Open Access
Article
SciPap-1467
Does Idiosyncratic Risk Affect Earnings Quality? Evidence from Indonesia
by
Yuni Yuni Pristiwati Noer Widianingsih 1,* 
and Doddy Setiawan 2
1 Accounting, Sebelas Maret University and STIE Swasta Mandiri Surakarta, Jl. Ir. Sutami No.36, Surakarta 57126, Indonesia
2 Accounting, Sebelas Maret University, Jl. Ir. Sutami No.36, Surakarta 57126, Indonesia
* Authors to whom correspondence should be addressed.
Abstract: This study examines whether idiosyncratic risk significantly affects earnings quality in non-financial companies listed on the Indonesia Stock Exchange. Research on developing countries, especially Indonesia, which links idiosyncratic risk and earnings quality, has not been widely conducted. This is interesting because the characteristics of the markets in developing countries are different from those in developed countries. This study uses the dependent variable of earnings quality, which is the residual value of the Kasznik and Dechow–Dichev model, and idiosyncratic risk, which is measured based on the Capital Assets Pricing and Fama–French models. The overall results indicate that high idiosyncratic risk is associated with low earnings quality (large residual value). Robustness tests are also conducted based on groups of positive and negative profit companies, as well as industry groups. The same results were obtained for each earnings component, namely, innate and discretionary factors. These findings contribute to the development of firm-specific risk literature as an additional analytical tool to assess earnings quality based on accrual rates. This allows regulators and standard-setters to provide more relevant information regarding investment decisions.
Keywords: Idiosyncratic, Return, Earnings Quality, Accrual, Discretionary Accrual
JEL classification: G3 - Corporate Finance and Governance, M41 - Accounting
Received: 16 January 2022 / Revised: 17 December 2022 / Accepted: 19 December 2022 / Published: 9 January 2023
