The Impact of Ownership Structure on Earnings Management: Evidence from the Indonesian Stock Exchange

Accepted 24.12.2021 Abstract Purpose: This research was conducted to test whether ownership structure has an influence on earnings management using the control variables of leverage, company size, profitability, and company growth. Moreover, this research aims to find out what type of ownership has more influence on earnings management in Indonesia therefore the authors focus on all types of company ownership as independent variables.


Introduction
Business development encourages business people to improve company performance to survive in their environment. Company managers play a big role in keeping or attracting investors as a way to strengthen the company's finances. For this reason, quality financial reports are needed. Financial reports are useful for companies, both external and internal parties, as means of assessing a company and helping management achieve company goals. Information from financial statements is also useful for making economic decisions (Felicya & Sutrisno, 2020). This situation makes it possible to motivate managers to show results of questionable quality to ensure the stability of the company, as well as to ensure the necessary funds for the company's investments. Therefore, managers apply earnings management to influence investors' perceptions of managers' discretion in financial reporting. Earnings management can take a variety of forms, for example compiling specific revenues, expenses, and transactions; changing the size of the accounting; and accruals management.
In terms of legality, the practice of earnings management is said to be legal if the disclosure of a company's earnings is in accordance with GAAP guidelines, for example changing the valuation of depreciation or inventory on current assets.
Contrastingly, earnings management practices can also be illegal if the activity is not in accordance with GAAP standards, for example by advancing revenue recognition and decelerating expense recognition (Aygun et al., 2014). Several shady earnings management practices have occurred in large companies in Indonesia, for example at This company was found to have used the profits by recognizing unearned revenues of $239.94 million in the 2018 fiscal year. This manipulation was deliberately carried out by managers in order to show better financial performance than the previous year. Thus, substantial supervision of earnings management practices in a company is necessary, especially companies listed on the stock market because the market value of public companies is very important to investors' perceptions (Reyna, 2018).
Previous studies have proven that ownership structure and company characteristics have a significant effect on earnings management. Alzoubi (2016) studying Jordanian companies reveals that family ownership, institutional ownership, blockholder ownership, foreign ownership, and managerial ownership have a bigger influence on the quality of financial reporting, because more broadly, they can potentially limit earnings management. The study agrees with Reyna (2018) using a sample of companies in Mexico whose earnings management practices can be reduced by the presence of family and institutional ownership. This however depends on the size of the company as well because it can provide different impacts.
However, several studies consider that ownership control has a positive impact to earnings management (Anwar & Buvanendra, 2019; Bao & Lewellyn, 2017;Mardianto, 2020). Anwar and Buvanendra (2019) found a significant positive relationship between foreign ownership and earnings management in Sri Lanka companies. The reason may be that foreign investors expect short-term financial results, so they cannot limit earnings management discretion by managers.
Most of the earnings management research has been conducted in developed countries but little attention has been paid to how earnings management activities vary in countries with very different corporate ownership structures and national institutional environments (Bao & Lewellyn, 2017). The characteristics of earnings management in each country are different. Based on the research by Wardani and Kusuma (2012) who examined the characteristics of earnings management in Southeast Asian countries, accrual-based earnings management is more aggressive than real earnings management in Indonesia. This study also finds that earnings Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 152-175 155 management is opportunistic in Indonesia, which means that managers use information asymmetry between external and internal companies to maximize their utility in relation to compensation contracts, debt contracts and regulations.
The previous research described above focuses on the relationship between corporate governance and earnings management and does not use all types of ownership as variables. This study develops previous research but only focuses on the ownership structure as an independent variable to determine its effect on earnings management as the dependent variable. Specifically, this study adds variables by including all types of share ownership, namely family ownership, institutional ownership, blockholder ownership, managerial ownership, foreign ownership, individual ownership, and government ownership. There is interest in examining the influence of each of these variables in the Indonesian context, where companies are still in their infancy and the influence of the decision-making process on companies by some shareholders is still limited. Therefore, this study is conducted to test whether ownership structure has an influence on earnings management in Indonesia.

Agency Theory
Agency theory shows a contractual relationship between an owner and his interests and the manager, and whose relationship can lead to conflict because each party acts to maximize their respective advantage (Jensen & Meckling, 1976). In some situations, the risk appetite of the manager and the shareholders is not aligned. This is because the manager has more information about the conditions and prospects of the company in the future than the shareholders. The condition of information asymmetry is an opportunity for management to carry out earnings management, so management monitoring is needed to ensure the protection of shareholder interests and produce reliable financial reports. A structured corporate governance mechanism is expected to reduce earnings management because it results in active management monitoring, especially in the financial reporting process. Corporate Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 152-175 156 governance can facilitate the reduction of agency costs that arise due to agency conflicts. Corporate governance also plays a role in confirming approval of the financial accounting system and enforcing the credibility of the financial statements (Alzoubi, 2016). Many studies suggest that corporate ownership structure offers a significant monitoring mechanism for managers; hence, may have a monitoring role in limiting earnings management activities.

Earnings Management
Klein ( Where: Total accruals of firm i in the yearly period t.
Net income of firm i in the yearly period t.
Cash flow from operating activities.
Total assets of firm i in the yearly period t-1.
Change in revenue of firm i in the year t compared to year t-1.
Change in account receivable of firm i in the year t compared to year t-1.
Fixed assets of firm i in the yearly period t.
Non-discretionary accrual of firm i in the yearly period t.
Discretionary accrual of firm i in the yearly period t.

Ownership Structure
It is mandatory that the internal control system is owned by the company, and this for various reasons, both for the smooth operation of the company and the level of security. Internal control is a system created by a company or organization in managing all its activities in it to achieve the company's goals. The ownership structure is an internal control component that refers to the manner in which representative rights reallocate company capital in one or more individuals or legal entities.

Family Ownership
Family owners are family members who carry out various operational activities in the company and are shareholders in the company. The measurement of family ownership according to Darmadi (2016) is the sum of family ownership shares = Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 152-175 158 divided by the total outstanding shares.

Institutional Ownership
The ownership of shares by companies and financial institutions in a company is called institutional ownership (Paramitha & Firnanti, 2018). Following Reyna (2018), this study considers institutions only when their ownership represents 5 percent and above of the company's share capital. The measurement of institutional ownership according to Reyna (2018) is the sum of institutional ownership shares divided by the total outstanding shares.

Blockholder Ownership
Blockholder ownership is defined as the number of shares owned by individuals who are not family members. Following Nguyen et al. (2020), this study considers blockholders only when their holdings represent 5 percent or above of the company's equity share capital. Measurement of blockholder ownership according to Nguyen et al. (2020) is the sum of ownership shares by blockholders divided by the total outstanding shares.

Foreign Ownership
Company shares owned by foreign individuals, foreign legal entities, foreign governments are included in foreign ownership (Meilita & Rokhmawati, 2017).
The measurement of foreign ownership according to Kablan (2020) is the sum of foreign ownership shares divided by the total outstanding shares.

Managerial Ownership
This happens when the management of the company owns shares in the company (Meilita & Rokhmawati, 2017). Measurement of managerial ownership according to Tran et al. (2020) is the sum of managerial ownership shares divided by the total outstanding shares.

Individual Ownership
Individual ownership is a part of shares owned by outside parties such as the general public who do not have a special relationship with the company (Yusnita, 2019). Measurement of individual ownership according to Hendi and Lisniati (2020) is the sum of individual shares whose ownership is below 5% divided by Journal of Accounting, Finance and Auditing Studies 8/1 (2022): 152-175 159 the total outstanding shares.

Government Ownership
Government ownership is a situation where the government owns the company's shares. The measurement of government ownership according to Attia (2019) is the sum of shares owned by the government divided by the total outstanding shares.

Leverage
The source of operational funds used by the company is described as leverage.
Measurement of leverage according to Reyna (2018) is total liabilities divided by total assets.

Company Size
Company scale is usually divided into three, namely small-scale enterprises, medium-scale enterprises, and large-scale enterprises. Company size is determined in terms of company assets, company sales, company share value, and others (Yuliana & Trisnawati, 2015). The measurement of company size according to Reyna (2018) is the natural logarithm of total assets.

Profitability
Profitability is measured by return on equity (ROE), which is a measure that shows the amount of profits obtained from shareholders on investments made by the company. The measurement of return on equity according to Lai and Tam (2017) is net income divided by equity.

Company Growth
Company growth is the ability of a company to increase its size (Paramitha & Firnanti, 2018). Growth opportunities are measured as the annual sales growth rate (Reyna, 2018). The measurement of company growth according to Reyna (2018) is the difference between current sales and previous year's sales divided by previous year's sales multiplied by 100%.

Institutional Ownership and Earnings Management
Many studies conclude that institutional ownership has a significant negative effect

Blockholder Ownership and Earnings Management
Previous research (Kablan, 2020;Nguyen et al., 2020;Saona et al., 2020;Yahaya et al., 2019) found that majority shareholders have more interference power than minority shareholders in pushing managers to convey financial information, so this motivates managers to reduce earnings management, especially when the company's financial performance is decreasing (Reyna, 2018). H3 = Blockholder ownership has significant negative effect on earnings management.

Foreign Ownership and Earnings Management
One of the many ways that are expected to tighten profit manipulation activities in a company is foreign investment. Aggarwal et al. (2005)  H4 = Foreign ownership has significant negative effect on earnings management.

Managerial Ownership and Earnings Management
Widyaningsih (2017)  does not always act in the interests of the owner, because of differences in interests, thus managers will tend to implement earnings management. The misalignment of the goals of management and owners will cause agency costs. The higher the managerial ownership, the higher the related party transactions carried out for earnings management purposes. The higher share ownership by management will increase the incentive for managers to conduct business transactions with related parties, both for the purpose of earnings management and to achieve certain targets (Nugroho, 2017). H5 = Managerial ownership has significant positive effect on earnings management.

Individual Ownership and Earnings Management
The more shares the public owns, the more information will be disclosed in the annual report. Individual ownership is one way to reduce agency conflicts. Agency theory states that individual ownership has the ability to monitor managers well.
Agency conflict will decrease because of the high supervision carried out by individual ownership, thus creating transparency which is a principle of good corporate governance. Public ownership determines the amount of personal information that must be distributed by the manager to the public (Kusumaningtyas & Farida, 2016;Meilita & Rokhmawati, 2017). According to Claessens et al. (2000), public ownership is one of the largest blockholder groups in developing countries. H6 = Individual ownership has significant negative effect on earnings management.

Government Ownership and Earnings Management
Research on the relationship between ownership characteristics and earnings management conducted by Guo and Ma (2015) who studied companies in 3.

Research Methodology
This study uses a type of comparative causal research, which is a type of research that seeks to identify a causal relationship between the independent variables  The descriptive statistical table above demonstrates that the value of discretionary accrual earnings management has an average value that is close to 0.1 and is negative. This output means that the non-financial Indonesian companies in the sample are engaging in "income decreasing" earnings management , as in other studies (Felicya & Sutrisno, 2020;Hendi & Lisniati, 2020;Kusumaningtyas & Farida, 2016;Mardianto, 2020;Widyaningsih, 2017). The minimum and maximum values state   The test results show that H₁ is not proven but is consistent with previous researchers (Abdullah & Ismail, 2016;Alhadab et al., 2020;González & Garcia-Meca, 2014). The results of this study suggest that in Indonesia, agency problems do not apply and family members who own shares and control the company do not pursue their own interests.
The test results show that H₂ is not proven but is consistent with previous researchers (Farouk & Bashir, 2017;Felicya & Sutrisno, 2020;González & Garcia-Meca, 2014;Lestari & Murtanto, 2018;Purnama, 2017;Widyaningsih, 2017;Yasser et al., 2017). This happens in accordance with the theory put forward by Porter (1992) which states that institutional shareholders are shareholders who focus more on short-term profits. Therefore, managers take earnings management The test results show that H₃ is not proven but is consistent with the results of previous studies (Al-Fayoumi et al., 2010;Anwar & Buvanendra, 2019;Kablan, 2020;Reyna, 2018). It is similar to institutional ownership, considering that the type of blockholder ownership consists of institutions and individuals who own the majority shares and blockholder shareholders only focus on short-term profits.
This may also be the case, as Pound (1988) argues, that they are either ineffective in their supervisory role due to possible lack of expertise or suffering from freeriding issues among themselves or strategically allied with management.
The test results show that H₄ is not proven but is consistent with the results of Hossain's (2020) research. There are factors that affect the inability of foreign shareholders to carry out the supervisory function, namely the lack of participation of foreign parties in the implementation of corporate governance, regulatory differences, and cultural diversity, and foreign shareholders only focus on company profitability for investment.
The test results show that H₅ is not proven but is consistent with the results of Liu and Tsai (2015). If the committee appointed by the company has done its job well in the sense that the shareholders' goals have been achieved, then the supervisory role by managerial shareholders does not affect the reduction of agency conflicts (Warfield et al., 1995).  (Reyna, 2018). The pressure to carry out earnings management will be even greater if the size of the company is large. Large companies have a tendency to manage earnings to attract market attention and meet the expectations of financial observers (Barton & Simko, 2002). Companies with good growth usually have a tendency to increase their profits in order to maintain investor confidence to keep investing their funds in the company (Felicya & Sutrisno, 2020).
This study may have managerial implications where our findings show that shareholders have a little role in the supervision of earnings management in Indonesia, but internal company factors can influence the occurrence of earnings management. The supervisory role of shareholders may not have an effect because there may be other committees that have been formed by the company that have worked well in achieving shareholder goals. However, the larger the company's debt, size and growth, the more the role of supervision is needed. Therefore, we suggest to companies that the role of the ownership structure needs to be improved and strengthened to make it clearer and more beneficial to the company.
Some of the limitations of this study are that many companies listed on the IDX do not publish complete financial statements consistently throughout the years so the