UNMASKING EARNINGS MANAGEMENT: REVEALING WHAT’S BEHIND FROM THE PERSPECTIVE OF CONSERVATISM, DISTRESS, AND OWNERSHIP

Abstract

This study examines the contribution of accounting conservatism, financial distress, and foreign ownership on earnings management, with firm size as a moderating variable, using panel data from Indonesian manufacturing firms during 2020–2023. Employing the Kothari model for earnings management estimation and panel regression analysis via EViews 13, the study explores both direct and interaction effects among variables. The findings reveal that financial distress has a significant positive impact on earnings management, indicating that firms under financial pressure tend to manipulate earnings to maintain favorable performance impressions. In contrast, foreign ownership significantly reduces earnings management, supporting its role as an effective external governance mechanism. However, accounting conservatism does not have a significant effect. The results further show that firm size mitigates the connection between financial distress and managerial earnings manipulation but unexpectedly strengthens the effect of accounting conservatism. No moderating effect is found between firm size and foreign ownership. These results highlight the need for differentiated governance strategies that consider both financial and structural characteristics of firms. The study adds value to the existing body of knowledge through offering a comprehensive assessment of the way in which governance mechanisms and firm attributes interact to influence earnings quality in an emerging market context.