How do accounting records affect corporate financial performance? Empirical evidence from the Indonesian public listed companies

Abstract

Previous studies demonstrate that accounting choices could, directly and indirectly, affect firm performance. We investigate whether accounting choices and financial ratios could affect firm performance. We extend the financial ratio variables by adding accounting choice and interaction variables. Based on the panel random effect regression analysis of 100 Indonesian public listed firms, we report that activity ratio, leverage, and depreciation method choice tend to be associated with firm profitability. We conclude that higher assets and leverage tend to be associated with higher efficiency and fewer monitoring costs. However, there is a difference in direction between equity and asset for the leverage variable. This may be explained by the existence of premiums (or discounts) in the equity component, but not in the asset component.

Keywords

• Financial ratio
• Accounting choice
• Random effect
• Asset turnover
• Leverage level
• Depreciation method