Market integration provides opportunities for companies to expand globally. Companies entering the global market are faced with a dynamic environment and more intense competition and to maintain a position in the market, the company must find a competitive advantage. The innovation strategy leads the company to be superior to its competitors. Firm innovative capacity reflects the knowledge of the company’s market. The knowledge will be used to support the company’s internal activities.  Innovation can be done to improve operational efficiency, accelerate lead times, increase production flexibility and reduce operational expenses. Companies that are able to achieve these features will experience a better performance than their competitors.

Innovative companies are not just companies that produce new products, but also companies that introduce new production methods, open new markets, have new raw materials, or create new organisational structures. Innovations in the form of new product development, changes in production methods, changes in promotional methods, and use of databases to improve knowledge share have proven to improve company performance. When an innovation idea has been advanced, an innovation feasibility assessment is undertaken. Once tested, innovations will be applied and related information will be disclosed to the public. Such disclosure and implementation will affect future earnings of the company and will also affect the value of the company. The influence of innovation on firm value is stronger in companies that implement corporate branding strategy because of the small cost used for product introduction.

Firm performance also affects the firm value. One measure of firm performance is profitability. Increased profitability will increase earnings per share. Such an increase in earnings per share may attract investors. Investors consider that the company is able to manage its resources well and has good prospects. This study aims to identify the effect of firm innovation and earnings management on firm value with firm performance as an intervening variable.

The population of this research is manufacturing company listed in BEI from 2012 to 2016. Among the population of 692 companies, as many as 5 companies experienced delisting, 19 companies did not have financial reporting date end of December 31, and 16 companies did not provide the required data. In accordance with the purposive sampling criteria, the observable sample for this study is 652 firms. Firm innovation has a significant effect on firm performance. This is due to the implementation of innovation that is expected to impact on increasing market share. Increased market share will further increase sales. As sales increase, profits earned by the company will increase and the firm performance improves. Earnings management has no significant effect on firm performance. This is due to the level of earnings management being low. The low level of earnings management is due to good performance. Good performance lowers the motivation of management to perform earnings management. Firm performance has a significant effect on firm value. Investors interpret good firm performance as evidence that the company has high quality and has good prospects. Companies with good prospects will be worth more for investors. Firm innovation has a significant effect on firm value. The high innovation of the company gives hope to investors to gain more profit in the future. This situation will lead to an increase in firm value in the eyes of investors. Earnings management has a significant effect on firm value. Investors interpret the high profits as evidence that the company has high quality and has good prospects. This will increase stock prices and will increase the value of the company. Firm performance is proven to indirectly affect the firm innovation variable to firm value, or in other words the firm performance is an intervening variable. 

Author: Prof. Dian Agustia, S.E., M.Si., Ak., CMA., CA

Detailed information from this research can be viewed on our article at:

Firdausya, Catellya Wina., Agustia, D & Permatasari, Yani (2021). The Relationship Between Performance, Innovation, Earnings Management and Firm Value: An Indonesian Case. International Journal of Innovation, Creativity and Change, 11(11), 262-282 https://www.ijicc.net/index.php/ijicc-editions/2020/164-vol-11-iss-11