TAX REFORM AND EARNING MANAGEMENT: POLITICAL COST HYPOTHESIS TEST IN INDONESIA

Abstract

This paper examine political cost hypothesis in Indonesia. Political cost hypothesis revealed that some firms that more vulnerable to political cost than the other manage income downward to avoiding the attention of government and regulator. In 2007 the government of Indonesia has made changes to taxation law. One form of such change is Act No. 36 of 2008. The purpose of this study was to examine and analyze indications of earnings management undertaken by property and real estate companies before and after the enactment of Act No. 36 of 2008. In additional, it also examine and analyze the influence of taxes and non-tax factor on earnings management undertaken by property and real estate companies. The author uses window period two years before and two years after the implementation of Act No. 36 of 2008. Population of this research is property and real estate companies listed on the Indonesia Stock Exchange. Thirty two companies are taken by author as sample. The result of Paired Sample T-Test shows that the discretionary accrual before and after the implementation of Act No. 36 of 2008 is statistically different. This implies that property and real estate companies are indicated take earnings management before and after implementation of Act No. 36 of 2008. In additional, panel data regression test results shows that earnings management are influenced by tax and non-tax factors. This result suggests support for the positive accounting theory put forward by Watts and Zimmerman (1990) that political cost having an affect on the motivation of earnings management undertaken by the company.