Does IFRS 7 Disclosure Weaken Earnings Management? Evidence from Indonesian Conventional Commercial Banks

Abstract

This study examines the influence of derivative instruments, income diversification, and liquidity ratios on earnings management with IFRS 7 disclosure as a moderating variable. The sample used consists of 129 conventional commercial banks that are listed and 116 banks that are not listed on the Indonesia Stock Exchange (IDX). This study uses moderating regression analysis (MRA) with the Robustness Least Squares with S-Estimation method. This study also conducted a sensitivity analysis with previous earnings management measurements (Kanagaretnam et al., 2010) and an additional test by comparing listed and non-listed banks on the Indonesia Stock Exchange. The empirical results indicate that IFRS 7 disclosure weakens derivative instruments' negative effect and income diversification's positive effect on earnings management but does not provide a moderating effect on liquidity ratios. This study contributes to the bank management and Indonesian banks authority to provides another view of implementing IFRS 7 disclosure that have not been maximized in the Indonesian banking industry. In the future, the researchers expect the authorities to encourage all banks to disclose complete IFRS 7 disclosure to minimize information asymmetry. On the other hand, this study also contributes to the banking management to increase derivative instruments and to carry out more supervision on the provision of income diversification to minimize earnings management. Theoretically, this study contributes to the new earnings managemen t measurement by applying more prudential principles based on the IFRS framework, IFRS 9 and Basel III regulations.

Keywords

• derivation instruments
• income
• diversification
• liquidity ratios
• earnings management
• ifrs 7 disclosure