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Earnings Quality and Market Values of Indonesian Listed Firms

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  • Yanthi Hutagaol‐Martowidjojo
  • Aljosa Valentincic
  • Dezie L. Warganegara

Abstract

We find that earnings quality (EQ) is reliably negatively correlated with the market values of equity of firms listed on the Jakarta Stock Exchange (IDX). The financial reporting process produces earnings viewed as increasingly ‘incomplete’ for valuation purposes by the capital market despite moves towards high‐quality financial reporting standards (IFRS) during the sample period 1995–2015. Time‐series analyses reveal that EQ decreases rather than increases through time. The role of earnings in valuation is replaced by other attributes, most notably net dividends. Firms that pay out dividends are valued significantly higher, and firms that issue equity are valued lower. These results are robust regardless of other accounting, market and governance controls. Large and closely held firms are valued higher than smaller firms, consistent with some aspects of the political cost hypothesis. Shares with higher idiosyncratic risk are valued higher, consistent with option value, as are shares where the volume of shares traded is more volatile. Collectively, the results indicate that the mere adoption of high‐quality accounting standards (IFRS) and other nominal changes in capital market regulations do not automatically increase the quality of the financial reporting process.

Suggested Citation

  • Yanthi Hutagaol‐Martowidjojo & Aljosa Valentincic & Dezie L. Warganegara, 2019. "Earnings Quality and Market Values of Indonesian Listed Firms," Australian Accounting Review, CPA Australia, vol. 29(1), pages 95-111, March.
    • Handle: RePEc:bla:ausact:v:29:y:2019:i:1:p:95-111
    DOI: 10.1111/auar.12234
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    Cited by:

    1. Yuni Pristiwati Noer Widianingsih & Doddy Setiawan & Y. Anni Aryani & Evi Gantyowati, 2022. "Accrual Management and Firm-Specific Risk," IJFS, MDPI, vol. 10(4), pages 1-12, November.
    2. Yuni Pristiwati Noer Widianingsih & Doddy Setiawan, 2023. "The tenure of directors and value relevance of accounting information," SN Business & Economics, Springer, vol. 3(6), pages 1-18, June.
    3. Fares Alsufy & Malik Abu Afifa & Mohammed Zakaria Soda, 2020. "Mediating Effects of Liquidity in the Relationship between Earnings Quality and Market Value of the Share Price: Evidence from Jordan," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 19(1), pages 17-32, June.

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