Bima Abdi Wibawa, Ratna Wardhani / The Effect of Conditional Conservatism and Agency Cost on Investment-Cashflow Sensitivity / 69 - 88

ISSN: 2089-6271 | e-ISSN: 2338-4565 | https://doi.org/10.21632/irjbs

Vol. 10 | No. 2

The Effect of Conditional Conservatism and

Agency Cost on Investment-Cashflow Sensitivity

Bima Abdi Wibawa, Ratna Wardhani

Faculty of Economics and Business, Universitas Indonesia, Kampus Widjojo Nitisastro,
Jl. Prof. Dr. Sumitro Djojohadikusumo, Kukusan, Beji, Kukusan, Beji, Kota Depok, Jawa Barat 16420

ARTICLE INFO ABSTRACT

Keywords: This research aims to give empirical evidence of the effect of conditional
Conditional conservatism,
investment-cashflow sensitivity,
conservatism on company’s investment-cashflow sensitivity, and
agency cost, whether the impact is stronger in high agency cost firms compare
dividend payout ratio, to in low agency cost firms. This research uses dividend payout
purposive judgement sampling
ratio to measure the agency cost, because this study uses Indonesia
as a research context where companies in Indonesia majority have
concentrated ownership and funding through debt so that agency
conflict that appears more dominant is the conflict of agency type two
and three. This study uses sample from manufacturing companies listed
in Indonesia Stock Exchange during the period 2008-2012. The total
observation in this research is 474 firm years, which 152 of the samples
is classified as high agency cost firms and 322 sample as low agency
cost firms. The result shows that as the recognition of economic losses
becomes more timely, the sensitivity of firm investment to cashflow
decreases. Conditional conservatism decreases investment-cashflow
sensitivity in low agency cost firms but increases the sensitivity in
high agency cost firms. In fact, before implementation of conditional
conservatism, high agency cost firms have smaller investment-
cashflow sensitivity compared to the low agency cost one.

SARI PATI

Penelitian ini bertujuan untuk memberikan bukti empiris tentang

pengaruh konservatisme kondisional (conditional conservatism)
terhadap sensitivitas investasi terhadap arus kas (investment-cash
flow sensitivity) perusahaan, dan apakah dampaknya lebih kuat
pada perusahaan dengan biaya agensi tinggi dibandingkan dengan
perusahaan dengan biaya agensi rendah. Penelitian ini menggunakan
rasio pembagian dividend (dividend payout ratio) untuk mengukur
biaya agensi, karena penelitian ini menggunakan Indonesia sebagai
Corresponding author:
konteks penelitian dimana perusahaan-perusahaan di Indonesia
ratnawardhani@yahoo.com mayoritas memiliki kepemilikan terkonsentrasi dan pendanaan
melalui hutang sehingga konflik keagenan yang muncul lebih

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International Research Journal of Business Studies | vol. X no. 02 (2017)

dominan adalah konflik keagenan tipe dua dan tiga. Penelitian ini
menggunakan sampel dari perusahaan manufaktur yang terdaftar
di Bursa Efek Indonesia selama periode 2008-2012. Total observasi
dalam penelitian ini adalah 474 tahun perusahaan, dimana 152 sampel
diklasifikasikan sebagai perusahaan dengan biaya agensi tinggi dan
322 sampel sebagai perusahaan dengan biaya agensi rendah. Hasilnya
menunjukkan bahwa karena pengakuan kerugian ekonomi menjadi
lebih tepat waktu (koservatisme yang lebih tinggi), sensitivitas investasi
terhadap arus kas perusahaan menurun. Konservatisme kondisional
menurunkan sensitivitas arus investasi-arus kas di perusahaan
dengan biaya agensi rendah namun meningkatkan sensitivitas pada
perusahaan dengan biaya agensi tinggi. Bahkan, sebelum penerapan
konservatisme kondisional, perusahaan dengan biaya agensi tinggi
memiliki sensitivitas investasi terhadap arus kas yang lebih rendah
dibandingkan dengan perusahaan yang memiliki biaya agensi rendah.

© 2017 IRJBS, All rights reserved.

INTRODUCTION addition, conditional conservatism also facilitates

Prior studies in the field of accounting have company’s monitoring function that makes a
proven that the quality of accounting information company with conditional conservatism has
influences company’s value (Healy and Palepu, the advantage in its governance (Lafond and
2001; Bushman and Smith, 2001; Easley and Watts, 2008). Jensen (1986) then state that
O’Hara, 2004; Lambert et al., 2007; Lara et al., conservatism is a mechanism that in ex-ante
2009). This statement stimulates our logic to controls management investment decisions and
questioning about what kind of quality that in ex-post facilitates monitoring function of those
could increase company’s value. The quality of decisions. Before investing, manager will tend
accounting information, which is reflected in to avoid having a negative NPV project, knowing
the financial statements, is shown through many that conservatism can easily record a loss on that
ways of reporting. There are many differences in investment. After running investment projects,
the way of how accounting is done. One is the the results of conservative accounting will make
principle underlying the procedures for making the assessment of management performance
it. One accounting principle that is considered to becomes more effective.
have a big influence in book keeping methodology
is conservatism. Conservatism in accounting is a In determining the amount of investment activity,
concept where the increase in the value of assets company will see the availability of internal
or income are not easily recognized. According to funds (usually proxied by the amount of cash
Basu (1997), conservatism can also be defined as flow from operations) in advance. If it is not
a tendency which is owned by an accountant who sufficient, company then will consider seeking
requires a higher level of verification to recognize additional funding from external parties (Stiglitz
profit (good news in earnings) compared to admit and Weiss, 1981; Myers and Majluf, 1984). An
losses (bad news in earnings). ‘‘ease’’ in obtaining external funding makes the
determination of company’s investment activities
Guay and Verrecchia (2007) and Suijs (2008) is less dependent to its internal fund, so they
state that conditional conservatism could could make investment activities more efficient.
increase company’s value, by increasing the In the realm of corporate finance literatures,
ability to get cheaper cost of external capital. In investment activity level of dependence on the

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 Bima Abdi Wibawa, Ratna Wardhani / The Effect of Conditional Conservatism and Agency Cost on Investment-Cashflow Sensitivity / 69 - 88

existence of internal fund is called the sensitivity the agency conflict between shareholders and
of investment to internal funds (investment-cash creditors. The amount of agency cost indicates
flow sensitivity). This sensitivity shows company’s the level of information asymmetry that is trying
ability to obtain external funding (Kaplan and to be mitigated by the company. The greater (the
Zingales, 1997; Hubbard, 1998; Imhof, 2014). smaller) agency cost, the greater (the smaller) the
The lower the sensitivity shows that corporate risk and return expected by capital providers. The
investment activities could be funded not only greater (the smaller) the risk and expected return,
from internal funds, but also from external funds the greater (the smaller) the cost of external
(Fazzari, Hubbard, and Peterson, 1988). capital to be paid by the company. Cost of external
capital which is quite expensive (cheap) difficults
There are factors that correlated with the (facilitates) the company to obtain additional
magnitude of sensitivity, one of which is funding from external sources when investing.
company’s agency cost. Sensitivity will be greater As a result, the amount of investment made by
(smaller) when asymmetry information is high the company is very dependent (not dependent)
(low) between managers and investors, indicated on the amount of internal funds, as indicated by
by higher (smaller) agency cost (Jensen, 1986 in higher (lower) investment-cash flow sensitivity
Imhof, 2014). Imhof (2014) also state that when (Imhof, 2014). This research also argues that
the agency cost is relatively high, company will be the level of investment-cashflow sensitivity for
more difficult to obtain external financing because companies with higher agency cost is greater
of the high cost of external capital set by the than companies with lower agency cost. Finally,
investors / creditors, thus, the amount of internal in addition to its ability to reduce the cost of
funds available will be very influential to predict external capital, higher conditional conservatism
company’s investment activities (high investment- is also able to improve the quality of corporate
cash flow sensitivity). governance (Lafond and Watts, 2008; Imhof,
2014). Based on the explanation, it can be said that
Conditional conservatism could reduce the level the effect of conditional conservatism in lowering
of company’s cost of external capital (Guay and the investment-cash flow sensitivity is stronger in
Verrecchia, 2007; Suijs, 2008). Lower cost of companies that also have problems in governance
external capital will enable company to obtain (high agency cost firm) and weaker in companies
external funding much easier, so that investment that already have a good governance mechanism
activity is not overly dependent on the availability (low agency cost firm).
of internal funds. Referring to this idea, this
research argues that the conditional conservatism This study replicates Imhof’s (2014) research
can reduce the level of investment-cash flow entitled ‘‘conditional conservatism, agency cost,
sensitivity. Furthermore, the risk assessment by and the cash flow sensitivity of investment firm’’,
capital providers is influenced by the amount where the study was conducted with samples of
of agency cost (Arugasian, deMello, and Saini, firms in the United States which has more diffused
2014). This study uses agency cost arising from ownership structure, thus, the context of the
the agency relationships between fund holders agency problem is more directed to the conflict
(investors / shareholders vs. creditor) because between shareholders and management. While
the focus of this study is on investment-cash flow in Indonesia, most companies have concentrated
sensitivity which is closely related to funding ownership structure and use debt as their main
decision for investment need. Therefore, to sources of fund so that the agency problem is
measure the agency cost, this study employs more directed to the conflict between the minority
dividend payout ratio because this ratio reflects shareholders and majority shareholders (who are

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International Research Journal of Business Studies | vol. X no. 02 (2017)

usually relatives) plus management and conflict scope. The second part contains the basic theory
between shareholders and creditor. This research and hypothesis development. While the third
implement this difference by using different proxy section will discuss the research methodology
compared to the one that Imhof (2014) used when that addresses the selection of samples, empirical
measuring agency cost. models used, the operationalization of variables,
as well as testing the model. Then in the fourth
The aim of this study are: (i) to determine whether section the discussion is presented on the results
conditional conservatism could decrease the of this study. Finally, in section five this research
sensitivity of corporate investment activities to discuss the conclusions, limitations, and potential
the availability of internal funds; (ii) to determine for future research.
whether the sensitivity of company’s investment
activities to its internal fund is higher for companies Theoritical Framework & Hypotheses Development
with relatively high agency cost and lower for firms 1. Conditional conservatism with Cost of Capital
with relatively low agency cost; (iii) to determine & Governance’s Monitoring Function
whether the effect of conditional conservatism to Guay and Verrecchia (2007) and Suijs (2008)
reduce investment-cashflow sensitivity is greater state that conditional conservatism could
for firms with relatively high agency cost and increase company’s value, by increasing the
smaller for firms with relatively low agency cost. ability to get cheaper cost of external capital.
Commitment to recognize losses in a timely
This study is expected to provide benefits for the manner (conditional conservatism) causes
development of science, regulatory, and financial management to disclose information more
practitioners. For the development of science, this thoroughly. It reduces the uncertainty in financial
study is expected to show whether the impact of reporting, lowering the risk of the company in
conditional conservatism to investment-cashflow the eyes of investors and creditors, and facilitate
sensitivity in Indonesian companies, which is more access to external financing at relatively low
bank based, will be different from the impact on cost. In addition, conditional conservatism also
US companies, which is more market-based. In facilitates monitoring function that can mitigate
addition, this study may add to the list of studies information asymmetry. This makes the company
on the impact of agency cost in Indonesia to with conditional conservatism has advantages in
company’s value that is reflected in the flexibility its governance (Lafond and Watts, 2008). As the
of funding sources in investing. For regulators, impact of good governance on the application of
the study is expected to demonstrate the benefits conditional conservatism, the manager will tend
of the application of conditional conservatism to to avoid having a negative NPV project knowing
increase the company’s value so that it can be that conservatism can be easily record a loss on
a useful input related to the development of the that investment. After running investment projects,
quality of accounting standards in Indonesia. the results of conservative accounting will make
For financial practitioners, this study is expected an assessment of the management performance
to provide a comprehensive understanding on becomes more effective (Jensen, 1986).
conditional conservatism and its impact on the
company’s flexibility in determining the source of 2. Investment-Cashflow Sensitivity
funding when investing. Investment-cash flow sensitivity is an indicator
to see the level of dependence (sensitivity) of
This study is divided into five sections. The first investment activities on the availability of internal
part contains an introduction that will discuss the funds. One interpretation of the magnitude of
background of writing, research objectives, and this sensitivity could demonstrate the company’s

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ability to obtain external funds when investing. other hand, the management and the majority
The smaller (larger) sensitivity, the more capable shareholder in the company with a relatively
(not capable) companies to get external funding low agency problem is not alarming minority
for investment activities (Myers and Majluf, 1984; shareholders to do so, so that, dividends tend to be
Fazzari, Hubbard, and Peterson, 1988; Hubbard, smaller (Rozeff, 1982; Gugler and Yurtoglu, 2001).
1998; Moyen, 2004; Bushman, Smith, and Zhang From the perspective of type three of agency
2011; Imhof, 2014). Fazzari, Hubbard, and Peterson conflict, dividend also a mechanism to control the
(1988) in Moyen (2004) conducted a study related agency cost between shareholders and creditors.
to the sensitivity of investment-cash flow from In the debt arrangement, creditors usually limit
operations and categorizes companies based on the dividend payment in the debt covenant. The
their financial constraints. The amount of financial policy is often done because the creditor wants
constraint is determined by the magnitude of the company to avoid excessive dividend payment
the cost of external capital. The greater cost of so that the company no longer has internal funding
external capital, the greater the resistance. The that can be used to support future growth
results showed that companies with the category
of most constrained (relatively higher financing 4. Hypotheses Development
obstacles) has a higher sensitivity of investment- 4.1. Conditional conservatism & Investment-
cashflow from operations than the company Cashflow Sensitivity
in least constrained (relatively lower funding Conditional conservatism, is an accountant
constraints) category. tendency to be more careful in recording revenue
and more timely in recognizing expense. This
3. Agency Cost tendency caused management to disclose
Agency conflict is divided into three types (Godfrey information more thoroughly and reliably, so that
et al., 2010). Type one explains the conflict between the accounting information is more qualified. It
shareholders and management. Type two explains reduces the uncertainty in financial reporting,
the conflict between majority shareholder plus lowering the risk of the company in the eyes
management versus minority, and type three of investors and creditors, and facilitate access
explains the conflict between shareholders and to external financing at relatively low cost. In
creditors. Companies in Indonesia have different line with the statement, Guay and Verrecchia
characteristic compare to companies such in (2007) and Suijs (2008) state that conditional
US or UK. Companies in Indonesia are mostly conservatism reduce the cost of external capital.
companies that have concentrated ownership and Relatively low cost of external capital will enable
use debt financing. Because of so, mostly, conflict the company to take external funds as a source of
occurs between the majority shareholder (plus funding for investment activities. This ease makes
management) and minority shareholders (type the company less dependent on the availability of
two conflict) and conflict between shareholders internal funds to invest (Imhof, 2014). This situation
and creditors (type three conflict). In this condition, is illustrated by the relatively small investment-
dividend is regarded as a more efficient mechanism cash flow sensitivity after implementation of
for measuring agency problems (Rozeff, 1982; conditional conservatism. Referring to the the
Gugler and Yurtoglu, 2001). For the fear of minority above argument, the hypothesis statement is as
shareholders will sell shares in a lower price as follow:
a result of the expropriation that happened, the
majority shareholder and management tend to H1: The conditional conservatism has a negative
give higher dividends as a form of anticipation impact on investment-cashflow sensitivity
(Rozeff, 1982; Gugler and Yurtoglu, 2001). On the

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4.2 Investment-Cashflow Sensitivity in firms with poor governance problem, which is

and Agency Cost characterized by the magnitude of agency cost,
There are other variables that may be related to the impact of conditional conservatism will be
the amount of sensitivity. The variables in question stronger in reducing sensitivity. The reason is,
is the amount of agency cost (Imhof, 2014). Risk when the adoption of conditional conservatism
assessment by the capital provider is influenced on high agency cost firm in addition could lower
by the amount of agency cost (Arugasian, the cost of capital, it also improves the function
deMello, and Saini, 2014). Imhof (2014) state that of corporate governance. This makes the owners
the amount of agency cost indicates the level of of capital provide a higher return when firms
information asymmetry that is tried to be mitigated with poor governance (high agency cost firm)
by the company. The greater (smaller) the agency implement conditional conservatism compared to
cost, the greater (smaller) its risk assessed and the application of the same thing in company that
return expected by capital providers. The greater already has a good governance (low agency cost
(smaller) the risk and expected return, the greater firm). Form of appreciation is the ease of being
(smaller) the cost of external capital to be paid able to get external funds when companies want
by the company. Cost of external capital which to invest, or in other words, a lower investment-
is quite expensive (cheap), difficults (facilitates) cash flow sensitivity. From these arguments, the
the company to obtain additional funding from hypothesis is built:
external sources when investing. As a result, the
amount of investment made by the company is H3: Negative influence of conditional conservatism
more dependent (not dependent) on the amount to investment-cashflow sensitivity will be greater
of internal funds, as indicated by the investment- for firms with higher agency cost rather than firms
cash flow sensitivity that relatively large (small). with lower agency cost.
Based on these explanations, the hypothesis:
METHODS
H2: Investment-cash flow sensitivity of companies Data Sources & Sample Selection
that have high agency cost is greater than the The data used in this research is secondary data
companies that have lower agency cost obtained through thomson reuters and datastream.
Sampling is done by purposive sampling method.
4.3. The Agency Cost Moderating Effect on Criteria used in selecting samples are as follows:
Conditional Conservatism Impact to (i) the Company listed on the Indonesia Stock
Investment-Cashflow Sensitivity Exchange during 2008 to 2012 (This study uses
Companies with relatively high agency problems the period 2008 and 2012 because the concept of
have problems in its governance. Lack of good conservatism is no longer adopted in International
governance made the asymmetry of information Financial Reporting Standard (IFRS) and replaced
tends to be high, so that the company more with the concept of prudence. The concept of
vulnerable to adverse selection and moral hazard. prudence has a very different understanding from
This situation forced the principal to issue a greater conservatism. Given that Indonesia has adopted
cost as a form of mitigation to the asymmetry of IFRS adoption in the Indonesian Accounting
information, which is reflected in the amount of Standards since 2012, this study uses the period
agency cost. Conditional conservatism in this case up to 2012); (ii) The Company is engaged in the
is considered to become a solution to this situation manufacturing industry; (iii) the company has
because it can accommodate an effective positive equity value (iv) there is completeness of
oversight function in corporate governance the data required in a row from 2008 to 2012.
(Lafond and Watts, 2008). Imhof (2014) state that

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Research Model investment-cash flow sensitivity previously descri-

This study aimed to examine the effect of condi- bed. Because conditional conservatism is believed
tional conservatism in reducing the investment- to have a negative effect on investment-cash flow
cash flow sensitivity in Indonesia. It also aimed to sensitivity, the hypothesis predict s the magnitude
test whether the effect will be stronger for firms of this interaction (CFO*CONS) will be negative
with relatively large agency cost and weaker in and statistically significant (Imhof, 2014).
companies with relatively small agency cost. To
test these predictions this research uses ordinary Moderating variable in this study is agency cost.
least squares regression which is based on Imhof This research uses the amount of dividends to
(2014). The dependent variable of this study is the measure the agency cost. From the magnitude
investment-cash flow sensitivity. In measuring the of the results of these measurements, the com-
sensitivity, this research regresses the amount of panies will be divided into two classifications.
investment companies (INV) on cash flow from Classification is divided by the level of agency cost
operations (CFO) and Tobin’s Q (a proxy for mea- (expressed in notation AGENCY) as measured by
suring the level of investment opportunities) as the dividend payout ratio. Variable agency cost
well as the size, the prior annual stock return and is treated as a dummy. Company with AGENCY
the previous year’s investment value as a control below the mean value of industry-year classified
variables. It is based on Imhof (2014). The magni- as a company with lower agency cost and coded
tude of the coefficient attached to the CFO (β1) 0, while companies with AGENCY above the-year
shows the magnitude of the investment-cash mean value of the industry classified as a com-
flow sensitivity. To better understand the rela- pany with high agency cost (coded 1). To test the
tionship between investment and cash flow, the moderation effect of agency cost on the relation-
model controls the amount of the firm’s growth ship between conditional conservatism and the
opportunity by using Tobin’s Q (1969) according to investment-cash flow sensitivity, the variable of
Imhof (2014). The greater the value of Tobin’s Q, interaction between agency cost and conditional
the more promising outlook for investment com- conservatism will be added into the model.
panies so that managers tend to be more likely to
invest in new projects (Imhof, 2014). To get a more specific description on the amount
of conditional conservatism’s negative influences
Independent variable in this study is the condi- on the investment-cash flow sensitivity, this study
tional conservatism, or in other words the appli- uses firm size (SIZE), prior annual stock return
cation of conditional conservatism. This research (RETit-1), as well as the previous year investment
uses Givoly and Hayn (2000) model in measuring value of (Invit-1) as control variables. Size (SIZE)
conditional conservatism. Givoly and Hayn (2000) may affect the magnitude of the company access
measures conservatism with the average amount to sources of external funding, thus affecting the
of the company’s accrual, which is derived from sensitivity of its investment-cash flow (Gurgler et
net income minus the cash flow from operations, al., 2000, in Imhof, 2014). In the regression model
for three years with a median value in period of investment that has been described previously,
t, multiplied by negative one to ensure that the a positive relationship between firm size and
positive value indicates higher conservatism (the investment activities is expected. As a further
result of this formula is denoted by CONS). To test control variable, this study use the prior annual
whether the conditional conservatism affect the stock return (RETit-1). The argument is based on
investment-cash flow sensitivity, the model inte- the argument of Lamont (2000) and Richardson
ract s operating cash flow (CFO) with conditional (2006) in Imhof (2014) that the stock return has
conservatism (CONS) into the regression model of the information related to the company’s growth

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International Research Journal of Business Studies | vol. X no. 02 (2017)

prospects which is not caught in the measurement INVit = αit + β1CFOit + β2AGENCYit +
of Tobin’s Q. β3AGENCYit * CFOit + β4Qit + β5SIZEit +
β6RETit-1 + β7INVit-1 + εit (3)

Based on the explanation above, the following

equation will be applied to test the research
hypothesis. Where :
Model 1: Investment-cash flow sensitivity, the INVit : The value of firm i investment in
basic model period t
CFOit :
Operating cash flows of firm i in
INVit = αit + β1CFOit + β2Qit + β3SIZEit + period t
β4RETit-1 + β5INVit-1 + εit (1) AGENCYit : The value of firm i agency cost in
period t
Where : Qit : The value of firm i investment
INVit : The value of firm i investment in period t opportunity (Tobin’s Q) in period t
CFOit : Operating cash flows of firm i in period t SIZEit : The size of firm i in period t
Qit : The value of firm i investment opportunity RETit-1 :
Annual stock return of firm i in period
(Tobin’s Q) in period t t-1
SIZEit : The size of firm i in period t INVit-1 : The value of firm i investment in
RETit-1 : Annual stock return of firm i in period t-1 period t-1
INVit-1 : The value of firm i investment in period
t-1
Model 4: The Correlation testing of agency cost
Model 2: The testing on the negative influence of and investment-cash flow sensitivity (Hypothesis
conditional conservatism on investment-cash flow 2)
sensitivity (Hypothesis 1)
INVit = αit + β1CFOit + β2CONSit +
INVit = αit + β1CFOit + β2CONSit + β3CFOit * CONSit + β4AGENCYit +
β3CFOit * CONSit + β4Qit + β5SIZEit + β5CFOit * AGENCYit + β6CFOit * CONSit *
β6RETit-1 + β7INVit-1 + εit (2) AGENCYit + β7Qit + β8SIZEit +
β9RETit-1 + β10INVit-1 + εit (4)

Where :
INVit : The value of firm i investment in period t Where :
CFOit :
Operating cash flows of firm i in period t INVit : The value of firm i investment in
CONSit : The amount of conditional conservatism period t
firm i in period t CFOit : Operating cash flows of firm i in
Qit : The value of firm i investment opportunity period t
(Tobin’s Q) in period t CONSit : The amount of conditional
SIZEit : The size of firm i in period t conservatism firm i in period t
RETit-1 : Annual stock return of firm i in period t-1 AGENCYit : The value of firm i agency cost in
INVit-1 : The value of firm i investment in period period t
t-1 Qit : The value of firm i investment
opportunity (Tobin’s Q) in period t
Model 3: The Correlation testing of agency cost SIZEit : The size of firm i in period t
and investment-cash flow sensitivity (Hypothesis RETit-1 : Annual stock return of firm i in
2) period t-1

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INVit-1 : The value of firm i investment in is 0.0048 with an average CONS for groups firms
period t -1 with high agency cost is lower when compared
with low enterprise agency cost (0.0019 and
Operationalization of the variables used can be 0.0061). It shows that the average low agency cost
seen in Table 1. company in Indonesia manufacturing industry
is more conservative than the average high
Model Testing agency cost company. In addition, the variable
The models above will be estimated using OLS investment (INV) has an average value of 0.0587
regression with pooled data. In this test, i also with an average INV to a group of companies with
test the fulfillment of BLUE (Best Linear Unbiased high agency cost is higher than the company its
Estimate) assumptions where the model must low agency cost (0.0706 and 0.0531). This shows
meet the assumption of normally distributed, that the Indonesian manufacturing industry, the
no heteroscedasticity, and no multicollinearity. average company of high agency cost invest more
Tests carried out using STATA statistical software in capital expenditure (CAPEX) compared to the
12 to obtain estimation of the value of models average low agency cost company.
parameter.
The Analysis of Impact of Conditional Conservatism
RESULTS AND DISCUSSION to Investment-Cashflow Sensitivity
Descriptive Statistic To investigate the investment-cash flow sensitivity,
This study uses sample of manufacturing Model 1 is tested. To investigate and analyze
companies listed in Indonesia Stock Exchange the influence of conditional conservatism on
during the period 2008-2012. The number of investment-cash flow sensitivity, the hypotheses
companies that are used as sample totaling 113 is tested using regression equations described in
companies with 474 firm years, which 152 of the Model 2. The Model 1 and 2 test results can be
samples is classified as high agency cost firms and seen in Table 4 and 5.
322 sample as low agency cost firms. Characteristics
of the sample can be seen from Table 2, and the Based on Table 4 it can be seen that the adjusted R
results of the descriptive statistics in Table 3. From Square for research model 1 is 0.2968. These result
Table 3 it can be seen that the average value of indicates that 29.68% of the variation amount of
the variable conditional conservatism (CONS) the investment company can be explained by

Tabel 1. Operationalization of Variable

Variable Operationalization of Variable

Firm Investment (INVit) Capital expenditures scaled by beginning period total assets
Operating Cashflow (CFOit) Cashflows from operations scaled by beginning period total asset
Conditional conservatism (CONSit) Firm’s three year average accruals, calculated as net income before
extraordinary items minus cash flows from operations multiplied by -1
Firm’s Investment Opportunity Total of market value of ordinary shares outstanding, book value of long
(Tobin’s Q) (Qit) term debt, and current liability divided by total assets
Firm Size (SIZEit) The log of the average total assets
Annual Stock Return (RETit-1) Company’s prior annual stock return
Agency Cost (AGENCYit) Company’s dividend payout ratio. Dividend payout ratio measured by
dividing dividend to net income.

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International Research Journal of Business Studies | vol. X no. 02 (2017)

Tabel 2. Sample Selection

Year
Criterias Total
2008 2009 2010 2011 2012
Population of Manufacture Industry 134 134 134 134 134 670
Firms with incomplete data 43 38 33 36 46 196
Final Sample 91 96 101 98 88 474
Low Agency Cost 68 70 68 61 55 322
High Agency Cost 23 26 33 37 33 152
Total 91 96 101 98 88 474
               
Average during five
Percentage (%)           years
Low Agency Cost 75% 73% 67% 62% 63% 68%
High Agency Cost 25% 27% 33% 38% 37% 32%
Total 100% 100% 100% 100% 100% 100%

Tabel 3. Statistic Descriptive

Panel A. Statistic Descriptive for all sample

Variable N Mean Median S.D Min Max
CONS 474 0.0048 0.0080 0.0908 -0.5348 0.5348
INV 474 0.0587 0.0375 0.0590 0.0000 0.3106
CFO 474 -0.0295 -0.0483 0.1933 -0.8228 2.3019
Q 474 1.5773 1.0626 1.2850 0.3288 6.8926
SIZE 474 14.1746 13.9639 1.4677 11.0413 18.5879
RETURNt-1 474 0.4201 0.1782 0.8936 -0.9500 3.8794
INVt-1 474 0.0557 0.0331 0.0606 0.0000 0.3096
AGENCY 474 0.1020 0.0000 0.1749 0.0000 1.3374
Panel B. Statistic Descriptive Low vs. High AGENCY COST Subsample
Mean S.D Median
Low High Low High Low High
CONS 0.0061 0.0019 0.1029 0.0573 0.0109 0.0077
INV 0.0531 0.0706 0.0589 0.0574 0.0318 0.0546
CFO -0.0586 0.0321 0.1991 0.1649 -0.0773 0.0166
Q 1.2214 2.3311 0.7721 1.7501 0.9695 1.7405
SIZE 13.9549 14.6399 1.3695 1.5619 13.7941 14.2862
RETURNt-1 0.3497 0.5693 0.8891 0.8876 0.0714 0.3499
INVt-1 0.0525 0.0627 0.0620 0.0569 0.0300 0.0416
CONS is a proxy for timely loss recognition, measure by average of the difference from net income with operating cash
deflated by the average total asset over three years. INV is capital expenditure divided by total asset in period t. CFO is the
amount of cash flow from operating activities of company i in period t divided by the beginning period of total assets. Q is the
proxy for measuring the investment opportunity of the company, which is the total sum of market value of the outstanding
ordinary shares, book value of long term debt, and current liability which is then divided by total assets (Kroes, 2013). SIZE is
natural logarithm of the average total assets. Average total assets are total assets of period t and t-1 divided by 2. RETURNt-1
is annual stock return of firm i in period t-1. INVt-1 is investment (INV) of company i in period t-1. AGENCY is measured by
dividing the dividend by the amount of EBIT DA of the firm on the perode t.

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Tabel 4. Regression Result for Basic Model (Model 1)

Model 1
INVit = αit + β1CFOit + β2Qit + β3SIZEit + β4RETit-1 + β5INVit-1 + εit
Variables Prediction Coefficient Prob Sig. VIF
Sign
C -0.0041 0.4270
CFO (+) 0.0422 0.0010 *** 1.34
Q (+) 0.0020 0.1745 1.43
SIZE (+) 0.0023 0.0750 * 1.09
RETt-1 (+) 0.0082 0.0010 *** 1.00
INVt-1 (+) 0.4443 0.0000 *** 1.06
N 474
F Test Sign 0.0000
Adj R Square 0.2968
***Significant at level 1% (one-tailed), ** Significant at level 5% (one-tailed), * Significant at level 10% (one-tailed)
INV is capital expenditure divided by total asset in period t. CFO is the amount of cash flow from operating activities of
company i in period t divided by the beginning period of total assets. Q is the proxy for measuring the investment opportunity
of the company, which is the total sum of market value of the outstanding ordinary shares, book value of long term debt,
and current liability which is then divided by total assets (Kroes, 2013). SIZE is natural logarithm of the average total assets.
Average total assets are total assets of period t and t-1 divided by 2. RETURNt-1 is annual stock return of firm i in period t-1.
INVt-1 is investment (INV) of company i in period t-1.

Tabel 5. Regression Result for Model 2

Model 2
INVit = αit + β1CFOit + β2CONSit + β3CFOit*CONSit + β4Qit +
β5SIZEit + β6RETit-1 + β7INVit-1 + εit
Variables Prediction Sign Coefficient Prob Sig. VIF
C   -0.0187 0.2000    
CFO (+) 0.0338 0.0140 ** 1.79
CONS (+ /-) -0.0403 0.0875 * 1.47
CFO*CONS (-) -0.1064 0.0030 *** 1.47
Q (+) 0.0018 0.1975   1.50
SIZE (+) 0.0034 0.0185 ** 1.14
RETt-1 (+) 0.0080 0.0010 *** 1.08
INVt-1 (+) 0.4485 0.0000 *** 1.06
N 474
F Test Sign 0.0000
Adj R Square 0.3177
***Significant at level 1% (one-tailed), ** Significant at level 5% (one-tailed), * Significant at level 10% (one-tailed)
INV is capital expenditure divided by total asset in period t. CFO is the amount of cash flow from operating activities of
company i in period t divided by the beginning period of total assets. CONS is a proxy for timely loss recognition, measure by
average of the difference from net income with operating cash deflated by the average total asset over three years. Q is the
proxy for measuring the investment opportunity of the company, which is the total sum of market value of the outstanding
ordinary shares, book value of long term debt, and current liability which is then divided by total assets (Kroes, 2013). SIZE is
natural logarithm of the average total assets. Average total assets are total assets of period t and t-1 divided by 2. RETURNt-1
is annual stock return of firm i in period t-1. INVt-1 is investment (INV) of company i in period t-1.

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International Research Journal of Business Studies | vol. X no. 02 (2017)

the independent variables in the model, and the sensitivity (Imhof, 2014). Prior annual stock return
rest is explained by other variables. While the F has a significant positive effect on the size of the
test shows that overall independent variables in investment company. This is similar to Lamont
the model significantly influence the dependent (2000) and Richardson (2006) which states that
variable. the value of the prior stock return affect the
future value of an investment company for storing
Based on t test model 1, the independent information related to the company’s growth
variables CFO has a probability value of t-statistic prospects are not explained in Q. The projection
of 0.0010 with a coefficient of 0.0422 or β1> 0. of the amount of investment company that will do
That is, the variable CFO has a significant positive in the future is not will be far away from his past
effect on the level of confidence of 99% on the investment value. This makes the variable INVT-1
dependent variable INV. CFO positive correlation has a large positive effect (0.4485) and significant
coefficient indicates a dependence (sensitivity) of at the 1% level to variable INV.
investment activity on the availability of internal
funds. While significant control variable is SIZE The results of model 1 indicates the existence of
(with a significance level of 10%), returnt-1 (with investment activities dependence (sensitivity) on
a significance level of 1%), and INVT-1 (with the existence of internal funds. To test hypothesis
siginifikansi 1% level). 1 Model 2 was regressed which already included
the effect of CONS. The test results of Model 2 can
CFO variable has a probability of significant t-statistic be seen in Table 5 in Appendix 2. Based on Table
with a positive correlation. This is consistent with 5 it can be seen that the adjusted R Square for
the prediction that there is a positive relationship model 2 is 0.3177. These result indicates that after
between the CFO with INV. Interpretation of the being combined with CONS variables, 31.77% of
results shows that investment activity does have a the variation amount of the investment company
positive dependency (sensitivity) for the presence can be explained by the independent variables
of internal funds. The test results are consistent in the model and the rest is explained by other
with research models Stiglitz and Weiss (1981), variables. While the F test shows that the overall
Myers and Majluf (1984), Kaplan and Zingales independent variables in the model significantly
(1997), Hubbard (1998), and Imhof (2014). influence the dependent variable. Based on
this Model 2 t test, it can be seen that the CFO *
Q insignificant effect on the level of investment the NEG variable has a probability value of t-statistic
company shows that the company’s investment of 0.0030 (significant at 1%) with a coefficient of
activities in Indonesia’s manufacturing industry -0.1064 or β3 <0. This implies that the the sensitivity
is influenced by factors other than the company’s of investment-cashflow is lower when companies
opportunity to invest (as measured by Tobin’s have higher conditional conservatism. In other
Q). These factors such characteristics of the words, CFO coefficient which shows the sensitivity
company (one of them the size of the company), of investment-cashflow will be lower after being
its performance in the capital markets, as well interacted with CONS. Control variables used in
as investing activities in the previous year. Size the model 2 is still having similiar direct result of t
as one of the characteristics of the company test on the coefficients and their significance to the
has a significant positive effect on the size of the results of the test model 1.
investment company. These results are in line
with the statement Gurgler et al. (2000) that the The test results of model 2 in Table 5 shows that
size of the company affect its access to external the variable CFO * NEG has a t-statistic probability
funding, and then affects the investment-cash flow of a significant negative correlation coefficient.

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This correlation coefficients is consistent with the reporting, lowering the risk of the company in
hypothesis. This indicates that the first hypothesis the eyes of investors and creditors, and facilitates
which states ‘‘conditional conservatism will access to the external cost of capital with relatively
decrease the sensitivity of investment-cash flow’’ low cost (Guay and Verrecchia, 2007; Suijs,
cannot be rejected. Interpretation of the results of 2008). Relatively low cost of external capital will
the testing of this model indicates that companies enable the company to obtain external funding
that implement higher conditional conservatism as a source of funding for investment activities,
will have a lower dependence on internal funds so, the company becomes less dependent on
when investing. These result is consistent with internal funds when investing (Imhof, 2014). This
Imhof (2014). situation is illustrated by the relatively low level of
investment cash flow sensitivity.
Explanation for this situation can be expressed as
follows: conditional conservatism is considered The Analysis of Impact of Agency Cost to
as an accountant tendency to be more careful in Investment-Cashflow Sensitivity
recording revenue and more timely in recognizing Furthermore, to investigate and analyze the
loss. This tendency is causing management to correlation of agency cost with investment-cash
disclose information more thoroughly and reliably, flow sensitivity level, this study test Model 3 and the
so that the accounting information to be more results can be seen in Table 6. Based on Table 6 it
qualified. It reduces the uncertainty in financial can be seen that the adjusted R Square for Model 3

Tabel 6. Regression Result for Model 3

Model 3
INVit = αit + β1CFOit + β2 AGENCYit + β3 AGENCYit* CFOit + β4Qit +
β5SIZEit + β6RETit-1 + β8INVit-1 + εit
Variables Prediction Sign Coefficient Prob Sig. VIF
C   -0.0045 0.4200    

CFO (+) 0.0485 0.0005 *** 1.51

AGENCY (+ /-) 0.0038 0.2405   1.23

AGENCY*CFO (+) -0.0418 0.0830 * 1.59

Q (+) 0.0026 0.1350   1.84

SIZE (+) 0.0022 0.0845 * 1.11

RETt-1 (+) 0.0079 0.0015 *** 1.07

INVt-1 (+) 0.4472 0.0000 *** 1.06

N 474

F Test Sign 0.0000

Adj R Square 0.2976

***Significant at level 1% (one-tailed), ** Significant at level 5% (one-tailed), * Significant at level 10% (one-tailed)

INV is capital expenditure divided by total asset in period t. CFO is the amount of cash flow from operating activities of
company i in period t divided by the beginning period of total assets. CONS is a proxy for timely loss recognition, measure by
average of the difference from net income with operating cash deflated by the average total asset over three years. Q is the
proxy for measuring the investment opportunity of the company, which is the total sum of market value of the outstanding
ordinary shares, book value of long term debt, and current liability which is then divided by total assets (Kroes, 2013). SIZE is
natural logarithm of the average total assets. Average total assets are total assets of period t and t-1 divided by 2. RETURNt-1
is annual stock return of firm i in period t-1. INVt-1 is investment (INV) of company i in period t-1. AGENCY is measured by
dividing the dividend by the amount of EBIT DA of the firm on the period t.

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International Research Journal of Business Studies | vol. X no. 02 (2017)

is 0.2976. These result indicates that 29.76% of the one of them. Moyen (2004) state that in addition to
variation amount of the investment company can cash flow from the issuance of debt, low agency
be explained by the independent variables in the cost firm is more flexible than high agency cost
model, and the rest is explained by other variables. to increase the size of the investment firm along
While the F test shows that overall independent with the amount of dividends paid. This is because
variables in the model significantly influence the there is no requirement to provide a fairly high
dependent variable. dividend, thus, low agency cost firm does not
have to sacrifice an increase in investment when
From the results of the t test in this Model 3, CFO deciding to pay dividends. Finally, the addition of
has a probability value of t-statistic of 0.0005 with cash flow from operations (which is infiltrated with
a coefficient of 0.0485 or β1> 0. This means CFO additional funding from debt) will be followed by
variables have a significant positive effect on the an increase in the value of investment in the same
dependent variable INV. AGENCY variable has direction and almost as large, so the sensitivity
a magnitude coefficient of 0.0038 but not signifi- of the company in this category seemed to be
cantly. This is indicating that the positive effect of high. This trend adds an explanation of why the
AGENCY does not have a significant impact on the investment-cash flow sensitivity on low agency
amount of investment companies in this study. To cost firms seemed to be higher.
test the hypothesis 2, this study will test whether
the coefficient AGENCY * CFO (β3) is significant. Moyen (2004) also explains why on the high agency
The results in Table 6 shows that the variable coef- cost firm, the sensitivity is relatively low. When
ficient AGENCY*CFO is -0.0418 and is at 10% signi- getting additional cash flow from operations,
ficance level. These results indicate that this va- high agency cost firm must choose whether to
riable is significant but the coefficient is negative. allocate these funds to increase investment or to
Negative coefficient indicates that the lower agen- pay dividends. Why they must choose? because
cy cost firms have a higher investment-cash flow companies in this category tend to give large
sensitivity compare to higher agency cost firms. amounts of dividends. So that when choosing to
The result indicates that hypothesis 2 is rejected. allocate funds to the payment of dividends, there
is no remaining funds to increase its investment.
The results of Model 3 in Table 6 shows that the This makes the investment-cash flow sensitivity at
company which has larger agency cost, their high agency cost firms seems to be lower (Kaplan
investment activity is more dependent from their and Zingales, 1997; Moyen, 2004) and even tend to
internal funds. In other words, the investment-cash be negative.
flow sensitivity in high agency cost companies
tend to be lower. Any increase (decrease) of CFOs For the control variables, in general there is
in companies with a large agency cost will lower no material change in results. All of variables
(raise) the amount of their investment activities. correlation coefficient direction and significancy,
The interpretation is not consistent with Imhof in general, is still the same. This suggests that these
(2014), but consistent with Moyen (2004) and control variables in the model have consistent
Kaplan and Zingales (1997). function, without prejudice to the presence of
moderating / new variable.
The reason for this result can be explain by Moyen
(2004) that state that low agency cost firms tend The Analysis Moderating Effect of Agency
to be more flexible in choosing where to allocates Cost’s on the Relationship between Conditional
their funds both on investment, dividend payments, Conservatism and Investment-Cashflow Sensitivity
or both. While high agency cost firm must choose Furthermore, to examine the moderating effects

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of agency cost on the effect of conditional -0.1208 with significance at the 1% level. AGENCY
conservatism negative influences on investment- variables showed a positive coefficient of 0.0027
cash flow sensitivity, Model 4 is tested. The results but not significantly. This indicates that the pre-
can be seen in Table 7. sence of agency cost dummy variables in the
model does not affect the size of the company’s
Based on Table 7 it can be seen that the adjusted R investment activity. CFO*AGENCY which shows
Square for model 4 is 0.3211. These result indicates sensitivity of the large agency cost company has
that 32.11% of the variation amount of the company a coefficient value of -0.0106 but not significant
investment can be explained by the independent (t-stat 0.3640). As for the CFO*AGENCY*CONS, it
variables in the model, and the rest is explained by has a coefficient of 0.4140 and significant at the 5%
other variables. While the F test shows that overall level. This suggests that in high agency cost firm,
independent variables in the model significantly the relationship between conditional conserva-
influence the dependent variable. tism and investment-cash flow sensitivity is higher
compare to lower agency cost firms. In other
From the results of the t test this model 4, the words, the investment-cash flow sensitivity in high
variable CFO*CONS shows the coefficient is agency cost firms increases after the implementa-

Tabel 7. Regression Result for Model 4

Model 4
INVit = αit + β1CFOit + β2CONSit + β3CFOit*CONSit + β4AGENCYit + β5CFO*AGENCYit +
β6CFOit*CONSit* AGENCYit + β7Qit + β8SIZEit + β9RETit-1 + β10INVit-1 + εit
Variables Prediction Sign Coefficient Prob Sig. VIF
C   -0.0204 0.1815    
CFO (+) 0.0352 0.0150 ** 2.01
CONS (+ /-) -0.0350 0.1195   1.49
CFO*CONS (-) -0.1208 0.0010 *** 1.56
AGENCY (+ /-) 0.0027 0.3090   1.28
CFO*AGENCY (+) -0.0106 0.3640   1.69
CFO*AGENCY*CONS (-) 0.4141 0.0210 ** 1.14
Q (+) 0.0012 0.3140   1.93
SIZE (+) 0.0035 0.0165 ** 1.18
RETt-1 (+) 0.0084 0.0005 *** 1.09
INVt-1 (+) 0.4424 0.0000 *** 1.07
N 474
F Test Sign 0.0000
Adj R Square 0.3211
***Significant at level 1% (one-tailed), ** Significant at level 5% (one-tailed), * Significant at level 10% (one-tailed)
INV is capital expenditure divided by total asset in period t. CFO is the amount of cash flow from operating activities of
company i in period t divided by the beginning period of total assets. CONS is a proxy for timely loss recognition, measure by
average of the difference from net income with operating cash deflated by the average total asset over three years. Q is the
proxy for measuring the investment opportunity of the company, which is the total sum of market value of the outstanding
ordinary shares, book value of long term debt, and current liability which is then divided by total assets (Kroes, 2013). SIZE is
natural logarithm of the average total assets. Average total assets are total assets of period t and t-1 divided by 2. RETURNt-1
is annual stock return of firm i in period t-1. INVt-1 is investment (INV) of company i in period t-1. AGENCY is measured by
dividing the dividend by the amount of EBIT DA of the firm on the period t.

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International Research Journal of Business Studies | vol. X no. 02 (2017)

tion of conditional conservatism. This shows that investing, and that makes the investment-cash
the hypothesis 3 is rejected. This situation is not flow sensitivity becomes smaller (Guay and
consistent with the Imhof (2014) who found that Verrecchia, 2007; Suijs, 2008; Lafond and Watts,
the negative effect of conditional conservatism on 2008; Imhof, 2014). However, when performed
the investment-cash flow sensitivity is strongest in by Indonesian high agency firms, capital owners
high agency cost firms relative to the low agency consider it bad because basically high agency cost
cost one. Control variables used in the model 4 is firms had much to allocate funds for the dividend
still having a similiar direct test results on the coef- (Kaplan and Zingales, 1997; Moyen, 2004). When
ficients and significance, as the results in hypothe- companies apply higher conditional conservatism,
sis 1, 2, and 3. capital providers are not focusing on the shape of
prudence applied by the company. Capital givers
There is an explanation for this situation. Imhof’s is focus more on the assumption that there is
(2014) research is conducted in the United States no more profit left for them. In effect, the cost of
where people there having a different characte- external capital required becomes relatively more
ristics with Indonesian people. This characteristic expensive. In addition, an increase in expense
differences include differences in decision-ma- / loss also makes the company seem to have
king, including decisions related to risk assess- more bad governance because it can not make a
ment and the return expected by the owners of profitable managerial decisions. Two things that
capital. Changes in risk assessment fund owners make Indonesian high agency cost firms (which
as a result of an increase in conditional conserva- implement higher conditional conservatism)
tism on the high agency cost firm is greater than becomes more difficult to obtain external funds
the change in the risk assessment firm low agency when investing, thus, the dependence (sensitivity)
cost, but reversed. While the risk assessment on on its internal fund becomes higher.
the low agency cost firms improved (indicated
by a decrease of sensitivity), the risk assessment MANAGERIAL IMPLICATIONS
of high agency cost firm worsen (indicated by an The implications of this research for (1) the deve-
increase in investment-cashflow sensitivity). The lopment of science: research indicates that the
main cause can be understood from the characte- relationship between agent and principal in In-
ristics of conditional conservatism itself. donesia is more efficient, not opportunistic. Thus,
future studies in Indonesia is expected to be more
Conditional conservatism drives company to focused on the exploration of efficient agency
not rush (be careful) when recording revenues relationship; (2) regulators: the IFRS convergence
/ profits, but tend to be more timely in the in fact the principle of conservatism has been
recording of expense / loss. This principle tends removed and replaced by prudence (prudence).
to lowering income, although it improves the However, the results of this study may be a stan-
quality of earnings. If done by a firm with high dard board might consider to include elements
agency cost in the United States, owners of capital of conditional conservatism in characteristic pru-
considered it as a good tendency to be more dence (prudence) in the conceptual framework.
careful in recording profit. As a result, the cost In addition, the empirical evidence that the appli-
of external capital required becomes relatively cation of conditional conservatism can improve
cheaper. In addition, the implementation of the company’s flexibility in managing its financial
higher conditional conservatism on high agency resources when investing may be considered by
cost firms repair its insight over the governance the Securities and Exchange Commission to re-
function. Two things make the company become quire the application of conditional conservatism
a lot more easier to obtain external funds when on the companies listed on the exchange. This is

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important because later on competition between Furthermore, this study shows that high agency
companies in the ASEAN region will be intense, cost firms has less investment-cashflow sensitivity
and the flexibility of determining the source of than the low agency cost one. Low agency cost
funds when investing plays an important role in firms tend to be more flexible in choosing where to
supporting the sustainability of growth companies; allocates their funds both on investment, dividend
(3) financial practitioners: results of this study are payments, or both. While high agency cost firm
expected to broaden the horizon of financial prac- must choose one of them. High agency cost firm
titioners, investors, creditors, financial analysts, is not focused on investment because they have
auditors and accountants that conditional conser- to prioritize allocation of funds to the provision
vatism is an accounting principle that is able to of a relatively large dividends. This makes the
increase the company’s flexibility in arranging fun- sensitivity is lower for high agency cost firms.
ding sources when investing. It is also expected (Kaplan and Zingales, 1997; Moyen, 2004). These
that future financial practitioners may consider the results are not consistent with the Imhof (2014),
application of conditional conservatism as an indi- but consitent with Moyen (2004) and Kaplan and
cation with a positive impact to company’s value. Zingales (1997).

CONCLUSION This study also finds that that in high agency

This study aims to provide empirical evidence that cost firm, the relationship between conditional
conditional conservatism has a negative effect conservatism and investment-cash flow sensitivity
on investment-cash flow sensitivity, and it will be is higher compare to lower agency cost firms. In
even greater influence on companies with high other words, the investment-cash flow sensitivity
agency cost as compared with low agency cost. In in high agency cost firms increases after the
addition, this study also wants to prove that before implementation of conditional conservatism.
the application of conditional conservatism, These results are not consistent with Imhof (2014).
companies with high agency cost of investment-
cash flow sensitivity is higher than the low This study has several limitations to be noted,
enterprise agency cost. Different from previous namely: (1) Referring previous studies, this study
studies, this study uses the dividend payout ratio used dividend payout ratio to measure agency
to measure the amount of agency cost. cost as a proxy of agency cost of type two and type
three. One of the potential problem in using this
The results show that in terms of reducing ratio is that dividend is not the only indicator of
investment activity dependence on the availability agency cost, a company which distributes more
of internal funds, conditional conservatism has payouts may not have higher magnitude of agency
a significant negative effect. This indicates that cost. Further research should also consider other
the application of conditional conservatism is forms of agency costs and use other proxies of
able to reduce the company’s dependence on agency cost; (2) The number of companies that
the availability of internal funds when investing. being sampled only 113 samples with 474 firms-
Control variables were shown to affect the amount year of five years of research. The number is still
of investment is the size of the company, prior relatively small when compared with Imhof’s
annual stock return, and the amount of investment (2014) research which uses 51.897 samples of 10
in the previous period. These results are consistent years of research. Future studies can fix this by
with research Imhof (2014) who conducted a adding a period of study in order to get more
similar study with a sample of companies in the number of samples. Greater amount of sample
United States. will make the research more representative; (3) In
calculating the value of conditional conservatism

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International Research Journal of Business Studies | vol. X no. 02 (2017)

company, this research only use one measurement. investment-cash flow sensitivity in the two groups
In contrast to Imhof (2014) which uses a model of companies. Future studies could develop this
Givoly and Hayn (2000) and Basu (1997) to research to determine the proportion of the
measure the conditional conservatism. Future amount of high and low sample enterprise agency
studies can use several measurements of cost with a specific mechanism adapted to the
conditional conservatism that can be used as a purpose of research. This minimizes the bias so
comparison; (4) The study divided firms as high that research can represent the real situation on
and low agency cost based on the mean value. As the phenomenon of investment-cash flow
a result, my research has the potential for bias in sensitivity in the two groups of companies.
representing the true state of the phenomenon of

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