Nugraha, Asep Tatip (2021) Determinants of, and Stock Market Reactions to, Financial Reporting Lag in Indonesia. Other Degree thesis, Victoria University.

Abstract

Financial reporting timeliness is one of the characteristics that enhance and improve the quality of useful financial information, which can affect stock prices. Given the importance of financial reporting timeliness, this research extends prior studies regarding determinants of, and stock market reactions to, financial reporting lag. However, the impact of tax-related variables (related party transactions, capital structure and tax audits) on financial reporting lag was analysed in this as well as other determinants (audit report lag, firm size, profitability, and audit opinion). The related party transactions and a high level of debt on capital structure are notoriously popular for achieving tax benefits and possibly considered as bad news. Investors could consider that gaining tax benefits or minimising tax payment as a negative behaviour in business. This study uses a stratified random sampling method to obtain the data from various industry sectors on the Indonesia Stock Exchange (IDX) from 2014 to 2017. The sample consists of 468 firm-year observations. Two-stages least squares regression method, the OLS model, and dynamic GMM model were used to analyse the relationship between stock market reactions and financial reporting lag. In addition, the least square model and Wald test were also used to analyse the asymmetric stock market reactions between timely and late financial reporting lags. Using LASSO Regression, the findings show that leverage, related party transactions, and tax audits are found to have no relationship with financial reporting lag. These findings indicate that the tax-related variables do not affect financial reporting timeliness. This means that the IDX firms do not consider related party transactions, high level of loan on capital structure, and tax audit results as bad news. Also, profitability and audit opinion have no relationship with financial reporting lag. Meanwhile, audit report lag and firm size are the variables, which are found to show a relationship with financial reporting lag. Moreover, the Wald tests on least square model reveal some evidence about asymmetric stock market reactions between timely and late financial reporting lag. Also, the data analysis using two-stage least-square model, the OLS model, and the dynamic GMM shows significantly negative relationship between predicted financial reporting lag and stock market reactions. However, the dynamic GMM model presents better results than those from the two-stage least square model and the OLS model due to the endogeneity problem on panel data used in this study. The results are consistent with the semi-strong form of the efficient market hypothesis. It indicates that the stock markets react to the publicly available information including prior stock prices and annual financial reporting during the event windows. The academic contributions of this study are as follows: 1. Investigating the audit report lag and tax-related variables into financial reporting lag and stock market research for emerging economies. 2. Selecting samples from various industry sectors for stock market reactions to financial reporting lag because prior studies used the sample from listed manufacturing firms in Indonesia. 3. Applying the two-stage least square method and the dynamic GMM model to analyse the stock market’s reactions to financial reporting lag because this method considers and tackles the endogeneity problem experienced in the model particularly on the panel data by the dynamic GMM model. 4. Using the Wald test to analyse the asymmetric stock market reactions between timely and late financial reporting lag. Finally, the practical contributions of this study are as follows: 1. The Financial Service Authority of Indonesia (OJK) could enhance its supervision toward the non-compliant firms in submitting their annual financial reports. 2. Investors may discover that publicly listed corporations do not take related party transactions, a high degree of debt on a capital structure, and tax audit results into consideration when releasing their annual financial reports. As a result, to make an investment choice, investors do not need to seek information about listed corporations declaring those accounts. 3. The investors also may find the appropriate timeliness to invest or divest their money from the timely and late financial reporting firms. 4. The companies’ managers could assess the impact of timely and late financial reporting of the listed firms. 5. The findings of this study have implications for investors in countries, which have similar financial reporting and tax regulations to Indonesia.

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