Butar Butar, Sansaloni (2016) IFRS Adoption In Indonesia and Its Implication On The relationship Between Ownership Structure and Investment Efficiency. IFRS Adoption In Indonesia and Its Implication On The relationship Between Ownership Structure and Investment Efficiency.

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Abstract

Agency theory predicts that separation of ownership and control might lead to moral hazard and adverse selection. In such a situation, investment decision making is not optimal and might put the company and stockholders in danger. Absence of control may induce managers to opportunistically use firms’ resources for personal benefit and invest in highly risky projects with negative present value. Therefore, monitoring function by institutional investors are necessary to minimize manager dysfunctional behavior. It is also deemed necessary to offer firm’s stock to managers to align the interest of managers and stockholders. This study investigates the effect of institutional and managerial ownership on investment efficiency as a proxy for firms’ performance. The effect of these two variables is investigated in the context of IFRS adoption. Since accounting policies underlying IFRS are more market friendly than US accounting standards, it is expected that full convergence to IFRS in 2012 may increase financial statement quality in Indonesia. Contrary to prediction, the evidence shows that converging reporting standard into IFRS does not increase investment efficiency. This suggests that IFRS adoption in Indonesia does not increase financial reporting quality. Furthermore, the impact of managerial ownership on investment efficiency remains unchanged following IFRS adoption. This suggests that managerial ownership does not align the interest of stockholders and managers. As predicted, however, monitoring function of institutional investors is increased after the adoption.

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