assets (ROA) variable is - 1.19, and the maximum value is 10.89, with an average value of 0.07. The minimum value of the company's natural age logarithmic variable (AGE) is 1.10, and the maximum value is 4.90, with an average of 3.45. The minimum value of the company size variable (SIZE) is 17.20, and the maximum is 26.05, with an average value of 21.76.

Table 2. Descriptive Statistics

Variable Obs Mean Std. dev. Min Max

EM 918 0.0458 0.1187 -1.2559 1.7209

DER 918 1.3651 1.1229 0.0410 9.3569

BDEBT 918 0.6242 0.6643 0.0013 7.8922

SDEBT 918 0.5318 0.6509 0.0029 8.4495

LDEBT 918 0.2180 0.2398 0.0033 2.1258

ROA 918 0.0727 0.4127 -1.1857 10.8897

AGE 918 3.4546 0.4704 1.0986 4.8978

SIZE 918 21.7603 1.6575 17.1982 26.0521

Source: Processed Data (2023)

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338 Table 3. Regression Output

(1) (2) (3) (4) (1) (2) (3) (4)

Variables EM EM EM EM EM EM EM EM

DER -0.010*** -0.054***

(0.003) (0.009)

DERAGE 0.013***

(0.003)

BDEBT -0.013*** -0.090***

(0.004) (0.016)

BDEBTAGE 0.024***

(0.005)

SDEBT -0.012*** -0.121***

(0.004) (0.024)

SDEBTAGE 0.031***

(0.007)

LDEBT -0.021* -0.193***

(0.012) (0.058)

LDEBTAGE 0.056***

(0.018) ROA 0.035*** 0.036*** 0.037*** 0.036*** 0.037*** 0.039*** 0.039*** 0.036***

(0.011) (0.011) (0.012) (0.012) (0.011) (0.012) (0.012) (0.012)

SIZE 0.003* 0.003* 0.003** 0.003** 0.002 0.002 0.003** 0.002

(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) Constant -0.011 -0.013 -0.029 -0.029 -0.002 -0.006 -0.021 -0.001 (0.034) (0.034) (0.034) (0.034) (0.033) (0.034) (0.034) (0.034)

R-squared 0.036 0.029 0.027 0.020 0.058 0.046 0.047 0.029

Source: Processed Data (2023)

Leverage and Earnings Management

Table 3 showed that the leverage variable used with several proxies and regression equa- tions, i.e., total debt, bank debt, short debt, and long debt, consistently negatively affects earnings management with a probability ≤ 0.1. Thus, a high-leverage policy minimizes earnings management practices.

Moderation Role of Firm Age

The parametric coefficient test for each proxy between leverage*age and earnings manage-

ment consistently has a significant positive effect on earnings management with a probability of ≤ 0.01. Thus, the firm age strengthens the leverage relationship (i.e., total debt, bank debt, short debt, and long debt) to the earnings management practices.

Return on Assets and Earnings Management Financial performance proxied by return on assets has a probability ≤ 0.01 and positive, which indicates a significant positive effect on company profitability on earnings management.

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Company Size and Earnings Management Firm size has a positive, although not consistently significant, effect on earnings management with a probability of ≤ 0.1. Thus, large company size encourages companies to practice earnings management.

DISCUSSION

Leverage and Earnings Management

Based on the regression results in Table 3, leverage using total debt, bank debt, short debt, and long debt proxies consistently has a negative and significant effect on earnings management. It means the higher the leverage (i.e., total debt, bank debt, short debt, long debt), then earnings management is getting lower. These results also prove that bank debt is the most influential debt policy on earnings management practices. It happens because the debt to finance the company's operational activities will cause interest expenses to be used as a debt tax shield (Ahmad et al., 2017; Kovacova et al., 2022; Lei, 2020; Soesetio et al., 2022a). Thus, when a company has high debt, it encourages using the income minimization method for tax re- duction because a high debt policy biases the alibi of being low profits. However, these efforts are still limited by policies that do not violate the debt covenants agreed upon with creditors so that the supervision carried out by creditors is maintained (Wijaya and Christiawan, 2014). Companies with extreme levels of the debt have weak governance, which can affect the management incentives when they manage earnings through accruals to perform earnings management (Fung and Goodwin, 2013).

These profit management efforts always end in the value of the benefits, especially to managers in the form of bonus compensation motives and work contracts as well as shareholders in the form of dividend earning motives.

The results of this study support the previous results by Susanto and Agness (2019), who found that leverage has a significant negative effect on earnings management. They mention two reasons for the negative relationship between leverage and earnings management. The first reason is that leverage requires debt repayment, which re- duces the cash available for non-optimal spending.

The second reason is that companies that use debt financing are often subject to spending restrictions by the lender. Another result from Zamri et al.

(2013) found that leverage significantly negatively affects earnings management. It is consistent with the argument that leverage is one of the con- trolling and monitoring systems used to reduce earnings management actions.

The Moderation Role of Firm Age

Firm age consistently strengthens the relationship between various leverage proxies on earnings management. Using the long-standing listing on the stock exchange has proven to strengthen earnings management practices through leverage policies. Earnings management practices that are influenced by debt policy through increasing the level of debt are the policy choices for companies that have long been established and listed on the stock exchange. Managers always do it to achieve motives to improve the welfare of managers and or shareholders. Sulistiawan et al. (2011) explained debt motivation where managers must show good performance from their companies so that creditorswanttoinvesttheirfundsinthecompany.

In addition, family companies in Indonesia domi- nate long-established companies (Muntahanah et al., 2021; Widagdo et al., 2021). It can be concluded that long-established companies are less involved in EM than their newly established coun- terparts. It is because long-established companies are family companies that avoid risk manipulation activities such as EM to maintain their company as a family legacy (Hamzah et al., 2022). There- fore, experience and survival power in the business competition, proxied by the company's age, strengthens the use of debt policies on earnings management practices. Studies from Agustia and Suryani (2018); Debnath (2017); Khanh and Khu- ong (2018); Susanto et al. (2019) show a significant effect of firm age on earnings management.

Whether or not a company has existed for a long time is a strong indication of using a company's debt policy to practice earnings management.

Return on Assets and Earnings Management Return on assets (ROA) has a positive and significant effect on the earnings management. It shows that the higher the ROA, the higher the ten- dency of company to practice maximizing earnings management and vice versa. Earnings management practices strongly influence the presenta- tion of earnings information, so users must be

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340 more careful in interpreting profit figures (Azizah

et al., 2019; Jao and Pagalung, 2011). At the same time, companies with high profits encourage management to manage earnings by maximizing income because it will be more attractive to shareholders and potential investors. Therefore, companies tend to carry out earnings management with income maximization to show that the profits gen- erated by the company have increased (Hidayah and Subowo, 2019; Partha et al., 2019). However, when companies with too high profits will raise the taxes that must be paid. Therefore, companies manage earnings by income minimization (Pur- nama, 2017) to reduce the tax that must be paid to the state (Puspitosari, 2015). In addition, managers more effectively carry out earnings management when company profits are higher. The higher the level of company profitability, the more likely the company will experience a decline in profitability in the future that cause the company's income to become unstable. As a result, the greater the company's profitability, the greater the practice of earnings management (income smoothing) to maintain consistency in the company decision- making (Purnama and Nurdiniah, 2019). The earnings management technique chosen will depend on the management's motives (Ghazali et al., 2015). Studies from Firnanti et al. (2019), Harahap (2021), and Puspitosari (2015) found that ROA has a significant positive effect on earnings management.

Company Size and Earnings Management Surprisingly result, company size has a positive effect on earnings management. Larger companies have internal control systems that tend to be stronger and more competent internal auditors than smaller companies which can reduce management's ability to manipulate earnings (Bassiou- ny, 2016; Firnanti et al., 2019). Large companies are also usually audited by one of the big four audit firms, which helps prevent profit manipulation due to efficient and effective audits.

However, large companies are also considered to have more power than small companies, thus encouraging earnings management practices.

Just like the phrase conveyed by Lord Acton that connects "corruption" with "power," that is, "power tends to corrupt, and absolute power corrupts absolutely" (Venter, 2015). That is, power is a part

that is very vulnerable to corruption. Indirectly this implies that power can be used as a tool that can make it easier for the holder to turn into a cor- ruptor. In addition, based on the size hypothesis presented by Watts and Zimmerman (1986) states that larger companies will be more sensitive to po- litical policy actions. Thus, large companies are suspected to be more aggressive in carrying out earnings management actions.

These results support previous studies from Barton and Simko (2002), which showed that the company size positively affects earnings management because large companies have a lot of pressure to meet analyst expectations. Another reason is that large companies have a greater bargaining position with auditors. They can bargain with auditors to reduce audit effectiveness and efficiency.

This result is also supported by Ali et al. (2015), who found that company size has a significant positive effect on earnings management because large companies face more pressure from investors and financial analysts to show positive earnings or increase earnings. However, this result is in con- trast to studies from Mahawyahrti and Budiasih (2016); Perwitasari (2014), which stated that company size has a significant negative effect on earnings management, this is because large companies will be viewed more critically by shareholders and outsiders. Therefore, in reporting financial statements, managers will act more carefully.

IMPLICATIONS

These results mainly support the motive of tax avoidance by companies, especially by large- scale companies, for the benefit of managers' and shareholders' welfare. Furthermore, the allocation of results from earnings management by the company is transferred to bonuses and dividends. Ho- wever, these findings also prove that the profit information presented in the financial statements results from earnings management, so the quality of financial reports is very worthy of scrutiny and caution in making decisions that rely solely on profit information.

RECOMMENDATIONS

As a policy maker, the government must es- tablish a standard and progressive mechanism for earnings management practices by companies, public accountants, and tax officials that are detri-

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mental to the state. For example, a government regulation provides a legal umbrella in the form of the authority of tax officers to investigate allega- tions of abnormal profit reporting. In addition, en- forcing civil and criminal penalties will deter the perpetrators of earnings management practices that are detrimental to the state. Furthermore, it is highly recommended for further research using a more dynamic and challenging model to investigate through in-depth interviews to uncover earnings management practices. In addition, a more specific separation of industrial sectors to obtain more interesting findings about earnings management practices. The sample in this study is limited to the non-financial sector. In addition, the limited regression method only uses the common effect model.

CONCLUSIONS

This study obtains empirical evidence of the negative effect of leverage and its various policies (i.e., total debt, bank debt, short debt, and long debt) on earnings management practices where the company's age strengthens the relationship. In addition, profitability information proxied by ROA and company characteristics in the company size also significantly influence earnings management.

Both support the motives of earnings management practices: bonus compensation, dividends, and tax avoidance. Large companies have more complex operational activities compared to small companies. Large companies also have higher agency costs than small ones. In addition, large companies are also considered to be in the spotlight and have power compared to small companies, thus trigger- ing earnings management practices.

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