Iran. Econ. Rev. Vol. 22, No. 2, 2018. pp. 599-625 [616534]

Iran. Econ. Rev. Vol. 22, No. 2, 2018. pp. 599-625
The Analysis of Effects of Good Corporate
Governance on Earnings Management in
Indonesia with Panel Data Approach

Iskandar Muda *1, Weldi Maulana2, Hasan Sakti Siregar3, Naleni Indra4

Received: September 10, 2017 Accepted: October 14, 2017

Abstra ct
he research was aimed to analyze effects of Good Corpora te
Governance , comprising of Composition of Commissioners & Audit
Committee on earnings management an Empirical Study on Indonesia
Stock Exchange with Panel Data Approach . The d ata collection method
used was documentation. The samples in this research were in
Indonesia registered in Indonesia Stock Exchange. The da ta analysis
method employed panel data regression analysis with E -Views
Software . The results demonstrate that Good Corporate Governance
simultaneously affects earnings management. Partial testing indicates
that Good Corporate Governance variable of Composition of
Commissioners has n o effect on earnings management & Audit
Committee has no effect on Earnings Management .
Keywords : Audit Committee , Composition of Commissioners , Good
Corporate Governance , Earnings Management .
JEL Classification: D53, G15, G32, L60 .

1. Introduction
The issue of Good Corporate Governance is being hotly debated,
especially among the economists & businessmen in Indonesia. The
financial crisis happening in various countries , particularly in
Indonesia in 1997, which eventually turned into an Asian financia l

1. Department of Accounting, Faculty Economics and Business, Universitas
Sumatera Utara, Me dan, North Sumatera, Indonesia (Corresponding Author:
[anonimizat]) .
2. Faculty Economics and Business, Universitas Sumatera Utara, M edan, North
Sumatera, Indonesia ([anonimizat]) .
3. Department of Accounting, Faculty Economics and Business, Universitas
Sumatera Utara, Medan, North Sumatera, Indonesia ( [anonimizat]) .
4. Department of Accounting, Faculty Economics and Business, Universitas
Sumatera Utara, Medan, North Sumatera, Indonesia ( [anonimizat]) . T

600/ The Analysis of Effects of Good Corporate Governance …
crisis , was seen as a result of the weakness in Good Corporate
Governance practices in Asian countries. The failure of several
companies & the emerging financial malpractice cases due to the
crisis is the bad pract ice of Corporate Governance. Because of it,
Good Corporate Governance finally became an important issue ,
especially in Indonesia which was worst affected by the crisis. In
addition, many infringement cases committed by issuer companies in
capital market be ing h andled by Capital Market & Financial
Institution Auditing Body Republic of Indonesia, show the low quality
of good corporate governance practices in our country.
Based on several cases, financial statements have raised the
question on the effectiveness of Good Corporate Governance
implementation in a company for minimizing earnings management.
The conflict of interest between the company owners & the
management can be minimized by a monitoring mechanism capable of
balancing the interests between the management & shareholders or
other parties. Below is an example of a company that performs an
earnings management.
It was indicated that PT. Kimia Farma Tbk. in 2002 had earning
management practices by raising its earnings up to IDR 32.7 billions.
PT. Indofarma in 2004 conducted an earnings management practice by
presenting an overstated net profit of IDR 28.870 billio ns, as an
impact of goods inventory assessment which is higher than expected,
resulting in understated cost of sales for that year. Financial scandals
also occurred in developed countries, such as such as Enron, Merck,
World Com in United States (US) & the majority of other companies
in United States (Cornett et al., 2006). Not long after the case, there
were similar cases such as Tyco, Global Crossing & Xerox Corp. All
these events defame the public accounting profession that should be
independent. On that basis, the United States Parliament on 23
January 2001 issued a provision in the field of public accountant
services known as the Sarbanes Oxley Act.
Looking at case examples above, it is very relevant to ask a
question on the effectiveness of Good Corporate Governance
implementation, especially in manufact uring companies listed on IDX
as there are manufacturing companies indicated to have implemented
earnings management. Good Corporate Governance provides a

Iran. Econ. Rev. Vol. 22, No.2, 2018 /601
structure facilitating the determination of a company’s goals, as well
as a means of determining the work m onitoring techniques
(Darmawati et al., 2004 & Lutfi et al., 2016 ).
The agency theory describes that earnings management problem
minimized by a monitoring through Good Corporate Governance.
Corporate Governance is a concept to improve management
performance in supervising or monitoring the management
performance while guaranteeing the manag ement accountability for
the shareholders based on regulatory framework (Dalimunthe et al.,
2016; Lubis et al., 2016 ; Muda et al., 2016) . The concept of Corporate
Governance is proposed for achieving more transparent company
management for all financial statements users. If the concept is used
properly, then the economic growth is expected to move forward in
line with better transparent company management, which eventually
gives benefits to many parties. (Nasution & Setiawan, 2007). The
level Good Corpora te Governance users can be measured, & it can be
compared with each other. A number of methodologies for measuring
Good Corporate Governance have been developed & can be used by
users. The Forum Corporate Governance in Indonesia (FCGI), for
example, develo ped a tool for assessing Good Corporate Governance
which can also be used as an audit tool (FCGI 2003). In this research,
the indicator of Good Corporate Governance mechanism used the
mechanism of Composition of Commissioners & Audit Committee. In
general, the Composition of Commissioners are given the tasks &
responsibilities to monitor the information quality contained in the
financial statements (Nurzaimah et al., 2016; Muda et al., 2016;
2017) . Briefly, there are five aspects assessed in this FCGI GCG
assessment scheme, namely: Shareholder rights , GCG Policy , GCG
Practice , Disclosure & Audit. In Audit weights consist of having an
effective internal audit, audited by an independent public accountant,
having an effective audit committee, developing effect ive
communication between internal audit, external audit & audit
committee . It is very important, in the light of the management’s
interests to implement earnings management which may put impact on
the decreasing investors’ trusts. The Audit Committee base d on BI
Regulation No. 8/4/PBI/2006 states that the task of the Audit
Committee is to monitor & evaluate the planning & execution of the

602/ The Analysis of Effects of Good Corporate Governance …
audit, as well as to monitor the follow -up of audit outcome for
assessing the adequacy of the financial statement proce ss.
One of methods conducted by the management in the process of
preparing financial statements – which may affect the level of profit
shown – is earnings management (Mahdaleta et al., 2016 & Lubis et
al., 2016) . It is expected to increase the company value at certain
times. Earnings management conducted by company management will
increase the company value, but then it will go down (Jansen et al. ,
2012). Earning management occurs when managers use their
decis ions in financial reporting & in preparing transactions to alter
financial statements to either create a false picture for stakeholders
about the company's economic performance, or to influence
contractual results that depend on accounting figures reported .
In the concept of Earning Management that has signaling
motivation to record discretionary accruals to better reflect the impact
of the underlying economic events on the performance of the
company. Management records discretionary accruals to convey
private information about a company's ability to generate future
profits, or to make profits a more reliable & timely measure of current
company performance than non discretionary accruals, while
Discretionary accruals are also called abnormal accruals are oft en
used as a proxy for opportunistic profit management in some previous
studies according to their respective contexts, but managers may have
other motivations for recording discretionary accruals to signal the
performance of the company today & the future .
The existence of Earning Management in business entity is
inseparable from various or underlying motivation factors as for some
motivations related to the implementation of Earning Management ie,
bonus motivation, political motivation, taxation motivatio n,
motivation of change of chief executive officer (CEO), motivati on of
initial public offering ( IPO), debt -induced motivation, motivation to
meet expectations & maintain reputation. In addition, there are several
steps or ways in doing business entities r elated to earning management
with Taking a bath, Income Minimization, Income Minimization &
Income Smoothing. Based on the background described above, the
subject matter in this research is: “Does Good Corporate Governance,
which consists of the Compositi on of Co mmissioners & Audit

Iran. Econ. Rev. Vol. 22, No.2, 2018 /603
Committee simultaneously & partially affect earnings management?”

2. Literature Review
2.1 Profit Management
Earnings management is an effort by corporate managers to intervene
or affect information in financial statements with the aim of deceiving
the stakeholders who want to know the performance & condition of
the company (Sulistyanto, 2008). In the opinion of (Lutfie et al. ,
2016), the ways to underst and the earnings management are divided
into two. First, it is seen as manager opportunistic agent in
maximizing its utility in the face of compensation contracts, debt
contracts & political costs (Opportunistic Earnings Management).
Second, viewing the earnings management from the perspective of
efficient contracting (Efficient Earnings Management), where the
earnings management gives flexibility to the manager to protect
themselve s & the company in the anticipation of unforeseen events for
the benefit of the parties involved in the contract.

2.2 Agency Theory
In order to underst and Corporate Governance, then it should use the basic
perspective of agency relationship. (Jansen & Meck ling, 1976 in Muda &
Dharsuky, 2015 ) pointed out that agency relationship is a contract between
the manager (agent) & the investor (principal). The owners expect high
returns from their investments in company, whilst the management expects
high compensation & fulfillment of their psychological needs. It leads to
conflicts between the management & owners, as each of them will fulfill
their own interests (opportunistic behavioral).
Stakeholder theory emphasizes on organizational accountability
which is far beyond simple financial or economic performance. This
theory declares that organizations will voluntarily disclose
information about their environmental, social & intellectual
performance, beyond & above mandatory requests, in order to meet
real expectations or those recognized by stakeholders (Yahya et al.,
2017) . Stakeholder theory has ethical (moral) & managerial sectors.
The ethics field argues that all stakeholders have the ri ght to be tre ated
fairly by the organization & managers must manage the organization
for the benefits of all stakeholders.

604/ The Analysis of Effects of Good Corporate Governance …
2.3 Good Corporate Governance
According to (Kausalty et al. , 2013), it was revealed that corporate
governance refers to the systems, principles & processes by which a
company is governed. Corporate governance provides guidance on
how to control & direct the company to fulfill the goals & objectives
that is able to a dd the company value & usable for all stakeholders in
the long term (Muda et al., 2017) . Stakeholders in this regard include
all parties of the board of directors, management, sharehol ders,
employees & the public. The mechanism of Good corporate
governance consists of several variable indicators. In the present
research, the indicators used by researchers are the Composition of the
Commissioners & Audit Committee.

2.4 Composition of Commissioners
In general, the board of commissioners is assigned and given
responsibility for information quality monitoring as contained in the
financial statements. This is important, given the importance of
management to perform earnings management, resulting in poorer
trust of the investors (Muda et al., 2017) . In orde r to h andle this, the
board of commissioners is allowed to gain access to company
information. The board of commissioners has no authority within the
company. Therefore, the board of directors is responsible for
delivering information related to the compan y to the board of
commissioners (NCCG, 2001).

2.5 Audit Committee
The audit committee is supplementary organ required in the
implementation of Good Corporate Governance principle, carrying out
the directorial functions in the implementation of company
management and managing important tasks related to the financial
statement system. According to Decree 29/PM/2004, the audit
committee is a committee set up by the board of commissioners for
carrying out the monitoring task over company management. The
presence of the audit committee is highly crucial for the company
managem ent. The audit committee is deemed as a connection between
the shareholders, the board of commissioners and the manage ment in
handling control issues .

Iran. Econ. Rev. Vol. 22, No.2, 2018 /605
2.6 The Five Aspects Assessed in the GCG Assessment Framework
Some tools for self -assessment of GCG conditions in companies in a
spreadsheet file consist of: (Internal Audit, 2017)

1. Shareholder rights
In shareholder rights may provide an evaluation, whether the company
has:
a. Holds a General Meeting of Shareholders (GMS) within 6
months after the end of the fiscal year,
b. Submit to shareholders notices concerning the Annual
Shareholder Meeting at least 28 days before the General
Meeting of Shareholders is held;
c. Encouraging shareholders to attend GMS and utilize their voting
rights;
d. Provide sufficient opportunities for shareholders to submit
questions at the GMS.

2. GCG Policy
In the GCG policy is assessed whether the company has:
a. Have written rules on GCG in which the rights of shareholders,
duties and responsibilities of the Board of Directors and Board of
Commissioners are explained;
b. Providing access for the public to know the company's policy
regarding public investors;
c. Establishing a responsible organ (e .g. the Board of
Commissioners) to ensure that the company complies with
established GCG rules;
d. Have rules of conduct / ethics for employees in writing;
e. Inform and implement properly th e rules of conduct/ethics .

3. GCG Practice
In practice this GCG is tested whether within the company:
a. The Board of Directors holds regular meetings with the Board of
Commissioners;
b. There are strategic plans and operational plans that provide
guidance to the Board of Directors and Board of Commissioners
to carry out their duties and functions;

606/ The Analysis of Effects of Good Corporate Governance …
c. The Board of Directors and Board of Commissioners have been
trained or have appropriate backgrounds, enabling them to
perform their duties;
d. Members of the Board of Commissioners and Board of Directors
are not involved in a conflict of interest;
e. There is a performance appraisal syst em of the Board of
Directors and the Board of Commissioners.

4. Dis closure
In this section it can assess whether the company has:
a. Providing equal access to shareholders and financial analysts;
b. Provide a proper explanation of business risks;
c. To express the remuneration of the Board of Directors and Board
of Commissioners correctly;
d. Disclose related party transactions;
e. Presents the results of financial performance and analysis
management via the internet.

5. Audit
In this section it should be assessed whether the company is:
a. Has an effective internal audit,
b. Audited by an independent public accountant,
c. Develops an effective audit committee,
d. Develop s effective communication between internal audit,
external audit and audit committee.
The conceptual framework can be described as follows :

Figure 1 : Conceptual Framework
Good Corporate
Governance (GCG)
Composition of Board of
Commissioners (CBC)
Audit Committee
(AC)
Earnings Management
(EM)

Iran. Econ. Rev. Vol. 22, No.2, 2018 /607
From the conceptual framework above, the researchers had the
intention to examine the analysis of effects of Good Corporate
Governance, which consists of the composition of commissioners and
audit committee, on earnings management. The composition of
commi ssioners is generally given with tasks and responsibilities to
monitor the information quality contained in financial statements. It is
highly important, given the importance of management to conduct
earnings management that may impact on poorer trust of t he investors.
In order to h andle this, the board of commissioners is allowed to gain
access to company information.
The audit committee is a committee set up by the board of
commissioners for carrying out the monitoring task over company
management. The presence of the audit committee is highly crucial for the
company management. The audit committee is deemed as a connection
between the shareholders, the board of commissioners and the
managem ent in h andling control issues. The audit committee is a
committ ee established by the board of commissioners to carry out
supervisory duties in the management of the company. The existence of
the audit committee is very important fo r the management of the company .
Earnings management is done with a specific purpose. Earnings
management is made by accruals that increase profits for the purpose
of obtaining relatively high stock prices at the time of issue issuance.
Earnings management can also be done with the aim of gaining profits
related to the ownership of managemen t shares. This can be done, for
example, in the employee stock option program. In this program, the
price of an option is usually determined at the time of the program
offer. This encourages management to make earnings management
before the option grant da te i.e. lowered earnings in order to affect
stock prices and thus management can accept the option at the time of
relative stock price .

3. Material and Method
3.1 Type and Site of the Research
The research type was based on causal associative research.
According to (Erlina, 2008 & 2017 ) associative / relationship research
aims to find out the relationship between two or more variables or to
explain effects of independent variables & dependent variables.

608/ The Analysis of Effects of Good Corporate Governance …
3.2 Research Population and Samples
Population is a combination of the entire data elements in the form of
events, objects or people having similar characteristics which become
the focus of a researcher for being viewed as a univers e of research
(Muda , 2017). The population in this research was 325 manufacturing
companies listed on Indonesia Stock Exchange which are grouped
based on sub -sector of the companies. The sample is part of the
population ( in part or representative population) to be employed in the
research ( Gusnardi et al., 201 6). The sampling in this research was
performed by using Slovin formula: (Sirojuzilam et al., 2016)
n =
where:
n: The number of sample’s members
N: Total population
e: error tolerance at 10%, therefore :
n = = 76,47 or 77, thereby, the number of samples
in this research is being rounded into 78 company sectors

3.3 Data Analysis Method
The data were analyzed using regression method of panel data, &
were sectioned using Eviews software tool. The panel data means
statistical methods with regression using panel data or pooled data was
a combination between time series & cross section data. In the opinion
of (Tarmizi et al. , 2016 & 2017 ), there are 2 ways to arrange a panel
data structure, i.e. Independent Pooled Data and Longitudinal Data.

3.4 Data Testing
The residual normality testing in formal OLS method can show
whether or not the residual is normally distributed, by means of
comparing the Jarque -Bera (JB) value with chi -Square α = 0.05 and
df = 2 of 5.9915:
1. If JB value > 5.9915 then the residual is not normally distributed
2. If JB value < 5.9915 then the residual is normally distributed.

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Iran. Econ. Rev. Vol. 22, No.2, 2018 /609
3.5 Estimation of Panel Data Regression Model
The panel data equation model is a combination of cross section data
and time series data:
Yit = α + β 1X1it + β 2X2it + ε it
where:
Yit : Dependent variables
Xit : Independent variables
α : Constant
β1, β2, : Coefficients Regressions
i : ith entity
t : tth entity
€ : error

In panel data analysis, there are several analytical methods, such as
Common Effects Model (CEM), Fixed Effect Model (FEM) and
Random Effect Model (REM). Common Effect Model (CEM) refers
to a model with non -different (constant) intercept and slope
coefficients, thus ignoring the site and time dimensions of the panel
data and using the OLS Regression Estimation for the estimation
(Gujarati, 2004). This metho d can be analyzed using two approach
models, i.e. Fixed Effect Model (FEM) and Random Effects Model
(REM).
Fixed Effects Model (FEM) refers to models with non -different
slopes (constant) but with varying or different intercepts based on
cross -section (in t his case is the company). Although intercepts may
vary between companies, each of these intercepts does not differ from
time to time (Gujarati, 2004). The estimation with OLS makes this
estimation into General Least Square Fixed Effect, thus the resulted
data are unbiased and consistent.
The Random Effects Model (REM) refers to a model with non –
different (constant) slope but with varying or different intercepts
based on cross -section (in this case is the company) in randomly
instead of in a fixed manner (Gu jarati, 2004). In the fixed effect
model, the differences between individuals are reflected by the
intercept or constants, but on the Random effects model the
differences are accommodated by the error terms of each individual.

610/ The Analysis of Effects of Good Corporate Governance …
3.6 Selection of Panel Data Regression Model
3.6.1 Chow Test
The chow test is undertaken to select whether the model used should
be Common Effect Model (CEM) or Fixed Effect Model (FEM). This
testing was performed with the following hypotheses:
Ho: Probability > 0.05, then Common E ffect Model (CEM) is valid
to be used.
Ha: Probability < 0.05, then Fixed Effect Model (FEM) is valid to
be used.

3.6.2 Hausman Test
The Hausman test is used as the basis for consideration in selecting
whether the model used is Fixed Effect Model (FEM) or Random
Effect Model (REM).
This testing was conducted with hypotheses as follows:
Ho: Probability > 0.05, then Random Effect Model (R EM) is valid
to be used.
Ha: Probability < 0.05, then Fixed Effect Model (FEM) is valid to
be used.

3.6.3 Hypothesis Testing
The hypothesis testing was conducted using panel data regression
analysis model which aims to predict the extent of the strength of
effects of independent variable on dependent variable through t test
and F test using static regression equation model:

EM = a + b 1CBC + b 2AC + e
Description :
EM : Earnings Management
a : Constants
b1,b2 : Coefficient Regression
CBC : Composition of Board of Commissioners
AC : Audit Committee
e : Error

3.6.4 Coefficient of Determination
The coefficient of determination statistical testing was conducted by
observing the adjusted R2. The adjusted R2 value of the coefficient of

Iran. Econ. Rev. Vol. 22, No.2, 2018 /611
determination ranges from 0 to 1 (0≤R2≤1) (Sadalia et al., 2017;
Azlina et al ., 2017; Nasir et al., 2017 ). The adjusted R2 value is said to
be good if it is above 0.5 becaus it ranges from 0 to 1.

4. Results And Discussion
4.1 Result
4.1.1 Descriptive Statistical Analysis
Descriptive statistics are the process of collecting, presenting, and
summarizing which serve to provide a sufficiently examined data. The
illustration or description of data can be seen from the mean, maximum,
and standard deviation v alues. It can be seen in the following Table:

Table 1: Descriptive Statistics
EM CBC AC
Mean 0.042682 0.375390 2.633898
Median 0.030740 0.333000 3.000000
Maximum 0.652810 0.750000 5.000000
Minimum -1.223345 0.100000 0.000000
Std. Dev. 0.166357 0.112074 1.125555
Skewness -1.505356 -0.030866 -1.611532
Kurtosis 16.74276 4.705446 4.634667
Jarque -Bera 2432.862 35.79773 160.5325
Probability 0.000000 0.000000 0.000000
Sum 12.59129 110.7400 777.0000
Sum Sq. Dev. 8.136367 3.692834 372.4610
Observations 390 390 390
Source : Eviews Results (2017) .

Figure 2: Normality Testing
Source : Eviews Results (2017)

612/ The Analysis of Effects of Good Corporate Governance …
4.1.2 Data Testing
Based on the table above, it can be concluded that concluded that the
earnings management being observed is normally distributed .

4.1.3 Estima tion of Panel Data Regression Model
4.1.3.1 Common Effect Model ( CEM)

Table 2: Cammon Effect Model (CEM)
Dependent Variable: EM
Method: Panel Least Squares
Date: 04/08/17 Time: 18:41
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
Variable Coefficient Std. Error t-Statistic Prob.
CBC 0.017664 0.086936 0.203179 0.8391
AC -0.005740 0.008656 -0.663055 0.5078
C 0.051169 0.039932 1.281415 0.2011
R-squared 0.001597 Mean dependent var 0.042682
Adjusted R -squared 0.05241 5 S.D. dependent var 0.166357
S.E. of regression 0.166793 Akaike info criterion -0.734014
Sum squared resid 8.123372 Schwarz criterion -0.696519
Log likelihood 111.2671 Hannan -Quinn criter. -0.719000
F-statistic 0.233556 Durbin -Watson stat 1.574240
Prob(F -statistic) 0.791861
Source : Eviews Results (2017)

Common Effect Model (CEM) generates the following equation:
EM = 0,051169 + 0,017664 CBC – 0,005740 AC
Based on the estimation result of using Common Effect Model
(CEM) with common intercept, it gives determination coefficient
value of Adjusted R -squared by 0.052415. That is, GCG variable
consisting of CBC and AC simultaneously is able to explain EM
variable at 5.24%, whilst the 94.76% is explained by other variables .

Iran. Econ. Rev. Vol. 22, No.2, 2018 /613
4.1.3.2 Fixed Effect Model (FEM)

Table 3: Fixed Effect Model (FEM)
Dependent Variable: EM
Method: Panel Least Squares
Date: 04/08/17 Time: 18:31
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
Variable Coefficient Std. Error t-Statistic Prob.
CBC 0.014574 0.112900 0.129085 0.8974
AC -0.002168 0.011959 -0.181261 0.8563
C 0.042921 0.053586 0.800983 0.4240
Effects Specification
Cross -section fixed (dummy variables)
R-squared 0.389597 Mean dependent var 0.0426 2
Adjusted R -squared 0.2330 83 S.D. dependent var 0.1663 7
S.E. of regression 0.1456 85 Akaike info criterion 0.8328 1
Sum squared resid 4.9664 64 Schwarz criterion 0.0704 9
Log likelihood 183.84 25 Hannan -Quinn criter. 0.5275 0
F-statistic 2.4892 19 Durbin -Watson stat 1.84149
Prob(F -statistic) 0.0000 01
Source : Eviews Results (2017)

Fixed Effect Model (FEM) generates the following equation:
EM = 0,0429216 + 0.0145740 CBC – 0.0021689 AC + [CX=F]
Based on result of equation estimation using Fixed Effect Model
(FEM) for EM, it obtains Adjusted R -squared equal to 0,233083. That
is, GCG variable consisting of CBC and AC simultaneously is able to
explain EL variable at 23.30% whilst 76.70% is explained by other
variables .

614/ The Analysis of Effects of Good Corporate Governance …
4.1.3.3. Random Effect Model (FEM)

Table 4 :Random Effect Model (REM)
Dependent Variable: EM
Method: Panel EGLS (Cross -section Random effects)
Date: 04/08/17 Time: 18:32
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
Swamy and Arora estimator of component variances
Variable Coefficient Std. Error t-Statistic Prob.
CBC 0.015842 0.093517 0.169399 0.8656
AC -0.004315 0.009552 -0.451698 0.6518
C 0.048100 0.044724 1.075479 0.2830
Effects Specification
S.D. Rho
Cross -section random 0.083775 0.2485
Idiosyncratic random 0.145685 0.7515
Weighted Statistics
R-squared 0.000786 Mean dependent var 0.026203
Adjusted R -squared 0.06058 0 S.D. dependent var 0.144770
S.E. of regression 0.145208 Sum squared resid 6.156948
F-statistic 0.114802 Durbin -Watson stat 1.959592
Prob(F -statistic) 0.891582
Unweighted Statistics
R-squared 0.001504 Mean dependent var 0.042682
Sum squared resid 8.124130 Durbin -Watson stat 1.572951
Source : Eviews Results (2017)

Random Effect Model (REM) generates the following equation:

EM = 0,048100 + 0,015842 CBC – 0,004315 AC + [CX=R]

Based on result of equation estimation u Random sing Random
Effect Model (REM) for EM, it obtains Adjusted R -squared of

Iran. Econ. Rev. Vol. 22, No.2, 2018 /615
0,060580. That is, GCG variable consisting of CBC and AC
simultaneously is able to explain EM variable at -6,05%, whist the
93,95 % is explained by other selection variables .

4.1.4 The Selection of Panel Data Regression Model
4.1.4.1 Hausman Test

Table 6: Correlated Random Effect – Hausman Test
Correlated Random Effects – Hausman Test
Equation: Untitled
Test cross -section Random effects
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross -section r andom 0.090820 2 0.0095
Source : Eviews Results (2017) .

From the table above, it shows that prob= 0.0095 which is smaller
than α = 0.05, thus model us ed is Fixed Effect Model (FEM). Based
on the test to select the model, using Chow and Hausman tests, it can
be concluded that the model is more appropriate to follow the Fixed
Effect Model (FEM), than the Common Effect Model (CEM) and
Random Effect Model (REM).

4.2.4 Hypothesis Testing
The selected model in hypothesis testing which is in line with the
selection of panel data regression model is Fixed Effect Model (FEM).
The Fixed Effect Model (FEM) generates the following equation:

EM = 0,0429216 + 0.0145740 CBC – 0.0021689 AC

Below is an analysis of the equation results above:
1. This result indicates that if there is no independent variable – GCG
which consists of CBC and AC then EM will be 0,0429216.
2. CBC regression coefficient on the test is 0.0145740, which
means that CBC has a positive effect on EM. Thereby, if CBC
increases by 1 unit then EM will increase by 0.0145740 units.
3. AC regression coefficient of the test is – 0,0021689, which
means AC has negative effects on EM. thereby, if AC increases
by 1 unit, then EM will decrease by -0,0021689 units .

616/ The Analysis of Effects of Good Corporate Governance …
4.1.5 Coefficient Determination Test
The coefficient determination in statistical test was conducted by
observing the Adjusted R -squared value in the Table as follows:

Table 7: Coefficient Determination Test
Dependent Variable: EM
Method: Panel Least Squares
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
Variable Coefficient Std. Error t-Statistic Prob.
CBC 0.014574 0.112900 0.129085 0.8974
AC -0.002168 0.011959 -0.181261 0.8563
C 0.042921 0.053586 0.800983 0.4240
Effects Specification
Cross -section fixed (dummy variables)
R-squared 0.389597 Mean dependent var 0.042682
Adjusted R -squared 0.233083 S.D. dependent var 0.166357
S.E. of regression 0.145685 Akaike info criterion -0.832831
Sum squared resid 4.966464 Schwarz criterion -0.070439
Log likelihood 183.8425 Hannan -Quinn criter. -0.527550
F-statistic 2.489219 Durbin -Watson stat 1.841439
Prob(F -statistic) 0.000001
Source : Eviews Results (2017) .

From the table above, the Adjusted R -squared value is 0.233083. It
means 23.30% of EM variables can be explained by CBC and AC, the
remaining 76.70% is explained by other variables not found in the
equation .

4.1.6 F Test
F test is performed to determine whether the independent variables
simultaneously have significant effect on the dependent variables. The
fixed effect model can be seen in the table as follows:

Iran. Econ. Rev. Vol. 22, No.2, 2018 /617
Table 8: F Model Test
Dependent Variable: EM
Method: Panel Least Squares
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
R-squared 0.389597 Mean dependent var 0.042682
Adjusted R-squared 0.233083 S.D. dependent var 0.166357
S.E. of regression 0.145685 Akaike info criterion -0.832831
Sum squared resid 4.966464 Schwarz criterion -0.070439
Log likelihood 183.8425 Hannan -Quinn criter. -0.527550
F-statistic 2.489219 Durbin -Watson stat 1.841439
Prob(F -statistic) 0.000001
Source : Eviews Results (2017)

Based on the table above, the value of F count is 2 ,489219, the F
table value is 1.37978 with the Prob significance value (F -statistic) of
0.00001 <0.05 (Hasan et al., 2017 ; Handoko et al., 2017) . It shows
independent variable, i.e. good corporate governance , consisting of
Composition of Commissioners and Audit Committee , simultaneously
affects the dependent variable, namely the earnings management .

4.1.7 t Test

Tabl e 9: Statistic t Model Testing
Dependent Variable: EM
Method: Panel Least Squares
Sample: 2011 2015
Periods included: 5
Cross -sections included: 78
Total panel (balanced) observations: 390
Variable Coefficient Std. Error t-Statistic Prob.
CBC 0.014574 0.112900 0.129085 0.8974
AC -0.002168 0.011959 -0.181261 0.8563

618/ The Analysis of Effects of Good Corporate Governance …
Tabl e 9: Statistic t Model Testing
C 0.042921 0.053586 0.800983 0.4240
Effects Specification
Cross -section fixed (dummy variables)
R-squared 0.389597 Mean dependent var 0.042682
Adjusted R -squared 0.233083 S.D. dependent var 0.166357
S.E. of regression 0.145685 Akaike info criterion -0.832831
Sum squared resid 4.966464 Schwarz criterion -0.070439
Log likelihood 183.8425 Hannan -Quinn criter. -0.527550
F-statistic 2.489219 Durbin -Watson stat 1.841439
Prob(F -statistic) 0.000001
Source : Eviews Results (2017)

Based on the test results in the table, partial effects of each
independent variable – GCG comprising of CBC and AC on Earnings
Management (EM) dependent variable can be described as follows:
1. CBC has a t statistic value of 0.129085 < t table of 1.968178 with
significant prob. = 0.8974> α = 0.05, thus it can be concluded
that CBC variable has no effect on EM in manufac turing
companies listed on Indonesia Stock Exchange in 2011 -2015.
2. AC has t statistic value of -0.002168 < t table of 1,968178 with
significant prob. = 0.8563> α= 0.05, thus it can be concluded that
the AC variable has no effect on EM in manufacturing
compan ies listed on Indonesia Stock Exchange in 2011 -2015.

5. Discussion
5.1 GCG Effects of Composition of Commissioners on Earnings
Management
The partial test results indicate that the Composition of
Commissioners shows a positive regression coefficient at 0.014574
with t statistic value of 0.129085 < t table of 1.968178 with significant
prob. = 0.8974, which is greater than α = 0.05. The testing result
obtained empirical evidence that the Composition of Commissioners
has no effect on earnings management. In general, the Composition of
Commissioners is given responsibilities and tasks over information
quality control , found in the financial statements. Based on the agency

Iran. Econ. Rev. Vol. 22, No.2, 2018 /619
theory developed by Johnson (1979), it views that the Composition of
the C ompany’s Board of Commissioners as agents for shareholders
will act with full awareness for its own interests, not as a wise and fair
party to shareholders. It shows that regardless the large or small size
of Composition of Independent Board of Directors in the company, it
won’t be a guarantee that there is no fraud in the financial statements.
The monitoring conducted by an independent board of commissioners
has yet to reduce the managers’ behavior which puts their personal
interests to the maxim um.
The research results are in line with the research by (Mawardi and
Cholid , 2011), stating that partially , the Composition of
Commissioners has no effect on earnings management. However, the
research results are not in line with previous research unde rtaken by
(Midiastuty and Machfoedz, 2003), saying that Composition of
Commissioners partially has positive effects on company’s earnings
management in a significant manner .

5.1.1 GCG Effects of Audit Committee on Earnings Management
The partial test results indicate that the audit committee shows
negative regression coefficient of -0.002168 with a t statistic value of –
0.181261 < t table of 1.968178 with significant prob.= 0.8563 which
is greater than α = 0.05. From the testing results, empirical evide nce is
obtained that audit committee has no effect on earnings management.
The result obtained from this research is that audit committee is not
capable of protecting the shareholders’ interest from the earnings
management conducted by the management. Base d on the Circular
Letter from JSE, SE -008/BEJ/12 -2001, it says that the membership of
audit committee should at least consist of three persons, including the
chairperson of the audit committee. There should only one member of
this committee coming from the commissioners. The committee
member from the commissioners should be a recorded independent
commissioner who is also serving as the chairperson of the audit
committee. Other members who are not included as independent
commissioners must come from independ ent external parties.
The results ar e in line with the research by Mawardi and Cholid
(2011), Veronica & Utama (2005) & Sefiana (2010), pointing out that
the audit committee has no effect on earnings management.

620/ The Analysis of Effects of Good Corporate Governance …
Nevertheless, it is in contrast with the res earch results by (Nasution
and Setiawan, 2007), arguing that the audit committee has negative
effects on earnings management in banking companies.

6. Conclusion
Based on simultaneous analysis results , the independent good
corporate governance variable which consist s of the Composition of
Commissioners and audit committee , affects the manufacturing
companies’ earning management in Indonesia Stock Exchange.
Partially, GCG composition variable on Board of Commissioners has
no effect on earnings management ; and audit committee has no effects
on earnings management. The present research is only limited to
manufacturing companies listed on Indonesia Stock Exchange.
However, it is advisable to be conducted to all companies listed on
Indonesia Stock Exchange.

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