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THE INFLUENCE OF MANAGERIAL ABILITY AND FOREIGN
OWNERSHIP ON FIRM VALUE: INCOME SMOOTHING AS
MEDIATING VARIABLE
Suwandi Ng, Livia Chandra
Universitas Atma Jaya Makassar, Sulawesi Selatan, Indonesia
Email: swnd_[email protected]
Abstract
This research is aimed to investigate the effect of managerial ability and foreign ownership to decrease income
smoothing as a mediating effect influence on value of firm. This research uses logistic regression analysis method
to investigate the effect of managerial ability and foreign ownership on income smoothing, and multiple regresion
linear to investigate the effect of managerial ability, foreign ownership, and income smoothing on value of firm,
and Sobel's test to investigate the effect of income smoothing as mediating variable. The results of this research
shown that managerial ability have not a significant effect on income smoothing and firm performance, but
foreign ownership have a significant effect on income smoothing and value of firm, and income smoothing have
a significant effect on value of firm. In addition, Sobel's test results showed that income smoothing do not mediate
the effect of managerial ability and foreign ownership on value of firm.
Keywords
: managerial ability; foreign ownership; income smoothing; and value of firm.
INTRODUCTION
Investors are one of the keys so that the entity can continue to operate. This encourages
managers to establish effective actions by increasing the value of the firm so that investors
continue to give confidence to the entity. The value of firm can be measured by the market
price of the company's shares, because the market price of the company's shares reflects the
investor's overall assessment of each equity owned (Utami, 2017). The higher investor
confidence in a company, the investor tends to increase investment in the company so that the
company's stock price will be higher (Ng and Daromes, 2016). The amount of earnings
obtained by a company is one of the factors that affect the stock price because in general an
investor will invest in a company that has a fairly good profit.
This research is based on the value of firm that focus on stakeholders, in line with
stakeholder theory where this theory focuses more on the position of stakeholders who are
considered more influential (Iqbal, 2016) in increasing firm value. The phenomenon that
occurred at PT Bukit Asam Tbk (PTBA) was recorded to obtain an increase in net profit of
60.2 percent in the second quarter of 2018 compared to the same period last year. This increase
in net profit caused PTBA's share price to rise 1.56 percent. PTBA has been transacted 2,137
times with a volume of 9.03 million shares and a total transaction of Rp 41.13 billion. Based
on this phenomenon, it can be concluded that the increase in the value of the company formed
shows the level of confidence given by investors to invest in the company.
The company will always maintain its performance to get a positive response from
stakeholders (Utami, 2017) to maintain and further increase the value of firm. One of the
Injuruty: Interdiciplinary Journal and Humanity
Volume 2, Number 6, June 2023
e-ISSN: 2963-4113 and p-ISSN: 2963-3397
The Influence Of Managerial Ability And Foreign Ownership On Firm Value: Income Smoothing As
Mediating Variable
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551
company's performance measurements can be done by paying attention to financial statements.
The freedom of choice of accounting methods in the preparation of financial statements allows
managers to make window dressing efforts on their company's financial statements by taking
advantage of loopholes in accounting standards (Solihin, 2004). This is one of the reasons that
encourage managers to do earnings management.
The form of earnings management carried out is generally in the form of income
smoothing. According to Saputra (2009), income smoothing can be explained by an agency
theory approach. The act of income smoothing which is the result of earnings manipulation in
the long run can produce losses to various parties that cause shareholders to increase costs for
the company and there is a decrease in company earnings, this will reduce investor confidence
so that it affects the entity stock price.
Managers are judged on the efficiency at which they generate revenue, intuitively
appealing because it is more in line with the company's overarching goal of maximizing profits
(Demerjian, et al., 2012). As managerial ability increases, a manager will also avoid income
smoothing because good manager performance allows high income results and provides profits
and meets the needs of shareholders and other stakeholders. The view of "efficient contracting"
according to Fama (1980) predicts that a well-known CEO (Chief Executive Officer) will take
actions that result in quality earnings. Therefore, controlling shareholders will use managers
who have the ability to manage and design efficient business processes and are able to make
decisions that add value to the company to maximize profits and firm value, especially for
controlling shareholders (Libby and Luft, 1993), so Febrianto (2014) suggests that the
company's ownership structure also affects the sustainability of the company.
Ownership structure is a type of institution or company that holds the largest shares in
a company (Wahyudi and Pawestri, 2006). The ownership structure includes concentrated
ownership, foreign ownership, institutional ownership and managerial ownership (Verawati,
2012). Foreign ownership is defined as the percentage of a company's share ownership by
foreign investors. Information asymmetry problems caused by geographical and language
barriers (Verawati, 2012) as well as geographical distance and ignorance of local conditions
can make foreign shareholders less influential in management and monitoring (Boardman, et
al., 1994). However, Alzoubi (2016) suggests that the increase in accounting knowledge and
strengthening corporate governance in all foreign institutional investors allows companies to
supervise their financial reporting systems and operating activities to be more efficient. In line
with Chung, et al. (2004) which suggests that foreign ownership is active in preventing
managerial behavior and lowering earnings management.
Thus the purpose of this study is to investigate the effect of managerial ability and
foreign ownership to reduce income smoothing to increase value of firm, considering that the
increase in company value in the future depends on the current management process of the
company carried out by managers and shareholders to encourage investors in investing in the
company.
METHOD RESEARCH
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This type of research is explanatory research which aims to examine cause-and-effect
relationships, namely the influence of independent variables on dependent variables. The
independent variables in this study are managerial ability and foreign ownership, while the
dependent variable in this study is company value. In addition to independent and dependent
variables, in this study there is also a mediating variable, namely income smoothing. The
population in this study is non-financial companies listed on the Indonesia Stock Exchange
(IDX) for the period 2014-2017. The samples used in this study were selected by purposive
sampling method.
The type of data used in this study is documentary data. In this study, researchers used
data in the form of financial statements and annual reports of companies published by non-
financial companies listed on the Indonesia Stock Exchange (IDX) for the period 2014-2017.
The data source used in this study is secondary data. Secondary data in this study include
financial statements and annual reports retrieved from the Indonesia Stock Exchange (IDX)
database for the year 2014-2017 via the official website of www.idx.co.id.
RESULT AND DISCUSSION
Hosmer and Lemeshow's Goodness of Fit Test Results
Simultaneous testing of Hosmer and Lemeshow's Goodness of Fit Test (Ghozali, 2016)
in this study is needed to see if a logistic regression model is hypothesized.
Table 1 Hosmer and Lemeshow Test Results
Model Structure
Chi-square
Df
Sig.
Information
Substructure 1
12,140
8
0.145
Accepted models
Source: SPSS Data Processing Results version 16 (2019)
The results of testing the equation in table 1 show the statistical value of Hosmer and
Lemeshow's Goodness of Fit Test is greater than 0.05 with a significant level of 0.145. Thus,
it can be concluded that simultaneous tests for models of the influence of managerial
capabilities and foreign ownership on income smoothing are acceptable.
F Test Results (F-test)
The F test (F-test) is used to test whether or not there is a simultaneous influence of
independent variables on the dependent variable and to find out whether regression models can
be used to predict the dependent variable.
Table 2 Statistical Test Results F
Independent Variables
Dependent Variables
F
Sig.
Managerial Ability (X
1
)
Foreign Ownership (X
2
)
Profit Smoothing (Y
1
)
Company Value (
Y2
)
8,519
0,000
Based on the results of the ANOVA test or F-test seen in table 2 shows that for
substructure equation 2 which examines the effect of managerial ability, foreign ownership,
and income smoothing on value of firm, it has a significant effect of 0.000 < 0.05. This shows
that there is an influence between managerial ability, foreign ownership, and income smoothing
together (simultaneously) on the value of firm.
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Cox and Snell's R Square Test Results
Cox and Snell's R Square (Ghozali, 2016) is a measure that tries to imitate the adjusted size
of R
2
in multiple regression based on likelihood estimation techniques with a maximum value
of less than 1 (one). The Cox and Snell's R Square test can be seen from the magnitude of the
Nagelkerke R Square which is interacted like the value of R
2
in multiple regression.
Table 3 Cox and Snell's R Square Test Results
Model Structure
-2 Log
Likelihood
Cox and Snell's R Square
Nagelkerke R Square
Structural Equations
141,884
0.081
0.113
The results of testing the structural equation in table 3 show the value of Nagelkerke R
Square of 0.113 and Cox &; Snell R Square of 0.081, which means that the variable ability of
managerial ability, foreign ownership in explaining the variable of income smoothing is 0.113
or 11.3%.
Path Analysis Test Results
Hypothesis testing is performed using regression models in path analysis to predict the
relationship between the independent variable and the dependent variable.
Table 4 Results of Path Equation Analysis
Model Structure
Standardized
Beta
Sig.
Information
Substructure 1
(The effect of managerial ability and foreign
ownership on income Smoothing)
Managerial Ability (X
1
)
Foreign Ownership (X
2
)
0.078
3,160
0.924
0.002
NotSignificant
Significant
Substructure 2
(The effect of managerial ability, foreign
ownership, and income smoothing on firm value)
Managerial Ability (X
1
)
Foreign Ownership (X
2
)
Profit Smoothing (Y
1
)
0.036
0.433
-0.180
0.673
0.000
0.042
NotSignificant
Significant
Significant
T-test results
The t test is used to determine whether or not the independent variables have a partial
effect on the dependent variable in the regression. If the calculation results show a probability
value of < 0.05, it means that there is a significant partial influence between the independent
variable and the dependent variable.
The results of the t test in this study can be seen in table 4 which has been presented
earlier. The discussion of the t-test results is as follows:
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1. The effect of managerial ability on profit smoothing is 0.078 with a probability of
significance of 0.924, greater than 0.05. As a result, H1, which claims that managerial
competence has a significant influence on profit smoothing, is rejected
2. The effect of foreign ownership on profit smoothing is 3.160 with a probability of
significance of 0.002, less than 0.05. As a result, H2, which asserts that foreign ownership
has significant effects on income smoothing, is accepted.
3. The effect of managerial ability on firm value is 0.036 with a probability of significance of
0.673, greater than 0.05. As a result, H3, which claims that managerial competence has
a significant effect on the value of the company, is rejected.
4. The effect of foreign ownership on the value of the company is 0.433 with a probability of
significance of 0.000, less than 0.05. As a result, H4, which asserts that foreign ownership
has a significant effect on company value, is accepted.
5. The effect of income smoothing on frm value is -0.180 with a probability of significance of
0.042, less than 0.05. As a result, H5, which asserts that income smoothing has a significant
influence on company value, is accepted.
Sobel Test Results
Testing the mediation hypothesis can be done using the sobel test. This sobel test is
performed to test the strength of the indirect influence of the independent el variab (X) on the
dependent variable (Y) through the mediation variable (M) or in other words test the
significance of the indirect influence.
Table 5 Sobel Test Results
Combination of
Variables
Estimated
Value
Standard
Error
P Value of Sobel
Test
Information
𝑥
1
→ 𝑦
2
via 𝑦
1
0.078; -0.245
0.817 ; 0.119
0.92402193
Not
Significant
𝑥
2
→ 𝑦
2
via 𝑦
1
3.160; -0.245
1,037 ; 0.119
0.08801696
Not
Significant
Based on the outcomes of the Sobel test analysis in Table 5, the influence of management
skill (X 1) on firm value (Y 2) via income smoothing (Y1) has a probability value of
significance of 0.924 > 0.05. This shows that income smoothing does not mediate the influence
of managerial ability on the value of the firm. As a result, H6, which asserts that income
smoothing mediates the influence of management competence on firm value, is rejected.
The effect of foreign ownership (X 2) on the value of the company (Y
2
) through income
smoothing (Y
1
) has a probability of significance of 0.088 > 0.05. This suggests that income
smoothing does not mediate the influence of foreign ownership on company value. As a result,
H7, which claims that income smoothing mitigates the impact of foreign ownership on company
value, is rejected.
1. The Effect of Managerial Ability on Income Smoothing
The results of the test of the influence of managerial ability variables on income
smoothing showed a regression coefficient value of 0.078 with a significance probability
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value of 0.924 > alpha 0.05, suggesting that managerial ability has a positive but not
significant influence on income smoothing.
The income smoothing produced by a company will be influenced by how capable the
manager is in controlling the use of company inputs to produce the desired output, this is in
line with DeFond and Park (1997) who suggest that managers in smoothing of income must
accurately forecast future earnings and then increase or decrease current income to reduce
revenue volatility and produce income in future reporting. This study is consistent with
research of Demerjian, et al. (2017) which also strengthens the research of Gaganis, et al.
(2016) and Good, et al. (2017) that highly skilled managers are likely to smoothing of
income to embed forward-looking information in current earnings, thereby increasing
earnings informativity.
Based on the agency theory proposed by Fama (1980), there is an efficient contractual
relationship between shareholders (principals) and company managers (agents), where
shareholders employ managers as agents to work to maximize well being for shareholders.
In accordance with the contract that has been agreed by the principal and the agent, the
manager with high ability will continue to keep the earnings. This act of income smoothing
aims to provide earnings to the company by considering the future of the company. In line
with Demerjian, et al. (2017) that managers' ability to even out profits when it benefits all
shareholders, but does not reduce income solely for their own personal benefit.
2. The Effect of Foreign Ownership on Income Smoothing
The results of the test of the effect of foreign ownership variables on income
smoothing showed a regression coefficient value of 3.160 with a significance probability
value of 0.002 < alpha 0.05 so that It may be inferred that foreign ownership has a favorable
and considerable impact on income smoothing. This shows that large foreign ownership will
encourage companies to smoothing of income.
Febrianto (2014) suggests that the ownership structure is believed to have the ability
to influence the running of the company in terms of supervising or monitoring the company
as well as its management and board of directors which can later affect the performance of
a company. So that with large foreign ownership, the profit generated by a company does
not fluctuate too much. This research is consistent with the results of research by Rofiqoh,
et al. (2004) where the results of his research show that companies owned by foreign
institutions carry out earnings management in the form of income decreasing to avoid
political costs. Earnings management and income smoothing are often associated because
the actions of both produce income that are different from the actual income that occur.
Companies that are mostly foreign-owned usually face information asymmetry problems
more often due to geographical and language barriers. This leaves companies with foreign
shareholdings more dominantly facing political risks, asymmetric information and legal
protections (La Porta, et al. , 1999) .
Based on the agency theory proposed by Fama (1980), there is an efficient contractual
relationship between shareholders (principals) and company managers (agents), where
shareholders employ managers as agents to work to maximize well being for shareholders.
However, foreign shareholders retain control of activities in the company's operations.
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Therefore, foreign shareholders will play a role in using their knowledge and technology to
produce financial reporting with income that do not smooth. In addition, smooth of income
also shows that in the period concerned the company has produced satisfactory performance
so that the company's equity market value remains stable.
3. The Effect of Managerial Ability on Firm Value
The results of the test of the influence of managerial ability variables on firm value
showed a regression coefficient value of 0.036 with a significance probability value of 0.673
> alpha 0.05 so that it can be concluded that managerial ability has positive but not
significant influence on firm value. This shows that the higher the ability of a manager, the
value of the company tends to increase but does not have astrong enough influence.
The resulting value of firm will be influenced by the ability of a manager to manage
company operations to achieve company efficiency by planning, organizing, implementing,
and controlling performance processes in terms of inputs to produce outputs that can provide
satisfaction for stakeholders. Holcomb, et al. (2009) demonstrate that managerial skills can
form the basis of value creation and performance gains when resources are
utilizedeffectively and efficiently. This research is consistent with the results of Ng and
Daromes' (2016) research which shows a positive and significant influence on company
value, where managers who have better expertise in investment and financial decision
making will have a fixed effect on corporate governance.
Based on the stakeholder theory proposed by Freeman and Reed (1983) that managers
are obliged to run company operations and meet the needs of the company and are able to
provide additional value for investors and meet the needs of other company stakeholders.
Anom (2018) suggests that company managers are people elected by shareholders and are
shareholders' trust in managing and running the company effectively and efficiently.
According to Ng and Daromes (2016), managers can manage company operations by using
company assets efficiently to create a broad market share for the company by paying
attention to the company's best revenue segment, increasing the efficiency of using free cash
flow and being able to consider changes in foreign exchange rates when there are certain
transactions in foreign currencies. Thus, shareholders will select and assign professional
managers to determine the right strategy so that the value of assets and the market value of
equity can increase, so that it also shows the value of the firm depends on the decision
making made by shareholders.
4. The Effect of Foreign Ownership on Firm Value
The results of the test of the influence of foreign ownership variables on company
value showed a regression coefficient value of 0.433 with a significance probability value
of 0.000 < alpha 0.05 so that it can be concluded that foreign ownership has apositive and
significant influence on firm value. This shows that the more foreign shareholders in a
company, the value of the firm will tend to increase.
The resulting firm value will be influenced by share ownership owned by foreign
parties in monitoring and controlling company operations. Choi, et al. (2012) suggests that
foreign ownership opens up possibilities for technology transfer and a more effective
professional workforce and company operations. This research is in support with
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Sissandhy (2014) and Hizazi (2014) which show that foreign ownership has a significant
effect on firm value so that companies with greater foreign share ownership will have a
greater company value as well. This shows that the management and use of company assets
will be more effective and efficient if managed by many foreign shareholders which results
in an increase in the market value of a company's equity.
Based on stakeholder theory, according by Ng and Daromes (2016) which suggests
that the stakeholder perspective is to create a higher level of welfare for stakeholders
involved in the value creation system led by the company. Consistent with stakeholder
theory, foreign shareholders will strive to have a positive impact on the company such as
large investment opportunities and high value to a company . Nuraini (2016) suggests that
investors will be more selective in choosing companies with foreign ownership that are
considered more ready and able to manage their funds and can provide these investors with
benefits. Thus, the welfare of stakeholders, especially investors, in the sustainability of the
company in the future can be well guaranteed.
5. The Effect of Income Smoothing on Firm Value
The results of the effect of the income smoothing variable on the company's value
showed a regression coefficient value of -0.180 with a significance probability value of
0.042 < alpha 0.05 so that it can be concluded that income smoothing has negative and
significant influence on the firm value. This shows that a high level of income smoothing in
a company will tend to reduce the value of the firm.
The resulting value of firm will be influenced by the income smoothing carried out.
The value of the firm can be shown from the level of trust investor in a company. In general,
income that are smooth intentionally so that they appear less fluctuating will produce false
information in decision making for the future so that the value contained in a company will
decrease along with the quality of reporting low profit information in the long run, consistent
with Wang and Williams (1994) who suggest that income smoothing reduces the content of
earnings information. This research is inconsistent with the results of Bao and Bao's (2004)
research which shows that income smoothing has a significant positive effect on company
value, which means that the higher the level of income smoothing carried out by a company,
the higher the value of the firm.
Based on the stakeholder theory proposed by Freeman and Reed (1983) that
managers are obliged to run company operations and meet the needs of the company and
are able to provide additional value for investors and meet the needs of other company
stakeholders. Therefore, the smoothing of income carried out by the company will give a
bad view and thinking about a company. This stakeholder theory focuses on the
relationship between organizations and their stakeholders (Ng and Daromes, 2016), so that
if the company has decreased stakeholder trust, especially investors, the company's stock
price will also decrease.
6. The Mediation effect of Income Smoothing on Managerial Ability and Firm Value
The results of testing the mediating role of income smoothing on the influence of
managerial ability variables on value of firm based on the results of sobel testing in table 5
show that income smoothing does not play a role in mediating the influence of managerial
The Influence Of Managerial Ability And Foreign Ownership On Firm Value: Income Smoothing As
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ability on firm value with a p value of sobel test of 0.924 > alpha 0.05. This shows that with
managers doing or not smooth of income, does not affect the value of the firm.
The agency theory proposed by Fama (1980) that there is an efficient contractual
relationship between shareholders (principals) and company managers (agents), where
shareholders hire managers as agents to work to maximize earnings for shareholders. In
addition, the stakeholder theory put forward by Freeman and Reed (1983) that managers
are obliged to run company operations and meet the needs of the company and are able
to provide additional value for investors and meet the needs of other company stakeholders.
Based on these two theories, it can be concluded that managers have responsibilities to
shareholders and stakeholders in terms of earnings and welfare. Therefore, managers must
make decisions about actions that must be taken for the sustainability of a company.
In general, not all stakeholders, especially investors, only consider the results of
income that has been achieved by a company to make investment decisions. This is because
income is the result obtained in one period or in the short term, while when compared, assets
are the basis for the company to obtain income that is managed continuously or in the long
term. This means that investors are more predictive of the profits that can be generated by
the company in the future. This is consistent with agency theory and stakeholder theory,
where managers provide benefits for shareholders and stakeholders by managing company
assets well to increase the market value of equity.
7. The Mediation effect of Income Smoothing on Foreign Ownership and Firm Value
The results of testing the mediating role of income smoothing on the influence of
foreign ownership variables on firm value based on the results of the sobel test in table 5
show that income smoothing does not play a role in mediating the influence of foreign
ownership on company value with a p value of sobel test of 0.088 > alpha 0.05. This shows
that with foreign shareholders doing or not smooth of income, it does not affect the value
of the company.
Eisenhardt (1989) suggests that there are two specific contributions of agency theory
to organizational thinking. First is information interpretation, this gives importance to
formal information systems, such as budgeting. Both are risk implications, where the
organization is assumed to have an uncertain future and part of that future is controlled by
the members of the organization. In addition, stakeholder theory put forward by Ng and
Daromes (2016) suggests that the stakeholder perspective is to create a higher level of
welfare for stakeholders involved in a value creation system led by the company. Based on
these two theories, it can be concluded that shareholders, especially foreign parties, will take
advantage of the interpretation of information and risk implications to control the company's
future in order to create the welfare of stakeholders.
Generally, foreign ownership is an added value in providing benefits for companies,
especially in terms of investment because according to Nuraini (2016) that foreign
ownership is considered more ready and able to manage their funds and can provide para
investors benefits. Chhibber and Majumdar (1999) also suggest that in certain countries
and industrial firms show on average foreign ownership performs better than domestic
workers. Based on this, it is believed that foreign parties have knowledge and technology
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that can manage company assets efficiently and effectively to generate profits and have a
positive influence on a company in the future so that investors are confident in companies
with foreign ownership that Considered to have provided good and guaranteed quality
financial information reporting
CONCLUSION
This study was conducted with the aim of investigating the effect of managerial ability
and foreign ownership in reducing income smoothing to increase value of the firm. Based on
the testing and data analysis results that have been carried out, the conclusions of this study are
as follows; Managerial ability has a positive but not significant influence on income smoothing.
The results of this study show that although managers have produced good performance, there
are still things that cannot be controlled so that managers take income smoothing actions by
considering the sustainability of the company in the future.
Foreign ownership has a positive and significant influence on income smoothing. The
results of this study show that foreign shareholders use their modern knowledge and
technology in controlling and supervising financial reporting in order to generate profits that
do not fluctuate too much. Managerial ability has a positive but not significant influence on the
value of the firm. The results of this study show that the control function is generally still held
by controlling shareholders so that managers still have restrictions in controlling company
operations to increase company value.
Foreign ownership has a positive and significant influence on the value of firm. The
results of this study show that foreign ownership is considered to provide added value so that
investors are more interested in investing their shares in companies that have foreign
ownership. Income smoothing has a negative and significant influence on the value of the firm.
The results of this study show that companies that do income smoothing are considered less
able to manage their assets well and this can affect the market value of a company's equity.
Income Smoothing does not act as a mediating variable on the influence of managerial
ability on value of the firm. The results of this study show that investors do not only consider
the results of current income, so that managerial ability in managing assets to generate profits
in the future can also be one of the considerations to increase the value of the company.
Income Smoothing does not act as a mediating variable on the effect of foreign ownership
on the value of the firm. The results of this study show that investors believe that foreigners
have the knowledge and technology that can manage company assets efficiently and effectively
and have a positive influence on a company in the future.
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Suwandi Ng, Livia Chandra (2023)
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