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Efficient Contracting Theory and Sources of Efficient Contracting Demand for Financial Accounting Information in Pandemic Covid-19
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Viola Syukrina E Janrosl 1, Argo Putra Prima 2*, Iskandar Muda 3
1,2* Universitas Putera Batam, Indonesia.
3 Universitas Sumatera Utara, Medan, Indonesia.
1 [email protected], 2* [email protected], 3 [email protected]
Article Info
Page Number: 926-933 Publication Issue:
Vol. 71 No. 3s (2022)
Article History
Article Received: 22 April 2022 Revised: 10 May 2022
Accepted: 15 June 2022 Publication: 19 July 2022
Abstract
The spread of Covid-19 affects the economic stability of a country. This economic stability also has an impact on corporate governance. To strengthen corporate governance, contracts must be made as efficient as possible. This is because efficient contracts are known to be very important in good corporate governance. This paper aims to discuss the theory of efficient contracts and the sources of demand for efficient contracts for companies in the Covid-19 Pandemic Era. The method used in this paper uses a qualitative approach whose data sources are obtained online. The results of this study are expected to provide information as a reference for companies, investors, and stakeholders who anticipate future pandemics.
Keywords: Efficient contracting theory, efficient contracting demand, financial accounting information.
1. Introduction
The outbreak of the Covid-19 virus that has hit the world since February 2020 has made the international economic and business order uncertain. Almost every country has experienced a recession with weakening international trade and business activities. In international stock markets, stock trading also slowed as market participants tried to curb the international economy and economic uncertainty. After the purchasing power of the global economy declined from March 2020 to the end of 2021. This decline was the worst outbreak of an extraordinary pandemic in 100 years, In modern business, the only constant change. Since World War II, no event has had as significant a planetary impact as the coronavirus pandemic, with its short- and long-term implications for any company. For more and more
"virtual" employees, the social aspect of their work engagement is no longer there, it's increasingly being replaced by telephone and video calls. Therefore, it is important to establish new organizational norms and rules, which will meet the individual needs of each company, and to establish efficient management governance practices for the future, through the development of new ideas and their market implementation, which will be positive affect productivity and market competitiveness. Changes in the context of education, work, movement, associations, behavior, spending free time, living with family, spouse, and others that have drastically changed, of course, have affected almost the entire population both in the world and in our region (Muda et al., 2019). By making a business strategy, even the
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largest companies in the world cannot imagine that one day they will be faced with a pandemic, which with such great potential will be able to jeopardize the continuity of their business. The pandemic marked the year before and completely changed the world, and many experts have already launched predictions about how the world will permanently change (Ristic, Damnjanovic, & Jankovic, 2021). Almost all countries affected by Covid 19, experienced an economic downturn accompanied by power buying people declining. The implementation of the lockdown policy or restrictions on the activities of the domestic and international community is considered to be one of the factors that are quite influential in increasing the weakening of the global economy. In the field of air transportation, many international airlines suffer losses and are unable to survive due to the high operational costs that must be borne, while airline users who use air transportation services to travel both domestically and internationally have decreased sharply (Ibrahim, 2021). On the other hand, the minority abstained calling for caution, pointing out that the causes of the crisis were not structural and, as such, they could not even lead to structural change. In addition to uncertainty related to ignorance of the future movement of the coronavirus pandemic, which makes it difficult to assess the future environment in which the company will conduct its activities and economic trends, uncertainty also refers to ignorance of the impact that exogenous shock factors will have on business activities. Globalization has influenced the threat level of the spread of infectious diseases, both new and known, to obtain entirely new quantitative determinants (Ristic et al., 2021). Callegari & Feder (2022) reviewed the current knowledge of the effects of pandemics on long-term economic development, covering both economic and historical debates. All economic inputs are potentially affected. The pandemic reduces labor and human capital and has mixed effects on investment and savings, but has the potential to have positive consequences for innovation and knowledge development, depending on the institutional changes that accompany it. In the absence of innovative responses supporting income redistribution, pandemics are likely to increase income inequality, exacerbate poverty traps and highlight distributional problems built into insurance-based health insurance systems (Callegari & Feder, 2022). This is a challenge for companies to survive most efficiently.
This paper aims to examine the role of financial accounting information in Efficient Contracting Theory and Sources of Efficient Contracting Demand in the Pandemic Covid-19 Era. This article is organized as follows. The first part discusses the Efficient Contracting Theory and Sources of Efficient Contracting Demand. This section is followed by a brief overview of the initial research based on Efficient Contracting and Sources of Efficient Contracting Demand. The fourth section presents empirical evidence related to Efficient Contracting Theory and Sources of Efficient Contracting Demand and is followed by a discussion of some important points to be studied. The final part of this paper contains conclusions.
2. Literature Review
2.1. Efficient Contracting Theory
Efficient contract theory is the study of how people and organizations build and develop legal agreements efficiently. It analyses how parties with conflicting interests construct formal and
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informal contracts, even leases. Contract theory refers to the behavioral principles of finance and economics as different parties have different incentives to perform or not to perform certain actions (Hensher, Ho, & Knowles, 2016). Efficient contracts are an important part of alignment by using corporate governance as policies that align company activities with the interests of investors and society. To make corporate governance better, contracts must be efficient. In this case, the company must achieve an optimal trade-off between benefits and costs to balance the contractor. The efficient contracting theory explains the details of the contract structure, including the terms of the loan contract, compensation arrangements, and accounting methods in the context of the contract. An important point in the efficient hypothesis (value maximization hypothesis) is that the choice of accounting method affects internal decision making and internal control. An efficient (optimal) way can be in the form of increasing profits or decreasing profits.
Accounting is used for probability estimation in decision-making and incentive alignment in inefficient contracts. These two different accounting functions are aligned with the two types of accounting theory. Positive accounting theory is more related to the issue of incentives.
Through normative accounting theory, Accounting Information allows stakeholders to assess future cash flows and know what decisions they have to make (Nguyen, Luu, Nguyen, &
Ziyi, 2021). On the other hand, positive accounting theory shows what happened, helping stakeholders understand and predict the outcome of the accounting process for stewardship issues. For the capital market, accounting helps reduce the effects of adverse selection and moral hazards (Li, 2019). Therefore, Accounting Information protects the capital market from information asymmetry by providing reliable and relevant information about future performance regardless of why it happened and how much organizational effort is required to achieve it (Li, 2019).
2.2. Sources of Efficient Contracting Demand 1) Lenders
Lenders are individuals or organizations of local and foreign legal entities that meet the qualifications in providing funds to be loaned through financial service providers. Trust is desirable to maximize benefits and eliminate potential costs in contracts, where the lender- company or shareholder-manager is involved with varying degrees of information control.
Financial accounting, therefore, is needed to reduce moral hazard, where the performance of managers cannot be observed, and to avoid agency problems, where managers are inherently self-interested rather than protecting shareholder or creditor values (Nguyen et al., 2021). The trade-off between reliability and relevance exists due to the demands of different stakeholders. Shareholders are always looking for valuation methods that help them assess the current stock price. Debt holders, on the other hand, prefer verifiable accounting numbers that warn and protect their interests. Historical cost, although it may not be relevant to fair value, is more reliable. As a result, the fundamental problems of financial accounting occur, searching for the best concepts and standards to inform investors and evaluate managers' performance. Lenders face payment asymmetry. They can suffer heavy losses if the company's performance is poor, but do not directly share the profits if the company does well. As a result, they demand early warning about financial difficulties.
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2) Shareholders
The increase in efficient contract sources on the demand for accounting policies is also obtained from shareholders to protect themselves from exploitation by managers to a certain extent, exploitation is controlled by basing manager compensation on several managers' performance measures, such as net income (Santoso, 2020). It also emphasizes the role of financial statements in helping prevent managers from overstating information during the year, which could result in stock overvaluing by the market.
Firm value is an investor's perception of a company's level of success, usually in relation to its share price. High and low stock prices affect the value of a company. The higher the stock price, the higher the value of the company from the point of view of investors and the higher the confidence of investors to invest in the company. Measurement of the firm's value ratio can be done with various indicators, such as PER, EPS, PBV, stock returns, prices, expected returns, and abnormal returns. Price Earning Ratio (PER) measures how investors evaluate the company's growth prospects in the future and is reflected in the share price investors are willing to pay per Rupiah of the company's income. The higher this ratio, the better investors are for the company's future development, and therefore investors are willing to pay a higher price to acquire certain shares (Sudana, 2011).
3. Method
This study uses a quantitative approach by collecting data from various sources that can be accessed online. This qualitative study was conducted to analyze the role of efficient contract theory and the source of efficient contract demand for financial accounting information during the covid-19 pandemic. This paper also describes the overall actions taken by the company and the results of a review of articles related to efficient contracts.
4. Result and Discussion 4.1. Result
The impact of the Covid-19 virus outbreak that has hit the world has made the international economic and business order worse, including in Indonesia. The following is data collected based on sources accessed online.
a. Composite Stock Price Index in Pandemic Covid-19 Era
Based on a report from the Indonesia Stock Exchange in December 2019 – December 2020, the following graphic image of the Composite Stock Price Index and Stock Trading Volume was obtained:
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Fig. 1; Composite Stock Price Index and Stock Trading Volume by BEI
Based on Figure 1, shows that there was a very significant decline in the range of March 2020. The value of the composite stock price index in March decreased to 3,937,632 (occurred on March 24, 2020) and closed at 4,538,930 (March 31, 2020). Meanwhile, trading volume has decreased since early December 2019 and experienced sideways until April 2020 (BEI, 2020). Throughout the global economy, travel and tourism are among the sectors most impacted by the COVID pandemic. (Sun, Li, Lenzen, Malik, & Pomponi, 2022). Meanwhile, pharmaceutical companies experienced an increase in sales during the pandemic (Prasetya, 2021).
b. The Effect of the Covid Pandemic on the Transportation Services Sector
During the pandemic, it had an impact on several corporate sectors in Indonesia, one of which was the transportation sector. The government's suggestion to limit travel and the occurrence of regional lockdowns has reduced performance in the transportation sector. This causes the transportation sector to have a negative impact as reported by Davianti & Salim (2022), the transportation service sector experienced financial distress during the COVID-19 outbreak. Eight companies are experiencing financial distress which is classified into two stages of distress, namely advanced distress and final distress. Four companies that are in the final stage of distress or legal bankruptcy are CMPP, GIAA, SDMU, and WEHA. Then in the advanced stage of distress or insolvency in bankruptcy, BLTA, IATA, MIRA, and TMAS are filled in. Regression testing was carried out on accrual management and real management to see the occurrence of earnings management (Table 1) (Davianti & Salim, 2022).
Table 1. Linear Regression Test Results in the Transportation Services Sector Beta Sig.
BLTA -0,000 0,598 CMPP -0,001 0,072 GIAA -0,166 0,137 IATA 0,007 0,231 MIRA 0,130 0,028*
SDMU -0,007 0,472 TMAS 0,006 0,845
2326-9865 WEHA -0,078 0,020*
(Source: Davianti & Salim, 2022)
Based on the data, Table 1 shows significant values for MIRA and WEHA companies, namely 0.028 and 0.020, respectively. The significant value is smaller than 0.05 indicating the occurrence of earnings management in the two companies. While other companies have a sig. greater than 0.05 which indicates the absence of earnings management in the company.
4.2. Discussion
An indication of earnings management practices carried out by MIRA is accrual earnings management. Accrual earnings management can be done by adjusting the accrued income or expense to change the financial statements after the pre-accruals are known with the provisions that have been regulated in financial accounting. Earnings management actions are carried out by managerial as part of the agency according to the efficiency contract theory in meeting the interests of the principal such as achieving targeted profits. Accrual earnings management also helps managers demonstrate survival conditions during a pandemic.
Accrual earnings management is carried out through an income maximization strategy that aims to provide relief or financing to carry out the company's operational activities. The choice of revenue maximization strategy is evidenced by a positive beta coefficient. The reduction of the company's fixed assets was carried out through the sale of assets of Rp.
640,181,866 and the write-off of assets of Rp. 887,695,133. The write-off of assets is carried out in the form of disposal of subsidiaries because these assets do not provide any benefit to MIRA. The disposal of this asset is recognized as a write-off of property, plant, and equipment in the 2020 income statement. Based on the sale and disposal of property and equipment, the loss incurred due to MIRA is Rp 716,876,625. Asset write-offs allow companies to report high profits. This is because the amount of deduction, which is the cost of depreciation of fixed assets, decreases along with the decrease in the number of assets owned by the company (Davianti & Salim, 2022).
While the company WEHA performs accrual earnings management with an income decreasing strategy. This strategy is represented by a negative beta coefficient. WEHA is classified as a very bad company, so it is not surprising that the company's management made wise decisions. The selection of accruals management strategy by WEHA managers aims to provide information that shows that a company can still survive during the pandemic.
The two companies indicated carrying out accrual earnings management proves the agency theory. Differences in the interests of both parties are achieved through information asymmetry. Corporate executives want to perform well in their financial statements. On the other hand, stakeholders (stakeholders) do not get actual company financial information. The motivation of company management to manage earnings is to restore credit and to show good financial performance during difficult times.
5. Conclusions
The spread of covid-19 caused a decline in company performance, and the stock price index also experienced a significant decline. This encourages company managers to act in earnings
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management. MIRA and WEHA companies are indicated to carry out accrual earnings management with income maximization and income decreasing strategies. The policy is carried out causing information asymmetry, namely the company wants to appear to be performing well on financial accounting reports, while stakeholders do not get real information. The policy in managing the financial accounting information is to show that financial performance is fine during the pandemic.
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