The Effect of Free Cash Flow, Financial Leverage and Corporate Social Responsibility on Earnings Management: The Moderating Role of Good Corporate Governance (Case Study Of Energy Sector Companies Listed on the Indonesia Stock Exchange for the Period 2019

Yael Andriyani; Endri Endri

doi:10.55927/ijbae.v5i2.11

Authors

Yael Andriyani Mercu Buana University
Endri Endri Mercu Buana University

DOI:

https://doi.org/10.55927/ijbae.v5i2.11

Keywords:

Free Cash Flow, Financial Leverage, Corporate Social Responsibility, earnings management, Good Corporate Governance

Abstract

This study aims to analyze the impact of Free Cash Flow (FCF), Financial Leverage (FL), and Corporate Social Responsibility (CSR) on earnings management, with Good Corporate Governance (GCG) as a moderating variable in energy sector companies listed on the Indonesia Stock Exchange (IDX) during the period 2019-2024. Using a panel data regression method on 25 companies, the findings reveal that FCF has a positive effect on earnings management, indicating that free cash flow provides companies with greater flexibility in managing earnings. Financial Leverage (FL) also positively influences earnings management, although its impact is not as significant as FCF. CSR has a negative effect on earnings management, suggesting that corporate efforts to enhance social responsibility can reduce the tendency for earnings manipulation. GCG, while positively associated, does not show a significant impact on earnings management. The study further finds that GCG significantly moderates the relationship between FL and earnings management, but does not have a substantial moderating effect on the relationship between FCF and CSR with earnings management. These findings provide valuable insights into the factors influencing earnings management and the role of GCG as a control mechanism in energy sector companies in Indonesia..

References

Firmansyah, A., Arham, A., Qadri, RA, Wibowo, P., Irawan, F., Kustiani, NA, Wijaya, S., Andriani, AF, Arfiansyah, Z., Kurniawati, L., Mabrur, A., Dinarjito, A., Kusumawati, R., & Mahrus, ML (2022a). Political connections, investment opportunity sets, tax avoidance: Does corporate social responsibility disclosure in Indonesia have a role? Heliyon, 8(8), 1–13.https://doi.org/10.1016/j.heliyon.2022.e10155

Scott, W.R. (2000). Financial accounting theory (2nd ed.). Prentice-Hall Canada Inc.

Fitriyani, T., & Waluyo. (2022). The moderating earnings management on the impact of CEO narcissism, sales growth, and profitability on tax avoidance. Journal of Economics, Finance and Accounting Studies, 1(1), 357–365.https://doi.org/10.32996/jefas

Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 87(3), 355–374.https://doi.org/10.2307/1882010

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman.

Amidu, M., Coffie, W., & Acquah, P. (2019). Transfer pricing, earnings management and tax avoidance of firms in Ghana. Journal of Financial Crime, 26(1), 235–259.https://doi.org/10.1108/JFC-10-2017-0091

Aldubhani, MAQ, Wang, J., Gong, T., & Maudhah, R.A. (2022). Impact of working capital management on profitability: Evidence from listed companies in Qatar. Journal of Money and Business, 2(1), 70–81.https://doi.org/10.1108/JMB-08-2021-0032

Wang, G.Y. (2010). The impact of free cash flows and agency costs on firm performance. Journal of Service Science and Management, 3(4), 408–418.https://doi.org/10.4236/jssm.2010.34047

Hidayat, ES, Kurniawan, WR, Silvia, N., & Fadhilah, NHK (2023). The influence of good corporate governance, free cash flow and leverage factors on earnings management with audit quality as moderating variable. Proceedings of the International Conference on Economics, Management and Accounting (ICEMAC 2021), 207(Icemac 2021), 90–99.https://doi.org/10.2991/aebmr.k.220204.010

Mock, H. M., Bock, R., & Gray, A. (1968). Basic financial management: Text, problems, and cases (p. 2510–2522). Brain, 142(8).https://doi.org/10.1093/brain/awz167

Kalantonis, P., & Kallandranis, C. (2021). Leverage and firm performance: New evidence on the role of economic sentiment using accounting information. 5(1), 96–107.https://doi.org/10.1108/JCMS-10-2020-0042

Sacconi, L. (2012). Corporate social responsibility and corporate governance working. EconomEtica, 38(1), 1–43.https://bsc.cid.harvard.edu/files/bsc/files/285_andrews_this_is_pfm.pdf

Idowu, S. (2016). Corporate social responsibility initiatives from around the world: An introduction (pp. 1–18).https://doi.org/10.1007/978-3-319-21641-6_1

Yuliana, N., & Utami, W. (2022). The effect of sustainability disclosure, corporate governance mechanisms and intellectual capital on financial performance. Accounting Research Journal of Sutaatmadja, 06(01), 41–52.https://ojs.stiesa.ac.id/index.php/accruals/article/view/929

Center of Risk Management & Sustainability. (2023). Sustainability in business governance. Harvard Business Review.https://bsc.cid.harvard.edu

Indonesia Stock Exchange. (2019). Corporate governance in Indonesia's capital market. Indonesia Stock Exchange.

Chen, W., & Tian, Y. (2024). The unintended consequences of environmental regulations on earnings management: Evidence from emissions trading schemes in China. Sustainability (Switzerland), 16(16), 1–21.https://doi.org/10.3390/su16167092

Ilham, RN, Putri, DE, Sinta, I., Siregar, L., & Saprudin. (2022). The effect of good corporate governance, free cash flow, and leverage on earnings management with audit quality as a moderating variable. Journal of Management Science, 10(4), 1144–1159.www.idx.co.id

Sastroredjo, P.E., Ausloos, M., & Khrennikova, P. (2025). Eco-innovation and earnings management: Unveiling the moderating effects of financial constraints and opacity in FTSE All-Share firms. Sustainability, 17(1), 1–25.

Bachtijeva, D., Tamulevičienė, D., & Subačienė, R. (2024). The impact of corporate social responsibility on the use of earnings management in the context of internal financial and macroeconomic factors: The case of Lithuania. Economies, 12(12), 1–20.https://doi.org/10.3390/economies12120329

Maqfira, A., Zaitul, Z., Darmayanti, Y., Azizah, M., & Ilona, D. (2024). Corporate governance and CSR disclosure: Earnings management as a moderating variable. Initiative: Journal of Economics, Accounting and Management, 3(1), 259–276.

Vatis, S. E., Drogalas, G., & Persakis, A. (2025). The impact of ESG on earnings quality and real earnings management: The role of firm size. Sustainability, 17(1), 1–26.

Azima, AF, Aristi, MD, & Ramashar, W. (2023). The influence of CSR and GCG on company value with financial performance as a moderating variable. Journal of Accounting Science and Research, 12(8), 2–25.

Bachtijeva, D., Tamulevičienė, D., & Subačienė, R. (2024). The impact of corporate social responsibility on the use of earnings management in the context of internal financial and macroeconomic factors: The case of Lithuania. Economies, 12(12), 1–20.https://doi.org/10.3390/economies12120329

Hidayat, ES, Kurniawan, WR, Silvia, N., & Fadhilah, NHK (2022). The influence of good corporate governance, free cash flow and leverage factors on earnings management with audit quality as moderating variable. Proceedings of the International Conference on Economics, Management and Accounting (ICEMAC 2021), 207(Icemac 2021), 90–99.https://doi.org/10.2991/aebmr.k.220204.010