LEAN AGAINST THE WIND : EXAMINATION ON ECONOMIC POLICY UNCERTAINTY, REAL EARNINGS MANAGEMENT, AND MARKET COMPETITION
Yeni Januarsi and Fauji Sanusi

Universitas Sultan Ageng Tirtayasa

Abstract

Purposes: This paper investigates the lean against the wind theory in emerging market by examining the effect of economic policy uncertainty (EPU) on manager behavior engaging real earnings management (REM). In addition, current study also examines how market competition effects the link between EPU and Real Earnings Management (REM) in Indonesia.

Methods: Current study use cross-sections times-series pooled ordinary least squares clustered by year to examine the proposed hypothesis, employing 1800 firm-year observations from Indonesian listed firms between 2012 to 2020

Results: This study finds that EPU is positively linked with REM, implying that managers engage in more REM when confronted with negative economic conditions induced by EPU, and providing support to the lean against the wind theory in less developed markets. This study additionally revealed that the favorable relationship between EPU and REM is more pronounced in firms operating in more competitive markets. From the supplementary analysis, current study finds consistent result with the analysis, EPU encourages managers to perform more REM for both income-increasing and income-decreasing firms. Finally, positive relationship between EPU and REM differs depend on information environment and politically sensitive industry. This finding holds for a variety of robustness tests.

Conclusion and suggestion: Undervaluation condition induces manager to engage more bias information in emerging market firms, reducing the quality of financial statement. Current study suggests that the users of financial statement should aware that the reporting earnings figures presented in financial statement could have been inflated or deflated as the result from fluctuate macroeconomic policy condition.

Keywords: Economic policy uncertainty (EPU), lean against the wind theory, market competition, emerging market, real earnings management (REM).

Topic: Financial accounting