The Effect of Earnings Persistence and Capital Structure on Earnings Response Coefficient in Indonesia Stock Exchange
1Rehuel Murlie Sandy, 2Ali Sandy Mulya
1School of Finance, Zhejiang Gongshang University, Zhejiang, Hangzhou, China.
2Faculty of Economics and Business, Budi Luhur University, Pesanggrahan, South Jakarta, Indonesia.
https://doi.org/10.47191/jefms/v7-i3-04
ABSTRACT:
This study managed to investigate the effect of earnings persistence and leverage on the Earnings Response Coefficient (ERC) in companies listed on the Indonesia Stock Exchange. Based on the annual report data of 265 companies from 2011 to 2021, we show that earnings persistence has a significant and positive impact on ERC, while leverage has a limited impact on ERC. Further findings demonstrate that higher investor sentiment could lead to a larger impact of earnings persistence on ERC. These results imply that, as high earning quality Attracts high investor sentiment in the trading stock, great news can be processed into the price quickly and the price rises in a short period, while bad news could also lead to immediate price corrections with investors’ attention. Thus, we find that a positive relationship between ROE and ERC, and investor sentiment helps strengthen the relationship. Our study adds the studies on price resilience and expands the understanding of the Indonesia Stock Exchange’s features.
KEYWORDS:
Earnings Response Coefficient; Indonesia Stock Exchange; Financial Report; Bank Indonesia; Earnings; Capital Structure
REFERENCES:
1) Abdulshakour, S.T. 2020. Impact of Financial Statements on Financial Decision Making, Open Science Journal, June.
2) Ali, Asgar, et al. 2021. Real Earnings Management and Stock Returns: Moderating Role of Cross-Sectional Effects, Asian Journal of Accounting Research Vol. 6 No.3, 2021 pp. 266-280 Emerald Publishing Limited 2443-4175 DOI 10.1108/ AJAR-11-2020-0107.
3) Al-Nasseri, Alya, et al. 2021. Investor Sentiment and The Dispersion of Stock Returns: Evidence Based on The Social Network of Investors, International Review of Financial Analysis Vol. 78, Nov 2021, 101910.
4) Ball.R. & Brown, P. 1986. An empirical evaluation of accounting income numbers, Journal of Accounting Research, 159-178.
5) Bessler, Wolfgang, et al. 2011. Information Asymmetry and Financing Decisions, International Review of Finance. 11:1, 2011: pp. 123-154.
6) Bulutoding, Lince, et al. 2020. The Connexion of Financial Ratio and Islamic Social Reporting (ISR) on Earning Response Coefficient with Firm Size as A Moderating, International Journal of Research Science & Management, Thomson Reuters. ISSN: 2349-5197.
7) CBOE. 2023. Chicago Board Options Exchange. www.cboe.com.
8) Cho, J., & Jung, K. 1991. Earnings Response Coefficients: a synthesis of theory and empirical evidence. Journal of Accounting Literature, 85-116.
9) Fatma, N. and Hidayat, W. 2020. Earnings Persistence, Earnings Power, and Equity Valuation in Consumer Goods Firms, Asian Journal of Accounting Research, Vol. 5 No.1 pp 3-13 Emerald Publishing Limited 2443-4175. DOI 10.1108/AJAR-05-2019-004.
10) Frank, M.Z. and Goyal, V.K. 2009. Capital Structure Decisions: Which Factors are Reliably Important, Financial Management, Spring pp 1 -37.
11) Graham, John R. and Leary, Mark T. 2011. A Review of Empirical Capital Structure Research and Directions for the Future, The Annual of Financial Economics, 2011,3:309-45.
12) Greenwood, R. and Shleifer, A. 2014. Expectations of Return and Expected Returns, Advance Access Publication.
13) Gurusinga, J.J. & Pinem, D.Br. 2019. Pengaruh Persistensi Laba dan Leverage terhadap Earning Respone Coefficient, Equity, Vol. 19 No. 1.
14) Hasanzade. 2013. Factors Affecting the Earnings Response Coefficient: An Empirical study for Iran. European online Journal of Natural and Social Sciences, 2(3), 2551–2560. www.european- science.com
15) Henckel, Timo, et al. 2021. Belief adjustment: a double hurdle model and experimental evidence. Experimental Economics 25, 26–67 (2022).
16) IDX. 2022. Indonesia Stock Exchange. www.idx.com. Indonesia
17) Imroatussolihah. 2013. Pengaruh Risiko, Leverage, Peluang Pertumbuhan, Persistensi Laba dan Kualitas Tangggung Jawab Sosial Perusahaan terhadap Earning Response Coefficient pada Perusahaan High Profil, Jurnal Ilmiah Manajemen Vol.1, No. 1, pp.75-87.
18) Khan. Z.A and Hussanie, I. 2018. Shareholders Wealth Maximization: Objective of Financial Management Revisited, International Journal of Enhanced Research in Management & Computer Applications, ISSN: 2319-7471, Volume 7 Issue 3, March 2018, Impact Factor: 3,578.
19) Mulyani. Sri, et al. 2007. Faktor-Faktor yang Memengaruhi Ernings Response Coefficient pada Perusahaan yang Terdaftar di Bursa Efek Jakarta, Journal of Accounting and Auditing Indonesia (JAAI), Vol.11 No. 1, hal 35-45.
20) Riyani, et al. 2023. Determinants of Indonesia Capital Market Reaction, World Scientific and Engineerring Academu and Society (WSEAS).
21) Scott, W.R & O’Brien, P.C. 2020. Financial Accounting Theory. 8th Ed. Canada: Pearson Prentice Hall Canada Inc.
22) Silalahi. 2014. "The Influence of Corporate Social Responsibility (CSR) Dis- closure, Beta and Price to Book Value (PBV) on Earnings Response Coefficient (ERC) (Empirical Study on Manufacturing Companies Listed on the Indonesia Stock Exchange)", Journal of Economics, Vol. 22, No. 1, Accounting Study Program, Faculty of Economics, Riau University, Pekanbaru.
23) Suwardjono. 2014. Teori Akuntansi Perekayasaan Pelaporaan Keuangan edisi Ketiga, BPFE Yogyakarta.
24) Wijaya, et al. 2020. Factors Affecting Earning Response Coefficient With Profitability as Moderating Variable in Manufacturing Companies, Advance in Economics Business and Management Research Vol. 145 Atlantis Press.
