Idiosyncratic Risk and Asset Pricing: Study at Companies Listed on Indonesia Stock Exchange

Abstract

This study aims to investigate the Accrual Principles in Accounting that contained in the Company's Financial Statements. The accrual principle is reflected in the Balance Sheet and Income Statement. Accrual measurements in the Balance Sheet are measured using Persistence Current Operating Accrual, Persistence Non-Current Operating Accrual, Persistence Financial Accrual. Accruals in income statement are measured using the Accrual anomaly Modified Jones Model. Accrual measurements are used as information used by investors as in predicting idiosyncratic risk and asset pricing. The idiosyncratic risk reflects the specific information about the company and it will fluctuate according to the information itself.

To measure the idiosyncratic risk in this study five factors of Fama-French Model (Fama & French, 2014) were used. This model is the development of three factors model (Fama & French, 1996)). The five-factor model Fama French is performed by conducting a stock return portfolio of the sample company and regressing the excess return using five factors. Asset Pricing Measurement uses the Dividend Discounted Model to predict stock prices.

The samples used in this study are all manufacturing companies listed on the Indonesia Stock Exchange. The Manufacturing Company is selected with consideration for the accrual measurement of accounts receivable, inventory, investment and liabilities. The sample was chosen by purposive random sampling method. The number of samples generated by this method is 154 companies with full reports for 2010-2015.

Using the SEM AMOS Ver. 24 and Sobel Test Path Analysis, the results show that Current Operating Accrual has a negative and significant relationship to idiosyncratic risk and asset pricing. The Financial Accrual variable has no relationship with idiosyncratic risk and asset pricing. For variable Non-Current Operating Accrual and Accrual Anomaly have positive and significant relation. By using Sobel Test, the test result shows that idiosyncratic risk has mediation effect in Persistence Current Operating Accrual, Non-Current Operating Accrual and Accrual Anomaly relationship to Asset Pricing. This indicates that investors in Indonesia capital market are trading investors considering idiosyncratic risk in decision making.

Keywords: Persistence Current Operating Accrual, Persistence Non-Current Operating Accrual, Persistence Financial Accrual, Accrual anomaly, Idiosyncratic Risk, Asset Pricing