Does value creation drive growth illusion? An evidence from Indonesia stock exchange

Abstract

The main aim of this study is to explore the illusion effect on the growth market of firm value, and to examine the value creation of manufacturing companies listed in the Indonesia Stock Exchange (IDX). The study used pooled data of the manufacturing companies listed in the Indonesia Stock Exchange (IDX), and estimated the overvaluation using the model developed by Rhodes- Kropf, Robinson, and Viswanathan (2005). The real earnings management, based on overproduction and auditing, results on an increase in the valuation. However, the value of creating actions of the firms in the form of accrual management and real earnings management based on discretionary expense are less likely to significantly contribute to shape the overvaluation. The findings are helpful for regulators to improve supervision to real earnings management based on overproduction and the use of the Big Four auditors to prevent any potential value creation that leads to misvaluation in the market, as well as for professionals, investors and analysts to evaluate the quality of accounting numbers, select a portfolio of stocks, and make lending decisions. Unlike any previous studies highlighting the consequences of overvaluation and focusing on predicting the occurrence of overvaluation as a result of earnings management practices, this study mainly focuses on the earnings management as the cause of the overvaluation in the form of variables of accrual management and real earnings management based on discretionary expenses and overproduction.