Corporate Governance and Earning Management

Oct 13, 2025 by talynt.org 116 views

The Effect of Corporate Governance and Earning Management on Cost of Capital through Information Asymmetry After Implementation of IFRS

Introduction

In today's business world, the cost of capital (Cost of Capital - COC) is a crucial factor that determines a company's competitiveness. COC consists of two main components: Cost of Equity (COE) and Cost of Debt (COD). The cost of these funds reflects the risk compensation for fund providers. One of the key factors that influence risk compensation is the quality of information used for risk assessment. If the available information is complete and transparent, it can reduce information asymmetry (information asymmetry - IA). This can be achieved through the implementation of good Corporate Governance (CG), which also functions to reduce the possibility of earning management (EM).

Research Objectives and Methodology

This study aims to analyze the relationship between variables related to the implementation of International Financial Reporting Standards (IFRS). IFRS implementation aims to standardize financial statements and improve the quality of information, thereby minimizing IA. The model developed in this study makes CG and EM central variables that influence COE and COD. In addition, this research also offers alternative measurements for these variables.

A total of 65 companies from the manufacturing industry were the objects of research for ten years, namely the period before and after the implementation of IFRS. Data was collected for the period 2011 to 2017 (before IFRS) and 2012 to 2016 (after IFRS) and analyzed using a path analysis and multigroup analysis with the Partial Least Square (PLS) method.

Research Result

The results showed that CG had a significant influence on IA, while EM did not have an effect on it. The most important finding of this study is that IA functions as the most contributing variable in the model, with a significant influence on COE and COD. It also functions as an intervening variable that mediates the relationship between CG and COE and COD.

In this context, IA acts as a partial mediator in the CG relationship on COD, and as a full mediator in the influence of CG on COE. This shows that the implementation of CG has succeeded in changing the pattern of relationships that are not in accordance with the theory, where CG is usually assumed to have a negative effect on COE.

Implications of IFRS Implementation

Analysis related to the implementation of IFRS shows a difference in influence between IA and COD before and after the implementation of IFRS, while the influence of IA on COE does not show significant differences. Likewise, the CG relationship with IA shows differences in influence before and after the implementation of IFRS, but EM does not show differences in influence on IA in both periods.

Conclusion

From the results of this study, it can be concluded that a good corporate governance plays an important role in reducing IA and ultimately has a positive impact on capital costs. IFRS implementation contributes to improving the quality of available information, which in turn can also reduce risk and increase company competitiveness. This study provides valuable insight for companies to better understand the importance of CG and EM in the context of capital costs and better decision making.

Theoretical Background

The concept of cost of capital (COC) is a fundamental concept in finance that refers to the cost of funds used by a company to finance its operations. COC consists of two main components: Cost of Equity (COE) and Cost of Debt (COD). COE is the cost of funds sourced from the company owner, while COD is the cost of funds obtained from loans. The cost of these funds reflects the risk compensation for fund providers.

The quality of information used for risk assessment is a key factor that influences risk compensation. If the available information is complete and transparent, it can reduce information asymmetry (IA). IA occurs when there is a difference in information between the company and its stakeholders, such as investors and creditors. This can lead to a higher cost of capital, as stakeholders may demand a higher return to compensate for the risk associated with the lack of information.

Corporate Governance and Earning Management

Corporate Governance (CG) refers to the system of rules, practices, and processes by which a company is directed and controlled. Good CG is essential for reducing IA and ultimately having a positive impact on capital costs. CG functions to reduce the possibility of earning management (EM), which is the practice of manipulating financial statements to present a more favorable picture of a company's performance.

EM can lead to a higher cost of capital, as stakeholders may question the accuracy of the financial statements. In contrast, good CG can provide stakeholders with confidence in the company's financial statements, leading to a lower cost of capital.

International Financial Reporting Standards (IFRS)

IFRS is a set of accounting standards that provides a framework for financial reporting. The implementation of IFRS aims to standardize financial statements and improve the quality of information, thereby minimizing IA. IFRS provides a common language for financial reporting, making it easier for stakeholders to compare and analyze financial statements.

The implementation of IFRS has been shown to have a positive impact on capital costs. By providing a more transparent and accurate picture of a company's financial performance, IFRS can reduce the risk associated with investing in a company. This can lead to a lower cost of capital, as stakeholders are more confident in the company's financial statements.

Methodology

This study used a path analysis and multigroup analysis with the Partial Least Square (PLS) method to analyze the relationship between variables related to the implementation of IFRS. A total of 65 companies from the manufacturing industry were the objects of research for ten years, namely the period before and after the implementation of IFRS.

Data was collected for the period 2011 to 2017 (before IFRS) and 2012 to 2016 (after IFRS). The data was analyzed using a path analysis and multigroup analysis with the PLS method.

Results

Implications

The results of this study have several implications for companies and stakeholders. Firstly, the study highlights the importance of good CG in reducing IA and ultimately having a positive impact on capital costs. Companies should prioritize the implementation of good CG practices to reduce the risk associated with investing in the company.

Secondly, the study shows that IFRS implementation contributes to improving the quality of available information, which in turn can also reduce risk and increase company competitiveness. Companies should consider implementing IFRS to improve the transparency and accuracy of their financial statements.

Finally, the study highlights the importance of EM in reducing IA and ultimately having a positive impact on capital costs. Companies should avoid engaging in EM practices, as they can lead to a higher cost of capital and damage the company's reputation.

Conclusion

In conclusion, this study provides valuable insight for companies to better understand the importance of CG and EM in the context of capital costs and better decision making. The study highlights the importance of good CG in reducing IA and ultimately having a positive impact on capital costs. Companies should prioritize the implementation of good CG practices to reduce the risk associated with investing in the company.

The study also shows that IFRS implementation contributes to improving the quality of available information, which in turn can also reduce risk and increase company competitiveness. Companies should consider implementing IFRS to improve the transparency and accuracy of their financial statements.

Limitations

This study has several limitations that should be noted. Firstly, the study only analyzed the relationship between variables related to the implementation of IFRS. Future studies should consider analyzing the relationship between other variables, such as the impact of IFRS on company performance.

Secondly, the study only used a path analysis and multigroup analysis with the PLS method to analyze the data. Future studies should consider using other methods, such as regression analysis, to analyze the data.

Finally, the study only analyzed the data for a period of ten years. Future studies should consider analyzing the data for a longer period to provide a more comprehensive understanding of the relationship between variables related to the implementation of IFRS.

Future Research Directions

This study provides several future research directions. Firstly, future studies should consider analyzing the relationship between other variables, such as the impact of IFRS on company performance.

Secondly, future studies should consider using other methods, such as regression analysis, to analyze the data.

Finally, future studies should consider analyzing the data for a longer period to provide a more comprehensive understanding of the relationship between variables related to the implementation of IFRS.

Conclusion

The study also shows that IFRS implementation contributes to improving the quality of available information, which in turn can also reduce risk and increase company competitiveness. Companies should consider implementing IFR
Q&A: The Effect of Corporate Governance and Earning Management on Cost of Capital through Information Asymmetry After Implementation of IFRS

Q: What is the main objective of this study?

A: The main objective of this study is to analyze the relationship between variables related to the implementation of International Financial Reporting Standards (IFRS) and its impact on cost of capital (COC) through information asymmetry (IA).

Q: What is the significance of this study?

A: This study is significant because it provides valuable insight for companies to better understand the importance of corporate governance (CG) and earning management (EM) in the context of capital costs and better decision making.

Q: What is the relationship between CG and IA?

A: The study shows that CG has a significant influence on IA, while EM does not have an effect on it. This means that good CG practices can reduce IA and ultimately have a positive impact on capital costs.

Q: What is the impact of IFRS implementation on IA and COC?

A: The study shows that IFRS implementation contributes to improving the quality of available information, which in turn can also reduce risk and increase company competitiveness. This can lead to a lower cost of capital, as stakeholders are more confident in the company's financial statements.

Q: What is the role of EM in reducing IA and COC?

A: The study highlights the importance of EM in reducing IA and ultimately having a positive impact on capital costs. Companies should avoid engaging in EM practices, as they can lead to a higher cost of capital and damage the company's reputation.

Q: What are the implications of this study for companies and stakeholders?

A: The study has several implications for companies and stakeholders. Firstly, companies should prioritize the implementation of good CG practices to reduce the risk associated with investing in the company. Secondly, companies should consider implementing IFRS to improve the transparency and accuracy of their financial statements. Finally, companies should avoid engaging in EM practices, as they can lead to a higher cost of capital and damage the company's reputation.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted. Firstly, the study only analyzed the relationship between variables related to the implementation of IFRS. Future studies should consider analyzing the relationship between other variables, such as the impact of IFRS on company performance. Secondly, the study only used a path analysis and multigroup analysis with the PLS method to analyze the data. Future studies should consider using other methods, such as regression analysis, to analyze the data. Finally, the study only analyzed the data for a period of ten years. Future studies should consider analyzing the data for a longer period to provide a more comprehensive understanding of the relationship between variables related to the implementation of IFRS.

Q: What are the future research directions based on this study?

A: This study provides several future research directions. Firstly, future studies should consider analyzing the relationship between other variables, such as the impact of IFRS on company performance. Secondly, future studies should consider using other methods, such as regression analysis, to analyze the data. Finally, future studies should consider analyzing the data for a longer period to provide a more comprehensive understanding of the relationship between variables related to the implementation of IFRS.

Q: What are the practical implications of this study for companies and stakeholders?

A: The practical implications of this study are that companies should prioritize the implementation of good CG practices to reduce the risk associated with investing in the company. Companies should also consider implementing IFRS to improve the transparency and accuracy of their financial statements. Finally, companies should avoid engaging in EM practices, as they can lead to a higher cost of capital and damage the company's reputation.

Q: What are the theoretical implications of this study?

A: The theoretical implications of this study are that it provides a new perspective on the relationship between CG, EM, and IA. The study shows that CG has a significant influence on IA, while EM does not have an effect on it. This means that good CG practices can reduce IA and ultimately have a positive impact on capital costs.

Q: What are the policy implications of this study?

A: The policy implications of this study are that it highlights the importance of good CG practices in reducing IA and ultimately having a positive impact on capital costs. Policymakers should consider implementing policies that promote good CG practices, such as requiring companies to disclose more information about their CG practices.

Q: What are the future research directions based on this study?