The role of religiosity on blockholders involvement in earnings management: evidence from Indonesia
Ratmono D., Hanafi R., Rohman A.
Abstract
Purpose: Prior studies on blockholders involvement in earnings management behavior have given rise to alignment and entrenchment perspectives. The alignment perspective states that blockholders are an effective control to reduce earnings management behavior. In contrast, the entrenchment perspective states that blockholders act opportunistically and encourage earnings management behavior. Firms in Indonesia generally have concentrated shares, which is probably in line with the entrenchment perspective. Therefore, this study aims to examine the influence of blockholders on earnings management and the role of religiosity as a moderator of the influence of blockholders on earnings management. Design/methodology/approach: This study uses multiple linear and multi-group regression to analyze 2,238 firm-year observations for firms listed on the Indonesia Stock Exchange period 2015–2021. Multi-group regression is used to test the effect of religiosity on the relationship between blockholders and earnings management. Findings: The finding of this study is that religiosity can mitigate the involvement of blockholders in earnings management, where blockholders positively influence earnings management in non-religious but not religious firms. This finding is expected to solve the agency problem between management with shareholders and the majority with minority shareholders. Practical implications: Firms should apply religious values in their business activities to prevent or minimize profit manipulation. Another implication is that investors can glance at Sharia stocks when investing because they have lower earnings management or higher-quality financial reports. Originality/value: To the best of the authors’ knowledge, this study may be the first to investigate the role of religiosity by comparing the effect of blockholders on earnings management between religious and non-religious firms. This study proves that religiosity is a new alternative to mitigating blockholders involvement in earning management and agency problems.
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