Revisiting earnings response coefficient: Does earning stability play a role?

Putu Ary Mas Suwandewi; Dewa Gede Wirama

doi:10.21744/ijbem.v9n1.2467

Authors

Putu Ary Mas Suwandewi
arymassuwan@gmail.com
Udayana University, Denpasar, Indonesia
Dewa Gede Wirama Udayana University, Denpasar, Indonesia

Keywords:

Earnings Response Coefficient, Earnings Stability, Direction of Earnings Change

Abstract

This study aims to examine the effect of earnings stability on the earnings response coefficient (ERC), with the direction of earnings changes serving as a moderating variable, while firm size and sales growth are included as control variables. Using a quantitative approach, this study employs moderated regression analysis on a sample of publicly listed firms in Indonesia over the period 2021–2023. The sample consists of 441 firm-year observations selected through proportional stratified random sampling. Descriptive statistics indicate a high degree of data variability across the observed firms. The empirical results reveal that earnings stability and the direction of earnings changes do not have a significant direct effect on ERC. Furthermore, the interaction between earnings stability and the direction of earnings changes is also insignificant, suggesting that the direction of earnings movements does not strengthen or weaken investors’ responses to earnings stability. These findings indicate that investors in the Indonesian capital market tend to react more strongly to transitory earnings information rather than incorporating long-term earnings quality considerations, which is consistent with the semi-strong form of market efficiency theory.

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