Earnings Management, Supervisory Board Effectiveness, and Company Value

Income smoothing is a form of earnings management that manipulates the profits reported in the annual financial report, motivated by managers' bonuses. This investigation examines the effects of supervisory board effectiveness — reflected in its size and independence — on income smoothing in non-financial companies in the LQ45 index in Indonesia from 2017 to 2023, followed by the relationship between income smoothing and company value. Income smoothing and company value are measured by the inverse of the Eckel Index and by the natural logarithm of the stock price, respectively. Meanwhile, the size and independence are quantified separately as the number of commissioners and the proportion of independent commissioners among the total commissioners. The samples used consist of nine companies. Moreover, the path analysis model is used to test the hypotheses, with t-statistics provided to support them. This investigation finds that the fewer people on the commissionary board, the lower income smoothing. The proportion of independent commissioners negatively affects income smoothing practices, suggesting that greater board independence improves oversight and limits earnings management. Because of successful supervision, income smoothing disappeared in the market, as evidenced by the meaningless association between income smoothing and company value. In practice, this study suggests that companies adopt a smaller supervisory board and greater independence to reduce income smoothing. Thus, the adverse effect of income smoothing disappears in the market.