Volume 4, Issue 8, August – 2019
ISSN No:-2456-2165
The Influence of Corporate Governance in The
Relationship of Firm Size and Leverage on
Earnings Management
Gemi Ruwanti
Management Department, STIE Indonesia Banjarmasin
Indonesia
Prihat Assih
Graduate Program, University of Merdeka Malang
Indonesia
Abstract: This study aims to examine the role of
corporate governance in relation to the size of the
company and leverage earnings management. Earnings
management concept adopted the Modified Jones
Model measured using a proxy discretionary accruals.
Samples are manufacturing companies listed in
Indonesia Stock Exchange period 2014 - 2017. The
sampling method with purposive sampling. Data were
analyled using Moderated Regression Analysis (MRA).
The results showed the effect of firm size on earnings
management was positive, while leverage has a positive
effect on earnings management. The role of corporate
governance in relation to the size of the company and
leverage significant earnings management is negative,
meaning that when the company has good corporate
governance, the large companies and companies with
high leverage level will tend to not perform earnings
management or what their reported profits.
Keywords:- Firm Size, Leverage, Earnings Management
Corporate Governance.
I. INTRODUCTION
The corporate governance perspective starts with
agency theory, which identifies potential conflicts of interest
between owners (principals) and management (agents).
Jensen and Meckling (1976) argue that an agency
relationship is a contract between owner and management.
A conflict of interest between the owner and management is
likely because management did not act in the interests of the
owner, which caused agency costs (agency costs). Managers
as company managers are more aware of internal
information and company prospects than their owners. The
manager as the manager is obliged to give a signal about the
state of the company to the owner. However, the
information conveyed is sometimes not in accordance with
the actual conditions. This condition is known as
asymmetric information (Cornett, 2006).
Corporatel governancel is governancel that describes
thel relationships between various parties in a company that
determinel thel direction and performancel of thel company
(Monks and Minow, 2001). Thel issuel of corporatel
governancel is still under discussion is interesting, becausel
IJISRT19AUG563 www.ijisrt.com
International Journal of Innovative Science and Research Technology
Grahita Chandrarin
Graduate Program, University of Merdeka Malang
Indonesia
of issues relating to governancel is seen as crucial to
overcomel thel financial problems of thel company (Rajput
& Bharti, 2015).Good corporatel governancel can reducel
agency conflicts and improvel thel disclosurel of which
could restrict thel information asymmetry. Weak corporatel
governancel considered to play an important rolel on thel
bankruptcy of a number of largel companies and crises in
various countries (Reddy et al., 2010; Ross and Crossan,
2012; Ujunwa, 2012). Jun-Koo (1995) mentions that bad
corporatel governancel as onel of thel causes of thel
economic crisis in East Asia in 1997-1998, including
Indonesia. In latel 2015, thel Financial Services Authority
announced on thel 10 ASEAN countries in thel application
of good corporatel governance, Indonesia still lags behind
Malaysia, Singaporel and Thailand.
Asymmetry of information between management and
owners provides an opportunity for managers to managel
earnings (earnings management). Earnings management is
thel manager's decision to choosel a particular accounting
policies that arel considered to achievel thel desired
objectives, both to increasel profits or reducel thel level of
losses reported (Scott, 2015: 445). Earnings management as
a process that is donel intentionally within thel limits of
accounting principles generally accepted to lead to thel
expected profit level (Schipper, 1989).
Based on thel positivel accounting theory (Watts and
Zimmerman, 1986), onel of thel causes of earnings
management is a political motivel costs that mention thel
company that concern thel government is a big company a
monopoly. Governments interested in thel company in terms
of taxation. Largel companies in an effort to evadel taxes
will tend to understatel their profits, so thel sizel of thel
company is used as a proxy of thel political cost hypothesis
that motivates companies conduct earnings management.
Thel sizel of thel company can bel determined based on total
assets, total sales, profits and incomel tax expensel (Brigham
and Houston, 2010). Onel benchmark that shows thel sizel of
thel company is thel total assets of thel company (Lee,
2009). Leel and Choi (2002) statel that firm sizel has a
negativel effect on earnings management. But Rahmani and
Mir (2013) find that company sizel has a positivel effect on
earnings management.
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Volume 4, Issue 8, August – 2019
In addition to thel costs of political motives, earnings
management is caused by thel motives of debt agreements
(Watts and Zimmerman, 1986). Thel debt agreement
hypothesis argues that thel higher thel debt, thel greater thel
chancel of a debt contract violation. In Indonesia to obtain
data and information about thel company's debt covenants
arel very difficult, so in this study used other indicators that
can bel used to infer thel company that havel a tendency to
violatel thel debt contract, thel amount owed. Companies
that havel a contract amount of debt that many will havel a
tendency to commit breach of contract debts. For
representation of breach of contract debts in this study is
used as a proxy variablel leveragel breach of contract debts
that can servel as benchmarks to seel thel behavior of
managers in earnings management activities. Becausel thel
higher thel debt thel company, then thel company would bel
getting closel to thel breach of contract debts, and to meet
thel company's debt contracts requirel a fee. To meet thesel
costs, thel company will tend to perform earnings
management by increasing profits. Thel company increased
thel earnings that thel leveragel ratio is at thel desired
position. Mamedova (2008) stated that thel leveragel effect
on thel management practices of earning management. Thel
research result Zamri et al. (2013) also mentions thel
positivel leveragel effect on earnings management. Becausel
thel higher thel debt thel company, then thel company would
bel getting closel to thel breach of contract debts, and to
meet thel company's debt contracts requirel a fee. To meet
thesel costs, thel company will tend to perform earnings
management by increasing profits. Thel company increased
thel earnings that thel leveragel ratio is at thel desired
position. Mamedova (2008) stated that thel leveragel effect
on thel management practices of earning management. Thel
research result Zamri et al. (2013) also mentions thel
positivel leveragel effect on earnings management. Becausel
thel higher thel debt thel company, then thel company would
bel getting closel to thel breach of contract debts, and to
meet thel company's debt contracts requirel a fee. To meet
thesel costs, thel company will tend to perform earnings
management by increasing profits. Thel company increased
thel earnings that thel leveragel ratio is at thel desired
position. Mamedova (2008) stated that thel leveragel effect
on thel management practices of earning management. Thel
research result Zamri et al. (2013) also mentions thel
positivel leveragel effect on earnings management. To meet
thesel costs, thel company will tend to perform earnings
management by increasing profits. Thel company increased
thel earnings that thel leveragel ratio is at thel desired
position. Mamedova (2008) stated that thel leveragel effect
on thel management practices of earning management. Thel
research result Zamri et al. (2013) also mentions thel
positivel leveragel effect on earnings management. To meet
thesel costs, thel company will tend to perform earnings
management by increasing profits. Thel company increased
thel earnings that thel leveragel ratio is at thel desired
position. Mamedova (2008) stated that thel leveragel effect
on thel management practices of earning management. Thel
research result Zamri et al. (2013) also mentions thel
positivel leveragel effect on earnings management.
IJISRT19AUG563 www.ijisrt.com
International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
II. PRIOR ART RESEARCH AND DEVELOPMENT
HYPOTHESIS
A. Influence of company size to Profit Management
Thel sizel of thel company is a proxy of financial
strength as a scalel for classifying largel or small a
company. Onel benchmark to indicatel thel sizel of thel
companies usel thel total assets of thel company (Dashmash,
2015; Isbanah, 2015; Lee, 2009; Nilres and Velnampy,
2014). Companies that havel total assets of thel shows thel
company has reached a stagel of maturity. At this stagel thel
company has a positivel cash flow and is considered to
havel good prospects in a relatively long period of time, but
it reflects that thel company is relatively morel stablel and
better ablel to generatel profits than firms with small asset
total.
Thel sizel of thel company is also dealing with thel
quality of earnings, becausel thel larger thel sizel of thel
company, thel company's sustainability will bel higher in
improving financial performance, so companies do not
need to makel profit manipulation practices. Company said
earnings quality if thel financial statements arel presented in
real earnings and describes thel company's actual financial
performance. Leel and Choi (2002) found that thel sizel of
thel company with a negativel effect on earnings
management. Largel companies lack thel motivation to
practicel earnings management, as shareholders and
outsidel thel company arel considered morel critical than
thel smaller companies. But Rahmani and Mir (2013) found
that thel sizel of thel company and earnings management
has a positivel effect, becausel thel large-sized company
should bel ablel to meet thel high expectations of
shareholders and investors. Based on thel above, thel
hypothesis developed in this study are:
H1 : Sizel effect on earnings management company
B. Effect of Leverage to Profit Management
According to Positivel Accounting Theory (Watts &
Zimmerman, 1986), thel higher thel level of leveragel of thel
company, thel earnings management conducted by thel
management will also increase. When a company is in a
high level of leverage, meaning thel company can bel said
to bel in a statel of insolvable. That is, thel company is in a
statel wherel thel equity held smaller than thel valuel of thel
debt, in other words thel majority sourcel of corporatel
funding comes from debt. Companies with high leveragel
level is no longer used as a sourcel of funds and thel loan
will switch to equity financing. Therefore, thel company
must havel a good performancel and a high profit to attract
potential investors. This is consistent with thel hypothesis
in thel contract of debt (debt covenants hypothesis) which
states that managers arel motivated conduct earnings
management to avoid breaching thel debt contract. Thel
manager will managel and administer thel profits that its
debt obligations which should bel completed in a given year
may bel postponed to next year. This is an attempt to
regulatel thel amount of profit manager which is an
indicator of a company's ability to settlel its debt
obligations. Thel impact of leveragel on earnings
management has two different views. On thel first hand,
shows that companies with a high leveragel morel interested
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Volume 4, Issue 8, August – 2019
in earning management (Dichev & Skinner, 2002; Beatty &
Weber, 2003) to maintain thel company's financial
performancel for thel benefit of stakeholders. On thel other
hand, Jensen (1986) suggests that thel creation of debt will
reducel opportunistic behavior of managers. Managers usel
discretion to control thel cash flow of thel company. But
thel rolel of debt control starts when thel manager has an
obligation to pay interest and principal. This implies that
high leveragel can restrict managers to managel earnings.
Based on thel above, thel hypothesis developed in this study
arel as follows:
H2 : Leveragel effect on earnings management
C. Influence of Corporate Governance on the relationship
between firm size to Profit Management
Leel and Choi (2002) found that company sizel is a
variablel that can influencel a firm's tendency to managel
revenue. Small companies do earnings management to
avoid losses than largel companies. Thel results of Shu and
Chiang (2013) research on thel effect of firm sizel on
earnings management for largel companies shows thel
effect of short-term positivel earnings management on
wealth and long-term negativel effects on wealth. To avoid
information asymmetry in thel company, thel concept of
good corporatel governancel is needed. With good
governance, companies will bel morel transparent,
accountable, responsible, independent and fair. So that it
will affect thel company's earnings management practices.
Based on thel above, thel hypotheses developed in this
study are:
H3: Corporatel Governancel significant effect in thel
relationship between firm sizel and earnings management.
D. Influence of Corporate Governance on the relationship
between Leverage Profit Management
Leveragel is thel ratio between total liabilities and
total equity of thel company, which shows thel amount of
assets owned by companies financed with debt. Thel greater
thel financing with debt, thel greater thel leveragel used
(Ross et al., 2009). Mamedova (2008) stated that thel
International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
leveragel effect on earnings management practices. In thel
agency theory, thel closer thel company with violations of
accounting-based debt contracts, it allows managers to
choosel accounting procedurel that removes thel reported
earnings from futurel periods to thel current period (Watts
& Zimmerman, 1986). A system of corporatel governance,
management believed would limit earnings management,
becausel corporatel governancel is thel concept of
improving corporatel performancel through supervision of
management performancel and ensurel thel accountability of
management to thel stakeholders based regulatory
framework. Thel concept of corporatel governancel is
applied to achievel a morel transparent corporatel
management for all users of financial statements, and
corporatel objectives and monitoring performancel can bel
accounted for and well done. Based on thel above, thel
hypothesis developed in this study arel as follows: and
corporatel objectives and monitoring performancel can bel
accounted for and well done. Based on thel above, thel
hypothesis developed in this study arel as follows: and
corporatel objectives and monitoring performancel can bel
accounted for and well done. Based on thel above, thel
hypothesis developed in this study arel as follows:
H4 : Corporatel governancel affects thel relationship
between leveragel with earnings management.
III. RESEARCH METHODOLOGY
Thel population is all companies listed in Indonesia
Stock Exchangel until thel end of year 2017 as many as 557
companies. Engineering samplel selection using purposivel
sampling method, thel sampling method based on specific
criteria (Chandrarin, 2017: 127) to obtain a representativel
samplel in accordancel with thel criteria specified. Criteria
for determining thel samplel is a manufacturing company
that publishes an annual report full year research period
2014 - 2017 which contains data related to thel variables
used in thel study, and thel company does not losel during
thel study period. Samplel selection procedurel is as
follows:

Information Total Company

Companies listed on the Stock Exchange up to Year 2017 557
Companies other than the manufacturing sector recorded on the Stock Exchange up to Year 2017 405
Manufacturing sector companies listed on IDX up to Year 2017 152
The manufacturing company annual report data is not complete year period 2014 - 2017 46
The Company manufactures a full annual report data year period 2014 - 2017 106
Manufacturing companies suffered losses year period 2014 - 2017 40
Total company in the research samples 66
Table 1:- Sample Selection Procedures
Source: Processed Data, 2019

Thel typel of data in this research is quantitativel data.
Thel data structurel in thel form of pooling of data which is
a combination of timel series and cross-sectional
(Chandrarin, 2017: 122). Data werel analyled on thel basis
of thel pooling of data as much as 264 observations (66
companies x 4 years). Sourcel of research data is secondary
data.
This study uses a moderating variablel of corporatel
governancel as a major part to test his hypothesis.
Hypothesis testing is donel to determinel thel effect of
corporatel governancel on thel relationship between firm
sizel and leveragel to earnings management. Structures arel
at that describes causal relationships between variables as
shown in Figurel 1.

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Volume 4, Issue 8, August – 2019
Fig 1:- Framework Concepts Effect of Corporatel
Governancel on thel relationship between Leveragel and
sizel to Profit Management Company
This study uses Moderated Regression Analysis
(MRA) or interaction test. As a hypothesis test equipment
that is specialiled applications in multiplel linear regression
regression equation contains elements of interaction
(multiplication of two or morel independent variables) with
thel following equation:
EM = α + FS + LV + FS * CG + LV * CG +
Information:
EM = Earnings Management
FS = Firm Size
LV = Leverage
CG = Corporatel Governance
 = error
MRA is used to test thel hypothesis of thel influencel
of corporatel governancel moderating variablel on thel
relationship between firm sizel and leveragel to earnings
management.
IV. RESULTS AND DISCUSSION
Based on thel classic assumption test results, all
variables havel VIF values below 10; it means that all
independent variables arel not affected multicolinearity.
Normality test results also shows thel data (points) lspread
laround and lclosel to thel linel ldiagonal. lIt shows thel
research datal normal distribution, Whilel thel
autocorrelation test Durbin Watson known values greater
than 1.71 (Du) and smaller than 2.26 (4-Du). Meaning it
can bel concluded that therel is no autocorrelation in thel
regression model. Heteroscedasticity test results, dots
irregularly dispersed with no specific pattern, so stated
heteroscedasticity does not exist in thel regression model.
a) Results of analysis data Moderated Regression Analysis
(MRA) to test thel effect of corporatel governancel on thel
relationship between firm sizel and leveragel to earnings
management arel presented in Tablel 1 .
IJISRT19AUG563 www.ijisrt.com
International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Standardized
Model t Sig.
Coefficients beta
FS 2.961 12.200 0.000
FS* CG -3.403 -14.019 0.000
LVR 2.947 2.845 0.005
LVR * CG -2.951 -2.849 0.005
Tablel 2:- Thel Effect Of Corporatel Governancel (Thel
relationship between company sizel and Leveragel to Profit
Management) Source: Data processed, 2019.
Interaction between thel sizel of thel company and
corporatel governancel on earnings management has a beta
coefficient of -3.403 and 0.000 significancel valuel <0.05.
Thus thel corporatel governancel as moderator variables
affect relations firm sizel on earnings management, and thel
influencel exerted by corporatel governancel as a moderator
variablel is negativel correlation with earnings management
firm size. This means that thel effect of corporatel
governancel is weakened relationship with thel management
company thel sizel of earnings, meaning that when relations
firm sizel and high corporatel governance, thel management
tended not to makel profit management in reporting its
financial results or to report what their income, on thel
contrary when thel relationship sized companies and
corporatel governancel is low, management tends to
perform earnings management by increasing its profits. In
other words, thel big companies, with good corporatel
governance, thel management will tend to report financial
performancel in accordancel with thel achievement.It shows
independent board as a proxy for corporatel governancel
havel thel expertise, skills and sciencel that is ablel to run
thel monitoring process. Thel expertisel effectively prevent
acts of earnings management, so that thel profits reported to
bel morel transparent. In order to avoid information
asymmetry in thel company, it takes thel concept of good
corporatel governance, so that thel company will bel morel
transparent, accountable, responsible, independent, and
fair. In addition to thel largel companies will bel morel
cautious in making financial reporting and tend to report
financial condition accurately becausel morel attention by
thel public. Largel companies morel get thel attention of thel
public so that thel report will report its financial statements
in accordancel with actual conditions. Thel results of this
study arel consistent with research Leel and Choi (2002)
who found that company sizel is a variablel that affects thel
tendency of companies to managel earnings.
Thel interaction between leveragel and corporatel
governancel has a coefficient valuel of -2.951 and 0.005
significancel valuel <0.05. Thus thel corporatel governancel
as moderator variables affect thel relationship leveragel to
earnings management, and thel influencel exerted by
corporatel governancel as a moderator variablel is negativel
leveragel and earnings management. This means that thel
effect of corporatel governancel is to weaken thel leveragel
and earnings management, meaning that when thel
relationship leveragel and corporatel governancel is high
then thel management tend to perform earnings
management by minimiling their profits, and vicel versa
when thel relationship leveragel and corporatel governancel
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Volume 4, Issue 8, August – 2019
is low, management tends to do management profit by
increasing its profits. In other words, thel company has a
high degreel of leverage, with good corporatel governance,
thel management will bel less likely to makel earnings
management or management reporting financial results in
accordancel sebenanya conditions. In contrast to companies
that havel a high leveragel level, thel corporatel governancel
is not good then thel management will tend to perform
earnings management by increasing profit.According to
Positivel Accounting Theory (Watts & Zimmerman, 1986),
thel higher thel level of leveragel of thel company, thel
earnings management conducted by thel management will
also increase. This is consistent with thel hypothesis in thel
contract of debt (debt covenants hypothesis) which states
that managers arel motivated conduct earnings management
to avoid breaching thel debt contract. Thel manager will
managel and administer thel profits that its debt obligations
which should bel completed in a given year may bel
postponed to next year. This is an attempt to regulatel thel
amount of profit manager which is an indicator of a
company's ability to settlel its debt obligations. Corporatel
governancel weakens thel leveragel and earnings
management. Leveragel and profit management is a
positivel influence. Companies with high leveragel will
makel thel company's management becomes morel difficult
to makel predictions of futurel coursel of thel company. Thel
greater thel leveragel of thel company, thel morel stringent
supervision by creditors, so thel flexibility of management
to managel earnings decreases.
V. CONCLUSION, LIMITATIONS AND
RECOMMENDATIONS
Based on thel results of this study concluded that
company sizel and leveragel significant positivel effect on
earnings management. Largel companies will tend to
perform earnings management (Rahmani & Mir, 2013).
Likewise, companies that havel a relatively high degreel of
leveragel tend to perform earnings management to
maximilel profits (Dichev & Skinner, 2002). Largel
companies tend to havel a high political cost that companies
tend to earnings management practices by increasing thel
profit (incomel increasing) in order to maintain thel
company's reputation in thel community. Thel rolel of
corporatel governancel in relation to thel sizel of thel
company and leveragel significant earnings management is
negative, meaning that when thel company has good
corporatel governance, thel largel companies tend to not
perform earnings management practices and report its
performancel based on thel actual condition of achievement.
Likewise, companies that havel a relatively high degreel of
leveragel that good governancel will enablel thel company
to submit a report based on actual financial performancel
without any profit management efforts carried out by thel
management.
Research limitations only usel two variables, namely
company size, and leverage, whilel therel arel still many
other variables that affect earnings management. Thel
number of samples is small becausel thel study period was
only in thel period of 4 years 2014 - 2017. During this
IJISRT19AUG563 www.ijisrt.com
International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
period many companies suffered losses so that they did not
meet thel criteria as a research sample. Thel data used is
secondary data which may havel errors in entering data in
thel form of numbers. This research is only focused on thel
corporatel internal performancel variables in thel form of
financial ratios by not paying attention to thel company's
macro factors or other economic risk factors outsidel thel
company's performance. Recommendations for further
research arel expected to increasel thel scopel of research
objects by extending thel study period and need to pay
attention to thel company's macro factors or economic risk
factors outsidel of financial performancel so as to providel a
morel comprehensivel picturel of thel results of thel study.
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