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Vol 40 No 2 (2025): May

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Oct 16, 2023
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May 28, 2025
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Uncertainty about Economic Policy and Decisions to Engage in Real Earnings Management: Evidence from Indonesia’s Capital Market

https://doi.org/10.22146/jieb.v40i2.10194
Yeni Januarsi
yeni_januarsi@untirta.ac.id
Universitas Sultan Ageng Tirtayasa
https://orcid.org/0000-0002-6619-486X
H. E. R. Taufik
Universitas Sultan Ageng Tirtayasa
Akhmadi
Universitas Sultan Ageng Tirtayasa

Corresponding Author(s) : Yeni Januarsi

yeni_januarsi@untirta.ac.id

Journal of Indonesian Economy and Business, Vol 40 No 2 (2025): May

Abstract

Introduction/Main Objectives: This study examines whether economic policy uncertainty (EPU) influences managers’ choice to engage in real earnings management (EM) in the Indonesian capital market. Background Problems: As a major driver of aggregate economic growth and business cycles, EPU may induce information asymmetry, affect the quality of financial reporting, and raise concerns about how macroeconomic conditions may impact how managers behave in managing reported accounting numbers. Novelty: This study explains how the lean against the wind theory and the lean with the wind theory affect real EM behavior in emerging markets. In addition, this study considers the endogeneity problem, which has frequently been overlooked in similar studies, and provides a robust analysis utilizing a variety of tests to validate the proposed hypothesis. Research Methods: This study investigates 1,800 firm-year observations represented by 200 Indonesian publicly listed firms from all industries that have data available, except the banking and financial industries, from 2012 to 2020.The researchers employ time-series cross-sections, pooled ordinary least squares (OLS),and robust standard errors clustered by years. Finding/Results: EPU causes managers to engage in more real EM. This result holds for a series of robustness tests, including testing by using a presidential election for alternative measurements for EPU. From additional analysis, this study reveals that the effect of EPU on real EM is more significant for more profitable firms. Conclusion: This study supports the lean against the wind theory for emerging markets. This evidence implies that EPU conditions induce managers to engage in more real earnings management in emerging market firms, and the uncertain environment can reduce the quality of financial information .

Keywords

Economic policy uncertainty real earnings management leans against the wind theory profitable firms
Januarsi, Y., Taufik, H. E. R., & Akhmadi. (2025). Uncertainty about Economic Policy and Decisions to Engage in Real Earnings Management: Evidence from Indonesia’s Capital Market. Journal of Indonesian Economy and Business, 40(2), 275 -. https://doi.org/10.22146/jieb.v40i2.10194
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Author Biographies

Yeni Januarsi, Universitas Sultan Ageng Tirtayasa

Yeni Januarsi is a associate professor at the Department of Accounting, Universitas Sultan Ageng Tirtayasa (UNTIRTA), Indonesia, where she has been a faculty member since 2003. She earned her bachelor’s degree in accounting at the Faculty of Business and Economics, Universitas Diponegoro, Indonesia. She did her master’s degree in accounting at Universitas Gadjah Mada, Indonesia. Besides She completed her Ph.D. from Department of Economic Engineering, Faculty of Economics, Kyushu University, Japan. Her research interests lie in the areas of corporate finance, Economic policy Uncertainty, Quality of financial reporting, financial accounting, and financial Sustainability. She has collaborated actively with other researchers from various fields in many research projects. He/she successfully published many articles in different top tier international journals. She also actively serves as reviewer on top tier reputable international journal from prestigious publisher such as Elsevier, Emerald, Francis and Taylor, and Springer.

H. E. R. Taufik, Universitas Sultan Ageng Tirtayasa

H.E.R. Taufik is a Professor at the Department of Management, Universitas Sultan Ageng Tirtayasa (UNTIRTA), Indonesia, where he has been a faculty member since 2002. He earned his bachelor’s degree in management from the Universitas Islam Nusantara (UNINUS), Indonesia. He did his master’s degree in management from Yayasan Institut Pengembangan Wiraswasta, Indonesia (IPWIJA) in 2002 and at Sekolah Tinggi Ilmu Administrasi Mandala Indonesia (STIAMI) in 2005, Indonesia. Besides He completed his Ph.D from University Utara Malaysia.  He His research interests lie in the areas of green marketing. He has collaborated actively with other researchers from various fields in many research projects. He successfully published many articles in different top tier international journals.

Akhmadi, Universitas Sultan Ageng Tirtayasa

Akhmadi is a Professor at the Department of Management, Universitas Sultan Ageng Tirtayasa (UNTIRTA), Indonesia, where he has been a faculty member since 2002. He earned his bachelor’s degree in management at the Faculty of Business and Economics, Universitas Muhammadiyah Jakarta, Indonesia. He did his master’s degree in Management at Universitas Muhammadiyah Jakarta, Indonesia. Besides He completed his Doctoral degree from Universitas Diponegoro, Indonesia.  He His research interests lie in the areas of finance, firm value, firm profitability, and dividend policy. He has collaborated actively with other researchers from various fields in many research projects. He successfully published many articles in different top tier international journals.

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