Corruption and earnings quality: further evidence and exploration from Indonesia

Corruption within corporate entities continues to be a relatively overlooked yet significant issue to date. This study seeks to investigate the impact of corruption on the quality of earnings. The sample comprises 846 firm-years listed on the Indonesian Stock Exchange. Earnings quality encompasses factors such as earnings persistence, earnings value relevance, and earnings predictability. Corruption is gauged by the corruption per capita in the region where the firms are headquartered. The data analysis employs regression models incorporating firm and province effects. Broadly, the findings of this study indicate that corruption diminishes earnings quality. Heightened corruption is associated with weakened controlling and monitoring functions, increased information asymmetry, and diminished managerial quality, all contributing to a decline in earnings quality. This research not only expands upon previous studies but also reaffirms the relevance of the social capital concept while presenting new empirical evidence within a context of a country with a higher corruption perception index, such as Indonesia. The relationship between corruption and earnings quality becomes a new insight for public. Regulator and society can maintain the good norm and value to reduce the bad impact of corruption into social capital. Indonesia has an increasing corruption perception so regulator, society, and business participants can improve the controlling and monitoring function to avoid misbehavior. Specifically, business participants can avoid misbehavior of report the lower quality earnings. It is new evidence in Indonesia and expected to be a consideration to formulate public and business policy in Indonesia