Zulfikar Ikhsan Pane
Rayakahyan group, Bogor Indonesia
Email: [email protected]
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ARTICLE INFO
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ABSTRACT
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Received: 25-09-2021
Revision: 2-10-2021
Received:
10-11-2021
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This study is motivated by the phenomenon of investors' concern when they
saw earnings from companies prepared by accounting managers who have
self-interest tendencies. As a result, investors may be misled in companies'
assessments. Based on this phenomenon, this study helps investors to get the
relevant value of earnings by eliminating three items in the income statement
so it becomes a value known as street earnings. Street earnings are values
that are generally generated by securities analysts. This value is the result
of recalculation of accounting earnings excluding non-recurring items, wherein
in this study, the items are amortization, research and development expenses,
and unusual/exceptional items. This research focuses on the relevance of
these three values especially unusual/exceptional items as a novelty. This
relevance is calculated by looking at the strength of relations between three
variables partially to year-end stock prices based on the value of R square.
Secondary data used from manufacturing companies in Indonesia was obtained by
the OSIRIS database from the 2015 - 2020 period. As a result, none of the
three variables has strong relations with stock prices, which means three
variables are irrelevant and should exclude in the calculation of street
earnings to make street earnings relevant. The limitation of this study is
research and development expense does not refer to companies
specific activities, so irrelevant results does not mean research activities
are useless. From these limitations, further research is comparisons of the
relevance between the disclosure of research and development activities and
research and development expense.
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Keywords:
street earnings;
unusual /
exceptional item;
relevance;
OSIRIS;
Indonesia
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Introduction
Usually, there are three types of agency
conflicts that often occur, namely conflicts between shareholders and
management, shareholders, and majority shareholders (Purwaningtyas & PANGESTUTI, 2011). And this
research is motivated by the phenomenon of investors when reading earnings
based on accounting profits because managers have a personal interest in what
they own. According to (Ratnasari & CHABACHIB, 2012) large
companies or go public tend to have less incentive to smooth earnings because
these large companies are noticed by the public. and according to (Rahmawati & Muid, 2012) small
companies will tend to practice income smoothing because small companies get
less attention from analysts and investors. (Dewi & ZULAIKHA, 2011) because
profit, in general, is the main concern in management responsibility.
Logically, accounting earnings are contained managers' interest in increasing
bonuses (Moradi, Salehi, & Zamanirad, 2015) so that
the figures presented can mislead investors (Bardos, Golec, & Harding, 2011). As a
result, investors usually seek other information (Ebaid, 2012) one of
them through securities analysts. Analysts are considered more independent
because their function is only as an intermediary between investors and
companies (Barker & Imam, 2008). In
practice, analysts publish figures about companies which are often known as
I/B/S earnings (Mbagwu, Entwistle, & Feltham, 2007) or analyst
consensus earnings (Barth, Gow, & Taylor, 2012) or street
earnings (Sadique & Sheikh, 2013).
Street earnings come from adjustment items in the
income statement that are considered irrelevant. These items are categorized as
non-recurring items. There is no standard agreement on the category of
non-recurring items, but based on previous studies non-recurring items contain
restructuring costs, acquisition costs, gains on asset sales, the realization
of investment gains (Gu & Chen, 2004),
write-down costs, and revaluation (impairment)., research and development costs,
merger and acquisition costs, mandatory stock compensation expenses,
amortization of goodwill and certain proceeds from subsidiaries (Bradshaw & Sloan, 2002).
Two of the above non-recurring items in the
Indonesian study had different results. First, amortization. In the 1999-2006
research period, it was found that goodwill amortization had no relevance and
was only considered a confounding variable (Lestari and Baridwan,
2008 cited by Suryandari & Yunitha, 2011) but in the
2001-2008 period it was found that amortization had a relevance value (Suryandari & Yunitha, 2011). Second,
research and development expenses. In the research period 2012 - 2016, it was
found that this expense had value relevance (Putri, 2018) but in the
period 2012 - 2017, it was found that this expense had no value relevance (Ferida, Alfian, & Firmansyah, 2021).
This study specifically examines 3 items
categorized as non-recurring items, namely amortization, research and
development costs, and unusual/exceptional items for two reasons. First, to
confirm the previous study that amortization and research and development costs
are non-recurring items, so must be eliminated to make street earnings in
Indonesia. Second, determine if unusual/exceptional items also include
non-recurring items which are not discussed in previous studies.
The novelty in this study is the unusual/exceptional
item variable that has not been studied previously. These variables are listed
in the financial statements stated from the OSIRIS database
The results of this study provide a suggestion
for investors when calculating relevant earnings so they can�t mislead when
making decisions. An investor only subtracts the three items from the income
statement. Another advantage of this study is to strengthen the role of
securities analysts as independent parties through a value called street earnings.
Based on previous studies, this research only
focuses on one phenomenon through three research questions, namely: a). are
depreciation and amortization relevant? (b) are research and development costs
relevant? (c) are unusual/exceptional items relevant? (d) do the three items
above affect the stock price?
This study was conducted by partially testing
the level of relevance of the three items to stock prices and testing their
effect on stock prices. This method is carried out to strengthen the conclusion
of the three items above deserve excluded from the calculation of street
earnings
Method
1. Sample selection
To prove the above hypothesis, data collection was carried out through
purposive sampling by the objectives of this study. The selected sample is all
manufacturing companies in Indonesia using the IDX Industrial Classification
(IDX-IC) category in the primary consumer goods sector (IDXNONCYCY), the
non-primary consumer goods sector (IDXCYCLIC), and the health sector
(IDXHEALTH). This study was conducted from the 2015 � 2020 period as many as
100 valid companies with data sources obtained from the OSIRIS database.
2. Variable
and measurement
This study uses three
independent variables and one dependent variable without a controlling variable
to test the strength of the relationship through the R Square. The strength of
the relationship is divided into the following 3 categories (Dwimulyani, 2019) :
a. If� ������� : R2������������������ < 0,40 ������������ = weak relation
b. If� ������� : 0,40 � < R2 ��� < 0,60������������� =
moderate relation
c. If
�������� : R2������������������ > 0,60 ������������ = strong relation.
a)
Stock price (MP)
This variable is
measured using year-end stock prices and is consistent with previous research
on value relevance (Albring, Cab�n‐Garc�a, & Reck, 2010).
b)
Amortization (AMR)
This
variable was measured by using the amortization value charged in the loss
statement which is consistent with previous research (Suryandari & Yunitha, 2011). The
formula is as follows :
AMR =
Amortization expense / total asset
c)
Research
and Development Expense (RND)
This variable is measured
by used research and development costs charged to the income statement consistent
with previous research (Gong & Wang, 2016; Wang & Fan, 2014). Formula
as follow :
RND
= Research and Development expense / total assets������
d)
Unusual/exceptional
item (UNS)
This variable is
measured by using unusual/exceptional item costs that are charged to the income
statement but no previous study has explicitly used it. The formula is as follow :
UNS
���������� = Unusual or �exceptional item / total assets
3.
Linear Regresion formula
Model 1
MPit ���� =
β0 + β1AMRit + eit
Model 2
MPit ���� =
β0 + β1RNDit + eit
Model 3
MPit ���� =
β0 + β1UNSit + eit
Results And Discussion
1. Descriptive statistics
Based on the
results presented in table 1 below, indicates :
a. The dependent variable of stock price or Y has a minimum value of 3,597
and a maximum of 9,842 and a mean of 6,412 or close to the maximum value,
indicating stock price is closed to maximum price. The standard deviation of
1.381 is smaller than the mean, indicating the deviation of the data is
relatively small from the average value.
b. The independent variable unusual/exceptional item has a minimum value
of -0.059 and a maximum of 0.009 and a mean of -0.00022 or closed to the
minimum value indicating unusual/exceptional value is more negative, means many
companies recognize unusual/exceptional items as a reduction of net profit.
c. The independent variable amortization has a minimum value of -0.051 and
a maximum of 0 and a mean of -0.00125 indicating the company charges a minimum
amortization of 5.1% of total assets with an average of 0.125% of total assets.
d. The independent variable amortization has a minimum value of -0.051 and
a maximum of 0 and a mean of -0.00125 indicating the company charges a minimum
amortization of 5.1% of total assets with an average of 0.125% of total assets.
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Table 1
Descriptive statistics
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N
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Minimum
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Maximum
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Mean
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Std. Deviation
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MP
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600
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3.597
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9.842
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6.412
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1.3813
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UNS
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600
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-0,059
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0,009
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-0,00002
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0,006324
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AMR
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600
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-0,051
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0,000
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-0,00125
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0,003649
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RND
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600
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-0,002
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0,000
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-0,00004
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0,000183
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Valid N (listwise)
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2.
Correlation
Correlation analysis as a statistical analysis
technique is known as a Pearson Product Moment (PPM) correlation and was first
discovered by Pearson (1904) and states that the correlation reflects the
degree of the linear relationship between two or more variables. The
correlation in Table 2 shows that there is a correlation between amortization
and stock market prices with a value of -0.097 significant at 0.05 level
errors. It shows that amortization charged by the company has an impact on firm
value, which means the formation of stock market prices could come from the
amortization charges that should be carried out by applicable accounting
standards. Meanwhile, the other two independent variables, unusual/exceptional
items, and research and development expense do not correlate with firm value,
meaning that the formation of stock market prices does not come from these two
variables.
Among the three
independent variables, there is no significant correlation, meaning that there
are no symptoms of multicollinearity,
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Tabel 2
Correlations
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Unusual
/ Exceptional item
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Amortization
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Research & development
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Market share
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Unusual / Exceptional item
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1
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Amortization
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.009
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1
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Research and development
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.053
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.008
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1
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Market share
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-.033
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-.097*
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-.063
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1
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*. Correlation is significant at the 0.05 level (2-tailed).
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**. Correlation is significant at the 0.01 level (2-tailed).
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3. The result of H1
SPSS version 25
software is used in this regression and gives the results shown in table 2
where the amortization with R square of 0.009 below 0.40 shows this variable
has a weak relation with stock prices, then H1 is fulfilled. This result also
showed a significance value of 0.018 then there is a significant effect on
stock prices.
This result
provides two explanations. First, although it gives significant results, the strength
of relevance for amortization is very weak. This is by previous studies which
stated amortization as a confounding variable (Lestari and Baridwan
cited by Suryandari &
Yunitha, 2011). Second, for this
reason, this variable is categorized as a nonrecurring item and should exclude
in the calculation of street earnings (Bradshaw & Sloan,
2002) so that street
earnings become relevant to be used by investors as an alternative earnings information
(Ebaid, 2012)
4. The result of H2
Research and
development expense has an R square of 0.004 indicating this variable has a
weak relation with stock market prices, then H2 is fulfilled. The significance
value of 0.124 also shows that this variable has no significant effect on stock
prices.
This result
provides two explanations. First, the relevance of research and development
expenses is weak by previous studies (Ferida et al.,
2021). Second, for this reason, this variable is categorized as a non-recurring
item and excluded in the calculation of street earnings (Bradshaw & Sloan,
2002) so that street earnings become relevant for investors to use as an
alternative earnings information (Ebaid, 2012).
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5. The result of H3
Unusual/exceptional
items have an R square of 0.001 below 0.40 indicating this variable has a weak
relationship to stock market prices, then H3 is fulfilled. The significance
value of 0.413 also shows that this variable has no significant effect on stock
prices.
This result
provides two explanations. First, the strong relevance of the unusual/exceptional
item variable is weak, indicating that this variable is a novelty in a categorized
nonrecurring item and excluded in the calculation of street earnings. Second,
excluded unusual/exceptional items relevant for the investor when used street
earnings as alternative earnings information (Ebaid, 2012).
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Table
3
Strength
of Relation
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Hypothesis
1
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Hypothesis
2
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Hypothesis
3
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R
Square
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Sig
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R
Square
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Sig
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R
Square
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Sig
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Amortization
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0,009
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0,018
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Research
Development
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0,004
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0,124
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Unusual
/ Exceptional item
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0,001
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0,413
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Conclusion
The results of this study
provide four important findings for manufacturing companies listed in Indonesia
in the categories of the primary consumer goods sector, non-primary consumer
goods sector, and the health sector. First value relevance of amortization,
research, and development, unusual or exceptional item is weak. All variables do
not have value relevance so should exclude in street earnings calculation.
Second, eliminating three
items in the calculation of street earnings will make street earnings relevant
for investors as an alternative earnings information because accounting
earnings are prone to be manipulated by managers
Third, analysts' position
as an intermediary is increasingly trusted because they can analyze and
eliminate irrelevant variables. After all, analysts are not bound by accounting
standards and are in a more independent position between managers and
investors.
Forth, unusual/exceptional
items become a novelty in Indonesia and treat similar like amortization,
research and development, and another nonrecurring items. It is also useful for
the third party to calculate street earnings by subtracting net profit in the financial
statement with amortization, research and development expense, and unusual/exceptional
item.
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Copyright
holder:
Zulfikar Ikhsan
Pane (2021)
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First
publication right:
Journal of Social
Science
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This
article is licensed under:
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Amortization, Research and Development Expense, Unusual/Exceptional Item Relevance for Street Earnings