Accounting Conservatism: Antecedents and Consequence in Indonesia
Manufacturing Companies
JACOBUS WIDIATMOKO, MARIA GORETI KENTRIS INDARTI*,
CAHYANI NUSWANDARI
Accounting Department,
Faculty of Economics and Business,
Universitas Stikubank,
Kendeng Street V, Bendan Ngisor, Semarang 50233,
INDONESIA
*Corresponding Author
Abstract: - The purpose of this study is to examine and evaluate accounting conservatism's effects on the price
of equity capital. All of the manufacturing businesses listed on the Indonesia Stock Exchange (IDX) between
2018 and 2020 comprise the study's population. Purposive sampling was used to choose the sample, and 241
observations were made. The findings of this study, which were obtained using the linear regression analysis
method, show that institutional ownership and profitability have a considerable impact on accounting
conservatism. Accounting conservatism is unaffected by three more criteria, including managerial ownership,
investment opportunity set, and leverage. In advance, accounting conservatism significantly negatively affects
the cost of equity capital. Thus, the higher the institutional ownership and profitability, the higher the
accounting conservatism and the lower the cost of equity capital. The findings of this study suggest that
management will be encouraged to use conservative accounting rules by institutional ownership as a form of
corporate governance. The market will react favorably to businesses with higher levels of conservatism, which
will cause investors to need less equity capital.
Key-Words: - share ownership, company characteristics, accounting conservatism, cost of equity capital, IDX
Received: March 23, 2023. Revised: September 29, 2023. Accepted: October 5, 2023. Published: October 20, 2023.
1 Introduction
Currently, the most serious economic issue facing
capital markets in developing countries is the
accuracy of business financial information,
particularly earnings. Accounting earnings are the
primary indicator for consumers to use as a
foundation for decision-making and offer crucial
information about a company's success, [1], [2]. As
a result, the efficacy and accuracy of decision-
making will be impacted by quality earnings, [3].
Earnings produced by a conservative accounting
procedure are one sign of quality earnings. The
tendency of accountants to demand a high standard
of proof to discern between good and bad
information in financial accounts is known as
accounting conservatism, [4], [5]. Accounting
conservatism is also thought of as a measure of
caution when valuing unforeseen circumstances
with the goal of preventing liabilities or expenses
from being reported lower and assets from being
shown higher, [6].
Although the precautionary principle is no longer
a part of the relevance and trustworthiness of
accounting information, conservatism is still a
crucial accounting guideline in the earnings
measurement, [7]. Conservatism transforms into a
measurement and valuation concept of accounting
that users of financial information seek and into a
tool to control management's opportunistic conduct
under uncertain circumstances. Accounting
conservatism can also be a strategy for resolving
issues that develop between agents and principals
from the standpoint of an agency, [8], [9], [10].
Investors and potential investors will be more
cautious when considering investments in
companies. Because future losses from overly
optimistic forecasts are significantly worse than lost
profitable chances brought on by adopting an
unduly gloomy (conservative) attitude, management
must uphold the principle of conservatism when
providing information to investors, [5].
Despite the fact that accounting conservatism is
crucial for achieving transparency and disclosure of
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DOI: 10.37394/23207.2023.20.199
Jacobus Widiatmoko,
Maria Goreti Kentris Indarti, Cahyani Nuswandari
E-ISSN: 2224-2899
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information, phenomena suggest that there are still
businesses in the globe, including Indonesia, that
need to implement the conservative principle. It is
clear that the company's financial statements still
include abnormalities. There are three main
categories, according to data from the Association
of Certified Fraud Examiners (ACFE, 2022) in
Report to the Nations: a global study on professional
fraud and abuse. Financial statement fraud by 10%,
one of the three major categories, was a factor in the
largest loss of $ 954,000. Financial statement fraud
is a problem that also exists in Indonesia. According
to the 2019 Indonesia Fraud Survey report, out of 50
instances of misuse of government and corporate
assets, financial statement fraud affected 22 of those
instances. Out of a total loss of 873,430,000,000,
there were 242,260,000,000 losses or around 9.2%.
Investigating the factors that influence how the
conservative principle is applied is crucial in light of
the aforementioned facts. This study looks at
corporate governance and firm factors in relation to
accounting conservatism. A system for balancing
management, shareholder interests, and insider
expropriation, strong corporate governance is
essential in generating shareholder wealth, [11].
From the perspective of share ownership,
specifically management and institutional
ownership, this study investigates corporate
governance. Aside from that, this research looked
into how a company's qualities affected its
accounting processes.
Managerial shareholding depicts the percentage
of outstanding stock held by management. Because
they are both agents and owners, managers with
larger share ownership tend to utilize conservative
accounting practices, working to ensure the
company's sustainability rather than only focusing
on bonuses and remuneration, [12]. According to,
[13]’s research, managerial shareholding has a
beneficial effect on accounting conservatism in
Indonesian manufacturing enterprises. [14], reported
the same outcomes as well. However, according to
various research, [12], [15], [16], managerial
shareholding had no impact on accounting
conservatism.
Institutional investors as parties who monitor the
company's running, play an essential role in the
corporate governance mechanism since they have a
financial interest and autonomy to assess the
company's management and policies unbiasedly.
Institutional investors therefore require fast and
trustworthy information to enable them to
effectively monitor company operations and
participate in formulating corporate strategies, [2],
[17]. Such financial information can be obtained
from more conservative financial reporting.
Therefore, institutional investors tend to demand
more conservative accounting from managers.
Conservatism also limits management's
opportunistic behaviour so that they prioritize
shareholders' interests and raise the firm's value.
Study by, [9], and, [18], prove that institutional
shareholding positively affects accounting
conservatism. In contrast, [15], and, [16], reported
that the number of shares owned by institutions has
no impact on accounting conservatism practices.
Meanwhile, [12]’s research shows the negative
effect of share ownership by institutional investors
on management prudent practices.
The investment opportunity set is an indicator of
company's investment decision, which can affect the
firm's financial dimensions alike the firm's capital
composition, debt contracts, dividend strategy,
compensation covenant, and firm's accounting
procedure. Companies with high investment
opportunities have profitable prospects and
investment opportunities in the future. These
investment opportunities result in rising stock
prices, which in turn have a favorable impact on
rising business value. As a result, the company's
market-to-book value ratio a gauge of conservatism
is also improving, [19]. Research by, [18], and, [19],
prove that the uplifted the investment opportunity
set, the uplifted the level of accounting
conservatism. However, the study by, [13], and,
[15], show that there is no influence of the
investment opportunity on conservatism practices.
High amounts of liabilities increase a company's
survival risk. The creditor has the right to learn
about the protection of the borrowed funds because
they are the legal owners of those funds and they are
hoping to reap additional benefits in the future.
There is a greater chance of disagreements
occurring between shareholders and owners of
money the more leverage the organization has. To
anticipate this, management will be encouraged to
apply conservative accounting, [20], [21]. Research
by, [2], and, [22], prove that leverage positively
influences accounting conservatism. On the other
hand, [9], reports that leverage has no influence on
conservative accounting practices, while, [12], finds
a negative effect between leverage and accounting
conservatism.
Profitability is an indicator applied by a company
to show its ability to make profits during a financial
reporting period and describe the information of the
efficiency of its operations. Companies with higher
profitability will face higher tax burdens. Therefore,
management tends to apply accounting policies that
produce smooth profits. This logic aligns with the
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Jacobus Widiatmoko,
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E-ISSN: 2224-2899
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findings of, [16], and, [21], which show that
profitability positively affects accounting
conservatism. However, several studies have shown
that profitability has no effect on accounting
conservatism, [9], [18]. Conversely, [23], shows that
profitability significantly negatively affects
conservative accounting practices.
Researchers re-examined the variables that affect
accounting conservatism in response to the
inconsistent research findings mentioned above.
This study looks at how corporate governance and
business traits affect accounting conservatism.
Corporate characteristics such as investment
opportunity sets, leverage, and profitability are used
to quantify corporate governance in addition to
share ownership by managers and institutions. The
difference with previous research lies in testing the
impact of accounting conservatism on the cost of
capital. Research on the usefulness of accounting
conservatism using the cost of equity capital as a
benchmark in the Indonesian capital market still
needs to be explored. Conservative companies will
have better earnings quality, so the return required
by investors in the form of the cost of equity capital
tends to be low, [10]. However, the findings of
previous studies have shown mixed results. [5]’s,
research in 37 developing countries proves that
investors will demand a lower cost of equity capital
in conservative companies. Several studies also
reported the same results, [10], [24], [25], [26].
Meanwhile, research by, [27] shows that there is a
positive influence of conservatism practices on the
cost of capital borne by companies. This condition
requires a more in-depth and comprehensive study
of conservatism practices in Indonesia by involving
the antecedents of accounting conservatism
practices and examining their impact on the cost of
capital. The study's conclusions help business
management lower the cost of equity capital by
implementing conservative accounting practices and
good corporate practices. Besides that, the outcome
of this research provide input to the Indonesian
Institute of Accountants as a regulator of accounting
policies in Indonesia that conservative accounting
practices are important to implement considering
that the principle of conservatism is no longer raised
in the conceptual framework of accounting in
Indonesia.
This paper is organized systematically as
follows. After describing the introduction which
contains the research motivation, relevant previous
research, research objectives and research
contributions, this paper presented literature review
and the formulation of hypotheses in the second
part. The research method is described in the third
section. The fourth section also includes data
analysis and a discussion of the outcomes of
hypothesis testing. This paper closed by presenting
conclusions, limitations, and suggestions for future
research.
2 Literature Review
By balancing the interests of shareholders and
managers, managerial ownership can reduce agency
costs from the perspective of the agency
relationship, [17], [28]. The percentage of
outstanding shares that are owned by managers is
indicated by managerial ownership. Managers will
perform their obligations in the company's best
interests when they behave as shareholders, [29].
The fact that managers who function as shareholders
not only steer the company toward significant
profits but are also more concerned with the
sustainability of the company might help eliminate
agency conflicts. As a result, management will
typically practice conservative accounting, [12],
[17], [28]. Managerial ownership displays the
percentage of outstanding shares that are owned by
managers. Managers will perform their obligations
in the company's best interests when they behave as
shareholders, [29]. Agency conflicts may be
reduced by the fact that managers who
simultaneously serve as shareholders not only drive
the company toward big profits but are also more
concerned with the company's sustainability.
Management will often use conservative accounting
techniques as a result, [12]. Management's financial
reporting is generally more conservative the more
shares of the company that managers own.
Numerous research carried out in Indonesia
demonstrate that the level of accounting
conservatism is increased in proportion to the
amount of shares held by management, [14], [29].
Conservatism aims to raise the standard of reported
earnings data so that the market reacts favourably,
driving up share prices and, ultimately, raising the
company's worth. The logic of thought and
empirical evidence shown above serve as the
foundation for the following hypothesis.
H1: Accounting conservatism is positively impacted
by managerial ownership.
Increased openness and less information
asymmetry can be achieved through institutional
share ownership as a governance method. Owners of
institutions have excellent chances, resources, and
the capacity to constrain manager behaviour, [12].
The board of commissioners and the audit
committee will receive encouragement and
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motivation from institutional shareholders to
effectively oversee management by using
conservative accounting rules. To the interest of
shareholders, effective governance will reduce
opportunistic actions taken by management.
Companies with significant institutional ownership
typically have a sufficient and effective external
monitoring mechanism, and they may adopt more
conservative business practices, [30]. According to
[9]’s analysis of manufacturing and finance
companies listed on the Amman Stock Exchange,
the level of accounting conservatism increases with
the proportion of shares held by institutional
investors, [18], who looked into Indonesian
government-owned firms, discovered the same
outcomes.
H2: Accounting conservatism benefits from
institutional ownership.
Managers and shareholders who have distinct
interests are put in conflict through agency
relationships. Conservatism is one strategy for
minimizing agency conflicts brought on by
investing choices, [22]. A group of assets that a
company possesse,s as investment opportunities and
may one day be used as investment alternatives is
known as an investment opportunity set, [19], [31],
[32]. According to agency theory, through
management-driven investment decisions,
investment opportunity sets can reduce issues that
can occur in agency interactions between
management and principals, [32]. Large sums of
money are required to finance the expansion of
businesses with high investment opportunity sets.
Due to their significant financial needs, managers
will be compelled to adopt a conservative approach
in order to raise money from investors, [18].
According to research by [19], businesses with a lot
of investment potential prefer to use conservative
accounting methods. The same findings were
presented by, [18], who said that conservative
management will be more prevalent the greater the
potential for a firm to expand since they typically
have hidden reserves that may be used to finance
expenditures that foster company growth. The
following hypothesis is put forth in light of this idea.
H3: Accounting conservatism is positively impacted
by the investment opportunity set.
According to agency theory, the conflicting
interests of managers and creditors result in agency
costs. Because debt is a component of the
company's capital structure, there is a correlation
between accounting conservatism and agency
expenses, [2]. High levels of debt increase the
likelihood that a company won't survive. This
requirement encourages creditors to keep a closer
eye on the business's operations and accounts. The
degree of debt repayment security provided to the
corporation is something that creditors are interested
in. The distribution of net assets in the financing of
assets granted and lesser returns to managers and
shareholders are also of interest to creditors. As a
result, management must exercise greater caution
and follow conservative accounting practices, [22].
Conversely, more cautious debtors will be
offered lower initial interest rates by creditors as a
result of debt agreement violations and the ensuing
danger of default. This circumstance will motivate
management to use caution in order to secure
minimal debt costs. Numerous studies demonstrate
that management will use conservative accounting
rules to a greater extent the higher the degree of
corporate debt. For instance, [9], analysis of banking
and manufacturing firms listed on the Amman stock
exchange reveals that debt, as measured by
leverage, has a favorable impact on accounting
conservatism. The, [33], model was used by, [2], to
measure accounting conservatism, and they came to
the same conclusions. Additionally, Indonesia
demonstrates that management will act more
conservatively the more debt that is owned. The
aforementioned concepts and empirical information
are used to generate the following hypothesis.
H4: The use of leverage benefits accounting
conservatism.
All parties interested in a firm rely primarily on
financial statements as a source of information, [21].
Profit is a part of financial statements that provides
users with crucial information and illustrates
management's effectiveness in running the business
so that profit serves as the foundation for current
and potential investors to make investment
decisions. However, businesses with high profit
margins will have political costs, such as a heavy
tax burden that must be paid. As a result, businesses
with great profitability typically use conservative
accounting techniques. This is consistent with the
findings of, [16], which discovered a favorable
relationship between profitability and accounting
conservatism. [34], investigated the impact of
profitability on accounting conservatism in
manufacturing companies listed on the Indonesia
Stock Exchange and reported similar findings.
Therefore, the more profitable a company is, the
more conservative accounting principles
management tends to choose. The study hypothesis
that is presented below is based on the description
provided above.
H5: Profitability influences accounting
conservatism in a favorable way.
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According to standard definitions, conservatism
refers to the degree of caution used when appraising
uncertain conditions in order to avoid inflating
assets or earnings and underreporting liabilities or
expenses, [6]. Agency issues that emerge in the
connection between agents and principals can be
solved using accounting conservatism. Investors can
deduce confidential information about the
company's prospects thanks to managers'
commitment to producing conservative accounting
statistics. Investors can accurately estimate the
company's value with more information, which
lowers their estimation risk and the needed rate of
return. Investors will encounter fewer risks when
investing in companies with a high level of
conservatism, therefore the rate of return in the form
of the cost of capital is also low, [5], [35]. This is
consistent with, [10]’s, study that looked at how
accounting conservatism affected the price of equity
capital for Indonesian manufacturing enterprises.
The results of the study show that businesses'
conservative accounting methods will reduce the
cost of capital. The same results, which
demonstrated that accounting conservatism
positively increases the cost of equity capital, were
also published by, [27], and, [24]. The following is
how the hypothesis is put out in light of the previous
description.
H6: The cost of equity capital is negatively
impacted by accounting conservatism.
3 Methodology
Manufacturing businesses registered on the
Indonesia Stock Exchange (IDX) in 2018–2020
make up the study's population. Using a purposive
sampling technique, the research sample was chosen
based on the following standards: The company 1)
releases audited financial reports, and 2) has
complete information. A total sample of 83
companies, or 249 data, was acquired for each year
based on preset criteria. There were 8 data outliers
after assessing the residuals for normality, for a total
of 241 final data processed in this study. Using the
documentary technique, research data were gathered
from IDX Statistics (www.idx.com). The cost of
equity capital and accounting conservatism are the
two dependent variables used in this study.
Ownership structure, which comprises management
and institutional ownership, and firm characteristics,
which include investment opportunity sets, leverage,
and profitability, are the two groups that make up
the independent variables. Table 1 lists the different
measurements.
Table 1. Variable Measurements
Varia
bles
Measurements
References
CON
ACC
((Income before extraordinary +
depreciation expense - net
operating cash flow)/Total
assets)) * -1
[32], [36],
[37]
CEC

r: Cost of Equity Capital
: Book value per share in
period t
 : Earnings per share in
period t+1
: stock price in period t
[13], [37],
[38]
MO
Number of shares owned by
institutional investors/Number
of outstanding shares
[29], [37]
IO
Number of shares owned by
management/Number of
outstanding shares
[39]
IOS
(BVFAt - BVFAt-1)/Total
Assets.
BVFAt: Book value of fixed
assets in period t
BVFAt-1: Book value of fixed
assets in period t-1
[19]
Lev
Total debt/Total assets
[13]
Prof
Earnings after tax/Total assets
[37], [40]
In this work, path analysis was combined with
ordinary least squares regression as the analysis
method. Models 1 and 2 are the two models used in
this investigation. Model 1 investigates the impact
of corporate characteristics including the range of
investment opportunities, leverage, and profitability,
as well as ownership structure including managerial
and institutional ownership. The following is a
statement of the mathematical equation for the two
models.
CONACC = β0 + β1 MO + β2 IO+ β3 IOSit + β4 Lev
+ β5 Prof + ε (Model 1)
CEC = γ0 + γ1CONACC + ε (Model 2)
Information:
CONACC : Accounting conservatism
β0 and γ0 : Constant
β1 - β5 and γ1 : Coefficient
MO : Managerial ownership
IO : Institutional ownership
IOS : Investment opportunity set
Lev : Leverage
Prof : Profitability
CEC : Cost of equity capital
ε : Error term
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4 Results and Discussion
4.1 Descriptive Statistics
For each of the variables considered in this
investigation, descriptive statistics are included in
Table 2. It is clear from Table 2's statistics that the
management share ownership rate for Indonesian
manufacturing businesses is fairly low at 9.3%.
Comparatively high, or 47.7%, is institutional share
ownership, on the other side. The average IOS score
of 4.67% for the manufacturing enterprises in this
study's sample reveals that there aren't many
prospects for growth. The sample companies'
average debt level is 53% of their total assets, and
their profitability is a relatively low 3.94%. The
sample companies are relatively cautious, as
evidenced by the average value of accounting
conservatism, which is 0.016. Additionally, equity
capital has a low average cost of -0.136. The
company's generally high level of conservatism is
likely to blame for this scenario. This finding
suggests that the typical sample company is asking
investors for a low return on investment.
Table 2. Descriptive Statistics
N
Mean
Minimum
Maximum
Std.
Deviation
241
.093
.000
.732
.252
241
.478
.001
.933
.288
241
4.675
-14.583
256.715
19.668
241
.534
.001
5.073
.563
241
.039
-.376
.466
.082
241
.016
-.352
.264
.072
241
-.136
-37.034
4.604
2.555
Note: MO: managerial ownership, IO: institutional
ownership, IOS: investment opportunity set, Lev:
leverage, Prof: profitability, CONACC: accounting
conservatism, CEC: cost of equity capital.
Before utilizing ordinary least squares regression
to assess Model 1, tests for normality and classical
assumptions are conducted. The residual normality
test yields a skewness value of 0.239 and a standard
error of 0.157 as its results. The z-skewness value is
1.522 based on these values. The residuals in the
regression model have a value between -1.96 and
1.96 and are therefore regularly distributed. The
Durbin-Watson value was 1.933, between the du
value of 1.725 and the 4-du value of 2.275,
according to the autocorrelation test. As a result,
there is no autocorrelation issue in the regression
model. The variance inflation factor (VIF) value is
less than ten, and the multicollinearity problem does
not exist in the regression model, according to the
findings of the multicollinearity test, which are
displayed in Table 4. Finally, Table 3 displays the
outcomes of the heteroscedasticity test using the
Glejser test. Table 3's data show that none of the
variables are significant at the 5% level, indicating
that the regression model is not heteroscedastic.
Table 3. Heteroscedasticity Test Results of Model 1
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std.
Error
Beta
1
(Constant
)
.002
.001
1.937
.054
MO
8.621E-5
.002
.003
.049
.961
IO
.001
.002
.059
.886
.376
IOS
-3.596E-7
.000
-.001
-.016
.987
Lev
.002
.001
.133
1.974
.050
Prof
.007
.005
.090
1.358
.176
Note: MO: managerial ownership, IO: institutional
ownership, GO: IOS: investment opportunity set, Lev:
leverage, Prof: profitability.
Table 4 displays the outcomes of the Model 1
test. According to the modified R square value,
managerial ownership (MO), institutional ownership
(IO), investment opportunity set (IOS), leverage
(Lev), and profitability (Prof) account for 22.10% of
the variation in accounting conservatism.
Comparatively, factors outside the model account
for 77.90% of the data. The statistical F value
displays a value of 14.592, which is 1% significant.
These findings show that management ownership,
institutional ownership, the opportunity set for
investments, leverage, and profitability all have an
impact on accounting conservatism, indicating that
the model is plausible.
The first hypothesis, which claims that
management ownership has a positive effect on
accounting conservatism, is disproved based on the
data in Table 4 since managerial ownership (MO)
has a beta value of -0.026 with a significance level
of 0.117. According to agency theory, managers
should own shares as a means of bringing
management and shareholder interests into
alignment, [28]. Empirical evidence, however,
demonstrates that management share ownership has
little effect on the accounting conservatism
practices. This is possible because management is
not encouraged to implement the principle of
accounting conservatism because the average
management share ownership in manufacturing
companies in Indonesia is relatively low, and even
in some cases there are companies whose shares are
not owned by management. Non-owner
management will frequently exaggerate accounting
numbers in order to receive bonuses, disobeying the
accounting conservatism principle, [12].
Management ownership may be a mechanism for
addressing conflicts of interest between
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Jacobus Widiatmoko,
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management and principals, in accordance with
agency theory. The findings of this study, however,
contradict this claim. The findings of this study are
at odds with those of earlier research by, [14], and,
[32], which demonstrated that managerial ownership
has a favorable impact on accounting conservatism.
The institutional ownership beta coefficient is
0.033, with a significance level of 0.024, supporting
hypothesis 2 that institutional ownership has a
beneficial impact on accounting conservatism.
Institutional ownership influences accounting
conservatism favorably, as was predicted.
Institutional investors play a significant role in
upholding corporate governance by monitoring and
supervising management because they own a
sizeable portion of the average share capital of
Indonesian manufacturing enterprises. The findings
of this study prove that institutional owners have
carried out the supervisory and monitoring functions
effectively, thereby limiting management from
taking opportunistic actions such as earnings
management and tending to apply the principle of
accounting conservatism. This conclusion is
consistent with research findings cited by, [9], [14],
and, [18], which demonstrate the beneficial
influence of institutional share ownership on
accounting conservatism. The results of this study,
however, are at odds with those of studies by, [12],
[15], and, [16], which demonstrate that institutional
ownership has no bearing on management's practice
of accounting conservatism.
The third hypothesis, which claims that the
investment opportunity set positively influences
accounting conservatism, is disproved because the
investment opportunity set variable has a beta
coefficient of 0.000 and a significant level of 0.261.
The reason for this is that management is
encouraged to report its best results to shareholders
without having to pay attention to the principle of
conservatism in order to increase the value of the
company because future investment opportunities
will affect the company's market performance. A
negative figure in the descriptive statistics indicates
that the typical investment opportunity in the sample
companies is also subpar and not optimal. In order
to make the performance appear strong and elicit a
favorable response from the market, this
circumstance motivates management to employ
aggressive accounting practices. The findings of this
study are consistent with those of, [15], and, [32],
who found no relationship between investment
opportunities and accounting conservatism. The
findings of this study, on the other hand, run counter
to, [18], and, [19], which demonstrate that
investment possibilities have a favorable impact on
accounting conservatism.
The fifth hypothesis is disproved since leverage
has no impact on accounting conservatism. The
study's findings contradict the agency theory, which
contends that when a company has a lot of debt, its
creditors will be more likely to keep close tabs on it
and force management to adopt conservative
accounting practices. Because the organizations in
this study's sample have very high levels of
leverage, management frequently use aggressive
accounting to make financial performance appear
stronger. Therefore, it is not necessary to renegotiate
their loan agreements. The results of this study are
consistent with those of studies by, [9], [12], and,
[21], which demonstrate that leverage has no
influence on accounting conservative policies but
contradict the findings of, [2], and, [22].
Table 4. Test Results of Model 1
Model
Unstandardized
Coefficients
Standard
ized
Coeffici
ents
t
Sig.
Collinearity Statistics
B
Std.
Error
Beta
Tolerance
VIF
1
(Const
ant)
-.007
.010
-.655
.513
MO
-.026
.017
-.092
-1.575
.117
.955
1.048
IO
.033
.015
.134
2.268
.024
.935
1.069
IOS
.000
.000
-.065
-1.126
.261
.986
1.014
Lev
-.006
.008
-.045
-.767
.444
.923
1.083
Prof
.390
.051
.447
7.662
.000
.952
1.050
Adjusted R Square .221
F value 14.592
Sig. .000
Note: MO: managerial ownership, IO: institutional
ownership, IOS: investment opportunity set, Lev:
leverage, Prof: profitability
The fourth hypothesis is accepted because the
profitability variable has the expected beneficial
effect on accounting conservatism. Profitability
demonstrates the business's capacity for making
money. As a result, businesses with a high level of
profitability will typically choose for conservative
accounting. This is due to the fact that managers can
use accounting conservatism as a tool for managing
earnings to make them appear smooth and devoid of
significant volatility. The political costs that
businesses must bear are also connected to the link
between profitability and accounting conservatism.
Companies that are profitable will produce high
profits, which means they will incur high political
expenses, such as high tax obligations. Because of
this, highly profitable businesses choose to utilize
cautious accounting techniques to lower their tax
obligations. The findings of this study concur with
those of earlier research, [16], which demonstrated
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2023.20.199
Jacobus Widiatmoko,
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E-ISSN: 2224-2899
2321
Volume 20, 2023
that profitability has a favorable impact on
accounting conservatism. However, they differ from
those of studies, [9], and, [18], which found that
profitability has no impact on accounting
conservatism.
Model 2 looks at how conservatism in
accounting affects the price of equity capital.
According to data in Table 5, the accounting
conservatism variable can account for 7.4% of the
variation in the cost of equity capital (CEC), with
other variables other than those in the model
accounting for the remaining 92.6% of the variation.
13.373 is the statistical F value, which is significant
at the 1% level. Model 2, which investigates how
accounting conservatism affects the price of equity
capital, is thus possible.
The CONACC variable, which measures
accounting conservatism, has a beta coefficient of -
5.293 and a significance level of 0.000 as it is
currently given. The sixth hypothesis, according to
which accounting conservatism has a bad impact on
the price of equity capital, is thus accepted.
According to the findings of the sixth hypothesis,
accounting conservatism has a considerable impact
on the price of equity capital. These findings
suggest that investors' expected rate of return
decreases in direct proportion to how conservatively
management presents its financial accounts. Investor
requests for returns are intimately tied to how they
view the risks that the company is taking.
Companies with higher levels of conservatism show
that they provide reliable financial data to be
perceived as low risk. Due to this, investors'
requests for returns on their investments are less
demanding, which lowers the price of equity capital.
The results of this study are consistent with the
agency theory, which contends that conservatism in
accounting can be a tool for resolving issues that
may emerge in the agency between agents and
principals. Investors can more precisely estimate the
worth of the company thanks to managers'
commitment to producing conservative accounting
data. This circumstance will lessen the risk
associated with their estimation and reduce the
required rate of return in terms of the cost of equity
capital. The findings of, [5], and, [24], which
demonstrate a negative link between accounting
conservatism and the cost of equity capital, are
consistent with the conclusions of this study. The
same findings were found in research, [6],
conducted on enterprises in Indonesia: the lower the
cost of equity capital that the company must absorb,
the more accounting conservatism is employed. The
conclusions of this study, however, are at odds with
those of a study by, [27], which found a positive
correlation between accounting conservatism and
the cost of equity capital.
Table 5. Test Results of Model 2
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std.
Error
Beta
1
(Constant)
.225
.078
2.900
.004
CONACC
-5.293
1.447
-0.284
-3.657
.000
Adjusted R Square .074
F value 13.373
Sig. .000
Note: CONACC: accounting conservatism
5 Conclusion
This study demonstrated that accounting
conservatism is significantly positively impacted by
institutional ownership and profitability. Accounting
conservatism is unaffected by managerial
ownership, investment opportunity set, or leverage.
This research established the large negative impact
accounting conservatism has on equity capital costs.
According to the study's findings, management
ownership rarely lessens agency conflict. The
findings of this study offer useful information for
making business decisions and give the Indonesian
Institute of Accountants suggestions on how to
include conservatism into its theoretical framework
for financial reporting.
Future research should take other corporate
governance components including independent
commissioners, audit committees, government
ownership, and foreign ownership into account due
to the relatively low adjusted R square (11.6%).
Future studies can look at how accounting
conservatism, acting as a mediating factor, affects
the cost of equity capital in both a direct and indirect
manner.
Acknowledgement:
The Directorate of Research, Community Service,
and Publications at Universitas Stikubank in
Semarang, Indonesia, is funding this study through a
grant with the grant number
062/J.09/UNISBANK/PN/XII/2021.
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Jacobus Widiatmoko,
Maria Goreti Kentris Indarti, Cahyani Nuswandari
E-ISSN: 2224-2899
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
- Jacobus Widiatmoko produces Ideas and Novelty
as well as making research concepts
- Maria Goreti Kentris Indarti has implemented
theory and discussion as well as the optimization.
- Cahyani Nuswandari was tabulating and
processing data and management references.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
The Directorate of Research, Community Service,
and Publications at Universitas Stikubank in
Semarang, Indonesia, is funding this study through a
grant with the grant number
062/J.09/UNISBANK/PN/XII/2021.
Conflict of Interest
The authors have no conflict of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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DOI: 10.37394/23207.2023.20.199
Jacobus Widiatmoko,
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