Companies that do not generate profits but make profit management

Oct 13, 2025 by pynkocean.com 114 views

The Relationship between Profit Management Practices and Market Reaction to Announcement of Food and Beverage Company Profit Information Listed on the Indonesia Stock Exchange for the 2008-2010 Period

Introduction

The stock market is a complex and dynamic environment where investors make decisions based on various factors, including financial statements. Financial statements are a crucial tool for investors in making informed investment decisions. However, the process of preparing financial statements can be influenced by various factors, including earnings management practices. Earnings management practices refer to the manipulation of financial statements to achieve a specific goal, such as increasing profits or meeting earnings expectations.

The Importance of Financial Statements in the Stock Market

Financial statements are an essential tool for investors in making investment decisions. When financial statements are published with relevant information for decision-making, market participants tend to react. However, many investors and other users of financial statements do not pay attention to the process of preparing them, which can cause dysfunctional behavior such as earnings management practices. Earnings management practices can lead to misleading information, which can have a significant impact on the stock market.

The Study's Objective

This study aims to analyze the difference in market reactions to three categories of companies:

Companies that do not generate profits but make profit management: These companies may use various techniques to manage their profits, such as manipulating accounting estimates or using discretionary accruals.
Companies that have low profits but use discretionary accruals that increase income: These companies may use discretionary accruals to increase their profits, which can lead to misleading information.
Companies that compare large companies with small companies that do earnings management: This category compares the market reactions of large companies that engage in earnings management with small companies that also engage in earnings management.

Methodology

The population in this study included 142 food and beverage companies listed on the Indonesia Stock Exchange in the 2008-2010 period. By using the purposive sampling method, there are 54 companies that are sampled for each period. The results of the analysis using the Kolmogorov-Smirnov Z test showed that at a significance level of 5%, there was no significant difference between market reactions:

Companies that carry out profit management compared to companies that do not: The value of Kolmogorov-Smirnov Z was -0.592, and the significance probability was 0.875.
Companies that have accruals discretionary to increase profits compared to companies that have low discretionary accruals: The value of Kolmogorov-Smirnov Z was 0.945, and the significance probability was 0.333.

However, there are significant differences in market reactions between large companies involved in earnings management and small companies that also do the same thing, with the value of Kolmogorov-Smirnov Z of 1,480 and a significance probability of 0.025.

Results and Discussion

From these results, it can be concluded that market reactions to earnings management practices vary based on company size. Large companies that carry out profit management seem to get a different market reaction compared to small companies. In other words, market participants show a higher sensitivity to the actions of earnings management taken by large companies. This highlights the importance of in-depth understanding of the context and characteristics of the company when assessing the influence of earnings management on the market.

Conclusion

In a broader context, the results of this study emphasize that investors need to actively monitor and analyze financial statements and company behavior in earnings management. With a better understanding, investors can avoid decisions based on incomplete or misleading information, and in turn, can contribute to the overall strengthening of the stock market.

Recommendations

Based on the findings of this study, the following recommendations are made:

Investors should actively monitor and analyze financial statements and company behavior in earnings management.
Companies should be transparent in their financial reporting and avoid engaging in earnings management practices.
Regulators should implement stricter regulations to prevent earnings management practices and ensure that financial statements are accurate and reliable.

Limitations of the Study

This study has several limitations, including:

The study only focused on food and beverage companies listed on the Indonesia Stock Exchange.
The study only analyzed the market reactions of companies that engage in earnings management practices.
The study did not consider other factors that may influence market reactions, such as company size, industry, and market conditions.

Future Research Directions

Future research should focus on:

Investigating the impact of earnings management practices on other aspects of the company, such as stock price and financial performance.
Analyzing the relationship between earnings management practices and other factors, such as company size, industry, and market conditions.
Developing a framework for identifying and preventing earnings management practices.
Q&A: Relationship between Profit Management Practices and Market Reaction to Announcement of Food and Beverage Company Profit Information Listed on the Indonesia Stock Exchange for the 2008-2010 Period

Q: What is the main objective of this study?

A: The main objective of this study is to analyze the difference in market reactions to three categories of companies: 1) Companies that do not generate profits but make profit management, 2) companies that have low profits but use discretionary accruals that increase income, and 3) compare large companies with small companies that do earnings management.

Q: What is the population of this study?

A: The population in this study included 142 food and beverage companies listed on the Indonesia Stock Exchange in the 2008-2010 period.

Q: What is the sampling method used in this study?

A: The purposive sampling method is used in this study, where 54 companies are sampled for each period.

Q: What is the significance of the results of this study?

A: The results of this study show that market reactions to earnings management practices vary based on company size. Large companies that carry out profit management seem to get a different market reaction compared to small companies.

Q: What are the implications of this study?

A: The implications of this study are that investors need to actively monitor and analyze financial statements and company behavior in earnings management. With a better understanding, investors can avoid decisions based on incomplete or misleading information, and in turn, can contribute to the overall strengthening of the stock market.

Q: What are the limitations of this study?

A: The study has several limitations, including: 1) The study only focused on food and beverage companies listed on the Indonesia Stock Exchange, 2) the study only analyzed the market reactions of companies that engage in earnings management practices, and 3) the study did not consider other factors that may influence market reactions, such as company size, industry, and market conditions.

Q: What are the future research directions?

A: Future research should focus on: 1) Investigating the impact of earnings management practices on other aspects of the company, such as stock price and financial performance, 2) analyzing the relationship between earnings management practices and other factors, such as company size, industry, and market conditions, and 3) developing a framework for identifying and preventing earnings management practices.

Q: What are the recommendations of this study?

A: The recommendations of this study are: 1) Investors should actively monitor and analyze financial statements and company behavior in earnings management, 2) companies should be transparent in their financial reporting and avoid engaging in earnings management practices, and 3) regulators should implement stricter regulations to prevent earnings management practices and ensure that financial statements are accurate and reliable.

Q: What are the implications for investors?

A: The implications for investors are that they need to be aware of the potential for earnings management practices and take steps to mitigate the risks associated with them. This includes actively monitoring and analyzing financial statements and company behavior, as well as seeking advice from financial experts.

Q: What are the implications for companies?

A: The implications for companies are that they need to be transparent in their financial reporting and avoid engaging in earnings management practices. This includes ensuring that financial statements are accurate and reliable, and that companies are not manipulating their financial results to achieve a specific goal.

Q: What are the implications for regulators?

A: The implications for regulators are that they need to implement stricter regulations to prevent earnings management practices and ensure that financial statements are accurate and reliable. This includes enforcing existing regulations and developing new ones to address the issue of earnings management.