Board of Commisioner Duality Role, Governance and Earnings Management of Initial Public Offerings in Indonesia

Abstract

Public firm is required to implement good corporate governance as assurance to reduce information asymmetry between firm and its stockholders. Corporate governance mechanism should be able to limit any improper actions of the firm’s management. This study investigates whether the duality role of the board affects earnings management practice of firms making initial public offering at Indonesian Stock Exchange. The study also examines other corporate governance mechanism factors, namely the number of board of commission­ners, the proportion of independent board of commissioners, size of firm, financial leverage, and profitability. Earnings management was measured using Cross-Sectional Modified Jones model. The study employs a total of 60 firms that went public from 2000 to 2006. The results show that duality status of board of commissioners positively and significantly affects earnings management in IPO firms. This could be interpreted that board of directors with duality role had a lower function in monitoring the firms’ performance so that management have opportunity to manage reported earnings. When board of commissioners have dual role, the level of earnings management is getting intense, and vice versa. Size of board of commissioners and profitability are positively related to earnings management.