Analyzing earnings management preferences from business strategies

Abstract

Purpose

This study aims to examine the preference for earnings management (EM) strategies according to business strategies, namely, cost leadership strategies and differentiation strategies,

Design/methodology/approach

This study analyzed 262 samples of manufacturing and service companies listed on the Indonesia Stock Exchange for the period 2019. Logistic regression analysis is used to test the company’s EM strategy preferences based on the applied business strategy.

Findings

The results prove that business strategy has a significant effect on EM strategy preferences. Companies that implement a cost leadership strategy tend to use an accrual form of EM rather than a real form of EM. Conversely, companies that implement a differentiation strategy tend to use a real form of EM.

Research limitations/implications

Theoretically, this study confirms that contingency theory can explain EM practice preferences based on business strategy. Practically, this study helps auditors and financial statement analysts in assessing the quality of financial statements, as well as the risk of financial misstatement based on the business strategy adopted by the companies.

Originality/value

Based on prior literature, research studies on the analysis of EM strategy preferences based on business strategy have been limited.

Citation

Purba, G.K., Fransisca, C. and Joshi, P.L. (2022), "Analyzing earnings management preferences from business strategies", Journal of Financial Reporting and Accounting, Vol. 20 No. 5, pp. 979-993. https://doi.org/10.1108/JFRA-04-2021-0103