An assessment of a company's performance can be known through the financial statements

presented. External and internal parties of the company are greatly helped because of the report
that can be used to predict the condition of the company in the future. Financial statements can
be used to help parties related to decision making. Research on the effect of profitability was
carried out by Reyhan (2014) and Mahendra & Wirama (2017) to obtain conclusions where there
was a positive influence on the profitability variable on earnings quality. Whereas Risdawanty &
Subowo (2015) and Ma & Ma (2016) conducted a study that obtained results that profitability
had a negative effect on earnings quality. However, research from Imad et al. (2017) and Ginting
(2017) get different findings, namely, profitability does not affect the quality of earnings.
Mojtahedi (2013) with Alves (2014) found that leverage affects the quality of earnings in a
negative direction. It is different from the study of Hassan & Farouk (2014) and Ramadan (2015)
which resulted in the finding that there was a positive relationship of leverage on earnings
quality. Research on management share ownership is done by Ayadi & Boujelbène (2014) and
Novieyanti (2016) concludes if there is a positive influence on managerial ownership of the QIR.
Whereas Moradi & Nezami (2011) and Pertiwi et al. (2017) conduct research that gets results if
managerial ownership does not affect the quality of earnings.
As for the relationship between institutional ownership and earnings quality, Pertiwi et al.
(2017) and Latif et al. (2017) conducted a study that concluded that institutional ownership had a
significant positive impact on earnings quality. Whereas Setianingsih (2013) research with
Novieyanti (2016) shows that institutional ownership does not influence the QIR. This means
that there are still inconsistencies in the results of the research on each variable
Originality in this study differs from previous studies in the form of earnings quality
measurement difference. In terms of measuring earnings quality, the research used is the
calculation of the Quality of Income Ratio (QIR). In previous studies, the use of QIR as a
measurement of earnings quality is still rarely used. Besides, the QIR describes the comparison
between operating cash flows and earnings before income tax. By using these measurements, it
can be seen that the operating profit is realized in the form of cash so that the higher the ratio, the
higher the company's earnings (Vatanparast et al., 2014).
Several theories support management in choosing accounting policies. Although not
directly, positive accounting theory determines the accounting policy decisions that are
appropriate for the company. This is because, management has flexibility in determining the

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right accounting policy for the company (Ramadhan, 2017). The choice of methods to be used in
the accounting process is part of corporate governance (Scott, 2011).
In addition to these theories, there are implications of agency theory, in this case, namely
the existence of information asymmetry between owners and agents. This relationship arises
when one or more principal people are employing other people or giving and delegating some
authority for decision making to agents in carrying out company activities (Jensen & Meckling,
1976). Some management intentionally beautifies earnings information on the company's annual
report so that it can align with the wishes of investors. This incident makes the profits presented
in the company's financial statements, not of quality.
Published financial statements have information that can be used as a signal to companies
to investors to consider decisions in terms of investment. Yuliawan & Wirasedana (2016) has the
assumption that in signal theory, investors and company managers do not have similar
information. Signal theory has information that is closely related to information asymmetry. If
the information contains a signal, it is expected that the external party can respond when the
signal is received. The quality of earnings in each company is expected to be able to make a
good signal so that the intended share is expected to react positively to the company.
The relationship of company size to earnings quality which is influenced by the political
cost hypothesis is included in positive accounting theory. The hypothesis supports if
management in large companies has the desire to postpone profits in the coming period to reduce
their political costs to create low-quality earnings. Political costs in the form of costs charged by
the company under the conditions of the company and are expected not to burden the company.
Political costs in this research are tax burdens.
In connection with the existence of signal theory, large companies tend to have profits in
line with the size of the company so that the political costs generated are also large. To reduce
the company's political costs, managers try to provide a signal in the form of financial
information to the government regarding the decline in corporate profits from what should be so
that the company seems to have a small profit. Then, the government is expected to capture the
signal. Such a profit is a profit that is not quality because it does not show the real condition. So
that the larger the size, the more it will not be of QIR quality. The statement is in line with the
research from Darabi et al. (2012), Valipour & Moradbeygi (2011), Dira & Astika (2014),
Mojtahedi (2013) and Marpaung (2019).

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H1: Company size has a negative effect on earnings quality.
The decline in profitability reflects less and fewer profits because management chooses a
policy to postpone profits in the coming period. Profitability explains the company's ability to
obtain profits (Risdawanty & Subowo, 2015). This is supported by the existence of a political
cost hypothesis where the company suspends company profits in the coming period to reduce the
company's political costs that have an impact on low profitability. So that low profitability will
be accompanied by declining earnings quality. The positive influence between profitability and
earnings quality is supported by research by Reyhan (2014), Ahmad & Alrabba (2017) and
Mahendra & Wirama (2017).
H2: Profitability has a positive effect on earnings quality.
One indicator to measure financial performance is leverage. Leverage is the financial ratio
obtained from comparing the total debt with total assets. Leverage is used to explain the assets
and sources of corporate funds that can be used in Marpaung's company activities (2019).
The higher leverage means that the company prefers external versus internal funding which
causes the company's dependence on creditors to be higher, this condition creates a high
motivation for companies to violate debt contracts (Ramadhan, 2017). So, companies want
financial policies that can increase profits when the level of leverage is high. This makes the
profits presented in the annual report reported by the company, not of high quality.
There is a relationship between profits obtained by companies with debt (Keshtavar et al.,
2013). The relationship between the level of debt and earnings quality is influenced by the debt
agreement hypothesis which is included in positive accounting theory. Where if leverage is high
then there is a tendency for company managers to use accounting policies to report changes in
earnings from the next time to the present which makes the quality of earnings decline. This is
supported by research from Darabiet al. (2012), Mojtahedi (2013), Alves (2014), and Warrad
(2017) wherein the study states that leverage has a negative impact on the QIR.
H3: Leverage has a negative effect on earnings quality.
Managerial ownership is part of corporate governance. The existence of share ownership
by managers raises the motivation to do better work to improve company performance.
Following agency theory, managers have a responsibility to the principal in managing the
company. Agents who own shares in the company mean the agent is part of the principal. This is
because the agent is part of the principal so that the agent also has profits generated by the

3
company (Tertius & Christiawan, 2015). It can be concluded that the increasing number of
managerial shareholdings has an impact on the increasing quality of company profits. This is
supported by research from Ayadi & Boujelbène (2014), Novieyanti (2016), and Khafid & Arief
(2017) explaining that there is a relationship of managerial share ownership to earnings quality in
a positive direction.
H4: Managerial ownership has a positive effect on earnings quality.
Institutional share ownership is one of the categories of corporate governance. According
to Widarjo et al. (2010), institutional ownership can be from the government, private, domestic
and foreign institutions. Jensen & Meckling (1976) describe agency theory, namely an agreement
between the manager and the owner in carrying out the task in the interests of the owner where
the owner entrusts the company's activities to the agent. Every party, both the manager and the
owner, has different interests, namely both wanting to improve their welfare and prosperity.
Institutions can reduce the gap of the agent's destination with the owner. The situation is because
the institution can control the company's internal control that is effectively implemented to
minimize earnings manipulation. So, the more share ownership by the institution, the more the
supervision of the activities of the company manager so that the profits presented are of high
quality. This description is supported by research from Ananda & Ningsih (2016), Ayadi &
Boujelbene (2014), Pertiwi (2017), and Latif et al. (2017) where it concludes that there is a
positive direction between institutional ownership and earnings quality.
H5: Institutional ownership has a positive effect on earnings quality.
RESEARCH METHODS
This research is a deductive study with a type of quantitative research. In this study, the
data used is secondary data. The company that becomes the population for research is
manufacturing companies listed on the Stock Exchange in 2013-2017 with a total of 147
companies. The research sample was obtained by purposive sampling method, in which samples
matched the category of 25 companies with a five-year observation period and obtained 125
units of analysis. The number of units of analysis is reduced by outlier data of 32 data. Outlier
data is an extreme value that has a far amount if it is equated to the overall value. Outlier data is
determined by eliminating the z-score value in variables with numbers above 3 or below -3 (-3
<x <3), where x represents the unit of analysis's z-score data. In the selection of sample
acquisition using criteria such as Table 1.

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 The data collection technique found in the research is documentation techniques. Research
data, namely the annual report of manufacturing companies listed on the IDX for the period
2013-2017. Data is obtained from the BEI office of the Semarang, Central Java branch and
downloaded on the IDX website. The research data analysis technique is a descriptive analysis
and inferential analysis. Before hypothesis testing, the data must be tested by classical
assumption. Hypothesis testing uses multiple regression analysis with a significance level of 5%
using SPSS 24.
RESULTS AND DISCUSSION
The classic assumption test in the study was used in examining the feasibility of the type
of regression equation. Classic assumption tests include normality, multicollinearity,
autocorrelation, and heteroscedasticity. Normality testing proves that the data is well distributed
where the number of Kolmogorov-Smirnov (K-S) significance is 0.096> 0.05. Multicollinearity
test obtained VIF number <10 and the amount of tolerance> 0.01 which means that the test in the
study did not detect multicollinearity. Autocorrelation testing uses the Run Test wherein the
number of Asymp is obtained. Sig. (2-tailed) above the 5% significance level means no
autocorrelation problems are found. The results obtained from the Run Test are 0.347 so there is
no autocorrelation problem. Heterokesdatisitas test in this study using a white test, then the
results obtained indicate that c2 count (46,872) <c2 table (115.39) which means there are no
symptoms of heteroscedasticity. Classical assumption testing shows the results that all
independent variables from the problem, they can only test the hypothesis. With the hypotheses
discussed, the regression equation1 has been prepared.
Effect of Company Size on Profit Quality
This research proves if the size of the company does not have an impact on the quality of
earnings. The statement was alleged because a company with a large size does not always
describe that the company must be healthy and stable. There are many possibilities that
companies are included in the big category. The size of the company in this study is proxied with
assets. Where the composition of assets is debt and capital. Companies with large sizes have not
guaranteed that the profits are also high. You can because the company is large because of the
composition of the debt more. So this reflects a large risk to the company.
Large companies with a high composition of debt reflect the interest expense of high
companies. High-interest costs can reduce the company's political costs. So that companies do

5
not need to postpone profits to reduce their political costs. This result can be concluded if the
size of the company does not affect quality company profits. These results are in line with the
studies of Marliyana & Khafid (2017), Ginting (2017), and Llukani, (2013) which result if the
firm size does not affect the quality of the company profits.
Effect of Profitability on Profit Quality
The test results prove the variable profitability affects the quality of earnings in a negative
direction. This is allegedly due to the influence of the bonus plan hypothesis found in positive
accounting theory. Company managers are more likely to carry out accounting policies were
changing the presentation of profits should in the future be the current period. This makes the
company have high profitability so that the manager gets a bonus. So that the quality of profits
presented decreases because it does not reflect actual profits. Thus, the higher the profitability,
the quality of earnings decreases. This study is in line with the results of the research of Ma &
Ma (2017), Warrad (2017), and Valipour & Moradbeygi (2011).
Effect of Leverage on Profit Quality
The test results prove that leverage has a negative effect on earnings quality. The higher
the leverage, the higher the company's dependence on creditors, this condition makes the
company motivate to violate debt contracts (Ramadhan, 2017). This is in accordance with the
debt contract hypothesis found in positive accounting theory. If leverage is high, then there is a
tendency for management to determine methods that report differences in profits from the next
period in the present, making the quality of earnings decline.
Companies that have large funding sources from debt are feared that the company cannot
repay their debts on time. The higher the risk of the company being received impacts the higher
the impossibility of obtaining high profits in the future. The amount of debt can be used in
forecasting the results of profits if the shareholders invest their shares. A large amount of debt is
feared that the company will focus more on paying off its debt than paying dividends to
shareholders. So that investors will think twice about deciding to invest in a company that has
high indigo leverage. This causes an encouragement for managers to manipulate their financial
statements so that the company is not afraid to lose shareholders despite having a high risk. So,
this makes the quality of earnings decline. This is in line with Mojtahedi (2013), Alves (2014),
and Warrad (2017) research where leverage has a negative effect on earnings quality.
Effect of Managerial Ownership on Profit Quality

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 The test results prove that the manager's share ownership does not influence the quality of
earnings. This is presumably due to the lack of managerial leadership in manufacturing
companies. 66.67% of manufacturing companies have very little managerial ownership. So that
there is no impact from managerial ownership with the quality of earnings. The results were
supported by Riswandi (2013) if the non-influential causes of managerial ownership of earnings
quality were suspected because the listing companies on the IDX were dominated by family
ownership and only had fewer managerial ownership structures. The average number of
managerial ownership is only 6.8% which indicates the low share ownership by managers.