Idiosyncratic Risk and Asset Pricing: Study at Companies Listed on ...

IDIOSYNCRATIC RISK AND ASSET PRICING (Study at Companies Listed on Indonesia Stock Exchange) Marselinus Asri* Muhammad Ali* Abdul Hamid Habbe* Yohanis Rura* *Hasanuddin University, Makassar-Indonesia 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 Disscounted 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 idiosyncraic risk in decision making.

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

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Electronic copy available at: https://ssrn.com/abstract=2992184

1.INTRODUCTION Risk is one of the main factors that investors consider when making investments. The risk of securities consists of two components, which are diversifiable risk and non-diversified risk. Portfolio securities are performed by investors to reduce diversifiable risk, while nondiversified risks will remain attached to each individual securities. Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) and (Lintner, 1965) have long formed the mindset of academics and practitioners on the relationship of risk and return. Traditional CAPM model, the market return measurement refers to the variation of individual stock movements to market return, while variations in specific stock return volatility refers to the idiosyncratic, the residual variance in regression model CAPM. The idiosyncratic volatility increases the researcher's attention when the investor can not fully diversify due to budget constraints and the ability to diversify. In the CAPM, the return of an asset is determined only by the systematic risk. In theory, the CAPM is very useful in explaining and predicting the relationship of risk and expectedreturn, but the empirical facts show that the model is not able to explain the phenomena (Roll, 1977) (Roll & Subrahmanyam, 2010); (Roll, Schwartz, & Subrahmanyam, 2014); (Prono, 2015) states that the CAPM can not be held in a variety of conditions or in other words the CAPM is often inappropriately used to predict the value of an asset. (Roll, 1977) explains that empirical testing provides results that are single stock price index is a proxy that is bad in the CAPM. (Sloan, 1996) found a negative correlation between the rate of accrual of subsequent stock return has given rise to numerous studies. Research at the company level is based on the US market. (Artyom Durnev, Morck, Yeung, & Zarowin, 2003); (Zhu, Jog, & Otchere, 2014); (Durnev, Li, & Magnan, 2016) showed that idiosyncratic risk is positively correlated with stock price informativeness. Indonesian capital market showed a positive effect of idiosyncratic volatility, although not as strong as documented evidence to Malaysia, Singapore and Thailand (Nartea, Ward, & Yao, 2011); (Nartea, Wu, & Liu, 2013) Based on these considerations, to answer the variation pattern of this relationship researchers used the idiosyncratic risk as mediating variables that explain the relationship with the accrual rate in the stock price perspective prospect theory frame. The ability of idiosyncratic risk in determining the formation of stock price becomes the focus of this research.Idiosyncratic risk as an indicator forming pasa stock prices in the capital. Based on the above arguments, the formulation of this research are summarized as follows: in the context of Indonesia's capital market, whether there is an anomalous phenomena accrual, whether the formation of anomalous accrual and persistence of accruals affect asset pricing and whether investors consider the idiosyncratic risk in the decisions that shape stock prices . This study is urgent because of the different characteristics in assessing risk in the CAPM model that is not in accordance with the conditions of the Indonesian capital market. Changes in specific information that often occur affect a particular company or industry to be the main basis in risk assessment by investors. This consideration should be in the idiosyncratic model.

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Electronic copy available at: https://ssrn.com/abstract=2992184

II. LITERATURE REVIEW (Merton, 1986) suggest a positive relationship between idiosyncratic risk and stock returns in markets with imperfect information. (Ang, Hodrick, Xing, & Zhang, 2009) used a sample of 23 stock markets, including Australia in search of 'risk-return puzzle'. (Ang, Hodrick, Xing, & Zhang, 2006) cross-sectional relationship between idiosyncratic risk and stock prices with a positive result. (Fu, 2009) using monthly data and the size EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) found a positive relationship and claimed superiority EGARCH measurement. (Ang et al., 2006); (Ang et al., 2009) produces a positive relationship. (Brockman, Schutte, & Yu, 2009) examines this relationship in 44 international markets. For the Australian market, they find a negative relationship. (Ang et al., 2009) measures the volatility of idiosyncratic generate positive relationships using measures based EGARCH as practiced by (Fu, 2009). (Brockman et al., 2009) examined the relationship of positive returns and idiosyncratic risk in the Australian stock market using EGARCH size to measure volatility. Idiosyncratic risk calculation allows assign largest portion of the total risk, understand the relationship of return and idiosyncratic risk is important for small investors and institutional investors (Aiyagari, 1994). (Merton, 1987) contributes associated cross-sectional relationship between idiosyncratic volatility and expected returns for the various levels of the company. (Ang et al., 2009) suggests a negative relationship between idiosyncratic risk and stock returns as a general phenomenon throughout the world called 'idiosyncratic risk-return puzzle', described by using alternative regression estimation using data Australia. Behaviour conditional distribution of extreme returns reflect differences Losses and investment gains. Characteristics relationship is not the same return on average level and can affect the conclusion. The study, applying quantile regression to overcome the return distribution, dimension squres least regression and portfolio methods are often used in research (Malkiel & Xu, 2006) (Ang et al., 2009);(Brockman et al., 2009); (Fu, 2009); ( Jiang, Xu, & Yao, 2009) ; (Huang, Liu, Ghon Rhee, & Zhang, 2011) with negative results. Finally, this study provides a new perspective on the shape of a cross-sectional relationship between idiosyncratic risk and stock returns, show empirical evidence that the relationship parabolic and quantile. Companies with a higher price variation will attract trade arbitration utilizing specific information. As a result, the company will track the company's fundamental values more closely. This will ultimately reduce the problem of information asymmetry that inhibits external funding and distorts capital spending decisions. 2.1 Prospect Theory (Prospect Theory) (Kahneman & Tversky, 1979) introduced the theory of prospects and developed the theory of prospects to explain why a person makes certain decisions from his psychological side. Prospect theory denies expected utility theory that explains that their individual decisions are rational and linear. Prospect Theory explains the framing effect, certainty effect, insurance effect, and the endowment effect. Prospect theory states that in making decisions, people tend to focus on the prospects, namely the prospect of gains and losses prospects, rather than on total wealth. As for, which is used as a reference point in calculating profit and loss always change from time to

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time. Furthermore, the decision-makers perceive a person or prospect (outcomes) in the form of value function. This is consistent with the main conclusions (Kahneman & Tversky, 1979) explains that the function of the values defined in terms of gains and losses. Value function explained that in making decisions, people tend to be risk-averse when it is in the domain of profit and risk-seeking when it is at a loss domain. The loss function function is represented by a more concave and steep curve, while the function of the profit value is represented in the form of a convex curve and not so steep. Relationships between variables in this study is based on prospect theory, the theory of real options, asset pricing and risk model development idiosinkrtik Developed in previous research. This study puts idiosyncratic risk as a mediating variable linking accrual persistence operating current, non-current operating persistence, persistence financial accruals and accrual anomaly on asset pricing. To build a model of the relationship between the operating current accrual persistence, persistence operating noncurrent accrual, accrual financial persistence and accrual anomaly against idiosyncratic risk used real options theory. Model of the relationship between idiosyncratic risk on asset pricing using the prospect theory. 2.2 Market Anomaly Efficient Market Hypothesis (EMH) suggests the market is said to be efficient if stock prices reflect all available information appropriately, including accounting information(Jones, 1991). The consequences of the Efficient Market Hypothesis is the ability of analysts expect future earnings to perfection, considering the element of accrual and cash in a profit element present. If future earnings forecasts can be perfectly predicted, then the current stock price will move into equilibrium fair price because the current fair price has accommodated future earnings, then there will be no price correction in the future when profit is announced. In discussing efficient market testing, it should also discuss about the existence of irregularities (anomalies) associated with efficient market hypothesis. 2.3 Efficient Market Hypothesis Efficient market concept was first proposed and popularized by (Fama, 1965). In this context, the market is the capital market and money market. A market is said to be efficient if no-one, both individual investors and institutional investors are able to earn abnormal returns, adjusted for risk, by using the existing trading strategies. That is, the prices formed on the market is a 'reflection' of information or 'stock prices reflect all available information'. Another expression says that in an efficient market the asset prices or securities quickly reflect the available information about those assets or securities. In studying the concept of efficient markets, attention is directed at how quickly the information can affect markets reflected in changes in the price of securities. 2.4 Capital Asset Pricing Model (CAPM) CAPM is the standard form of general equilibrium relationship for the return assets developed by (Sharpe, 1964) and (Lintner, 1965). Risk and benefit assessments are based on beta coefficients. The beta coefficient is a non-diversifiable risk index. The most important thing of the Capital Assets Pricing Model is a statement about the relationship between expected risk premium individual assets and systematic risk. (Sharpe, 1964) and (Lintner, 1965)formulated the CAPM as follows Rj - Rf = α i + βi

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2.5 Idiosyncratic Risk Idiosyncratic risk reflects specific information about the company and fluctuate according to the information itself (Goyal & Santa-clara, 2003). Factors that may affect this risk are announcements about seasonal earnings information, supplies and company requests and the dynamics of corporate competition. Company earnings information can be observed from the accrual quality in the financial statements. Idiosyncratic risk is possible also arise because of government regulations that have direct impact on certain industries. Stock returns in the period used to estimate the regression coefficient and intercept namely beta risk, and substituting the market model to calculate the residual error between the actual return and the market return, then the residual error is used to calculate the residual error variance, the end result is called idiosyncratic risk. To calculate the value of idiosyncratic risk can also be done through Fama_French regression model, the result of residual error variance is idiosyncratic risk. Idiosyncratic risk is the risk that a part of the overall risk of the securities that are not related to the various risk factors that are not biased diversified. The five-factor model (Fama & French, 2014) is a development of a three-factor model (Fama & French, 1993) Based on the research of (Fama & French, 1993), there is a three-factor model which are the basis for empirical studies for asset pricing. The third factor is beta, size as measured by market capitalization and book-to-market ratio (BMR) into the market index to describe the average rate of return. Size return premium is the difference between large and small firms are denoted by the SMB (small minus big) while the book-to-market premium is the excess return of the high and low BMR denoted by HML (high minus low). Five models of Fama-French factors is done by regressing the difference in return (excess return) using five factors, as follows. Rit -RFt = ai + bi (R Mt R Ft) + the + hi HMLt SMBt RMW + ri + ci CMA + ei 1. the difference between the return of the market portfolio, 2. difference return of portfolio of small stocks to the portfolio return small stock large stock deductible (Small Minus Big - SMB), 3. the difference between the return of the portfolio with a ratio Book To Market (BTM) high-yielding portfolio with lowBTM ratio (High Minus Low- HML) 4. RMW difference between returns on portfolio diversification and low profitability 5. CMA difference between returns lower stock portfolio diversification with high investment company. 2.6 Idiosyncratic Volatility and Stock Price Information The importance of idiosyncratic volatility in corporate decision making is of concern in recent years. States with the protection of property rights are better tend to have a lower return synchronicity which eventually leads to firm-specific information is reflected in the stock price resulting in a higher market efficiency. Idiosyncratic risk increases will increase the accounting transparency of a country. This suggests that the efficiency of capital allocation positively correlated with idiosyncratic risk and stock returns in the country.

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(Chen & Chen, 2012) shows that managers of companies with high idiosyncratic risk incorporating information about the stock price into investment decisions. Several studies have questioned the use of idiosyncratic volatility as a measure of market efficiency ((David Hirshleifer & Teoh, 2009); (Schrand & Zechman, 2012); (Fan & Yu, 2013) This study attempts to examine the relationship between idiosyncratic volatility and stock prices, 2.7 Real Options Real Option method is a model that can decipher the value of a company in uncertainty and regulate the flexibility in investment strategy. Real Option is a model with a theoretical approach that option Black-Scholes model, so With this approach will be very useful in determining business strategy And investment in the future. Real Options Theory attractive to non-financial industries because of its ability to consider flexibility Management in delaying, revising investments, and undertaking operational strategies Along with the unresolved level of uncertainty of a project. Application of this theory in the non-financial industry known as the 'Real options'. The term real options introduced by (Myers, 1984) and (Black, 1986) by observing and applying the option pricing theory in investment decisions. III THEORETICAL FRAMEWORK AND HYPOTHESES 3.1 The theory of real options: the persistence relationship accrual and idiosyncratic risk Attributes are used to measure the quality include accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism (Francis, Lafond, & Schipper, 2004); (Shanken & Zhou, 2007); (Dechow, Ge, & Schrand, 2010). This study focuses on measuring the quality of persistence attributes are accrued using the operating current accrual persistence,persistence operating non-current accrual, accrual financial persistence and accrual anomaly. Accrual is not only the components of profitability but also an investment component Fairfield, Whisenant, & Yohn, 2003). (Dixit & Pindyck, 1994) emphasized the main traits irreversible on investment decisions, sustainability, and the uncertainty in the environment where the decision is implemented. Therefore, (Dixit & Pindyck, 1994) stated that there is added value to get better information but this is never enough. (Easley & O’Hara, 2004) states that the accounting treatment and disclosure could affect the company information environment which will then have an impact on risk information, idiosyncratic volatility, and capital costs (cost of capital). Real options used in connection persistence and idiosyncratic risk to understand the behavior of the company's investment in industry dynamics and government policies. Real options is a systematic approach and integrated solutions that combine financial theory, economic analysis, management science, decision theory, statistics, and economic modeling. Investors need to know the operating current accrual persistence, persistence operating non-current accrual, accrual financial persistence and accrual anomaly in the financial statements to understand the company's specific information that can be viewed as a form of investment decisions that involve risk. The persistence of an accrual and accrual anomaly further affects idiosyncratic volatility. S real option for full assessment of management decisions in persistence Accruals And an anomalous accrual in a dynamic business environment that has uncertainty, where business decisions are flexible.

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3.2 Prospect Theory: relationships idiosyncratic risk and asset pricing Prospect theory begins with Kahneman and Tversky's research on human behavior that is considered strange and contradictory in decision making. This prospect theory can be used to 'photograph' the phenomenon of investor behavior, especially in decision making process 'unreasonable'. This theory is used to measure the behavior of people or organizations in making decisions. The same research subjects were given the same options but were formulated differently, and they showed two different behaviors. This is referred to as riskaversion and risk-seeking behavior. This behavior is described using the value function in the face of gain and loss. In the domain of gains investors tend to risk aversion and in the domain of losses tend to be risk seeking. Figure 3.1 Relationship Prospect Theory, Risk Preferences and Return Volatility

Source: (Bhootra & Hur, 2014) Based on the above description, here is a conceptual framework of research model that can be established. 3.3 Development of Hypotheses Real options are rights granted to the owner to take the best actions of alternative investment opportunities. The decision is conditional an inherent part of the real options (Myers, 1984). Real options theory is used in relation to the persistence of accruals and Idiosyncratic risk to understand the behavior of the company's investment in industry dynamics and government policies. (Ali & Paul Zarowin, 1992); (Fan & Yu, 2013) examine the information content of accruals against idiosyncratic risk.Idiosyncratic risk is influenced by monetary policy, characteristic factors of the company, the funding policy the company and the company's operating activities (Fu, 2009). (Subramanyam, 1996) describes the Short-term and Longterm accruals accruals affect the risk. (Easley & O’Hara, 2004) states that the accounting treatment and disclosure could affect the company's information environment then have an impact on risk information, idiosyncratic volatility, and the cost of capital. (Artikis & Papanastasopoulos, 2016) states the relationship of financial information and Idiosyncratic risk is based on the dimensions

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of the company's operations. (Francis, & Smitht, 2005) using accruals quality as a measure of risk information. Peneliian operation in this dimension is measured using operating current accrual persistence measure changes in current assets receivables and inventories. Changes to receivables and inventories are an option given to management. Management decisions related to changes in receivables and inventories are inherent in this part of the theory of real options. Prospect theory emphasizes the psychological factor that in making decisions individuals tend to focus on their prospects, the profit and loss prospects, not the total wealth. In the prospect theory, noted that the frame is adopted person can influence his decision, under conditions of uncertainty people will choose the option that produces the greatest expected utility. Attitudes facing profits will be very different from the attitude of dealing with losses. As for, which is used as a reference point in calculating profit and loss always change from time to time. This is referred to as risk-aversion and risk-seeking behavior. This behavior is described using the value function in the face of gain and loss. In the domain of gains investors tend to risk aversion and in the domain of losses tend to be risk seeking. The loss-loss function is represented by a more concave and steep curve, while the profit function function is represented in the form of a convex curve and not so steep. Measurement of risk in this study using the idiosyncratic risk (volatility and idiosyncratic). Volatility of the company's risk is measured using the Fama-French model of five factors. Idiosyncratic volatility risk then grouped in the domain of the gain or loss in accordance with prospect theory utility function. This function connects the risk preference, volatility and asset pricing. Investor psychology factors in the decision making berkaitaan asset pricing in the prospect theory associated with risk preference. In the domain of gains, investors tend to behave risk averse, so decisions tend to select stocks with lower idiosyncratic volatility because it provides high utility. In my domain loss, investors tend to behave in a risk seeking, so decisions tend to favor stocks with high idiosyncratic volatility because it provides high utility. Investor behavior with regard to decision-making can be observed based on the relationship of risk preference, volatility and asset pricing. Investor's decision related to asset pricing in the prospect theory envisaged utility function. (Nartea et al., 2013); (Nath & Brooks, 2015) finds idiosyncratic volatility stronger than the risk of beta or firm size. Firm size is positively correlated with stock returns after controlling for idiosyncratic risk is thus Idiosyncratic risk is one of the important variables that affect the stock price. (Nartea et al., 2013);showed lower idiosyncratic volatility will occur when the accounting information is not found, it means that the information disclosure was positively correlated with idiosyncratic risk. Fu (2009) found the stock returns and the size of the company today has a positive correlation after controlling for idiosyncratic risk, indicates the size of the company, stock returns are higher. (Mashruwala, Rajgopal, & Shevlin, 2006) finds stocks of small-sized companies having high risk Idiosyncratic and high transaction costs.Arbitrage risk is a part of the stock volatility (Mendenhall, 2014). (Ke & Ramalingegowda, 2005) found the transient behavior of institutional investors in response to repair the role of accounting information stock price efficiency. (Jin & Myers, 2006) found a lower idiosyncratic volatility and lower stock returns occurs when information is not transparent accounting and investor protection worse, information disclosure is negatively correlated with risk Idiosyncratic (Pincus, Rajgopal, & Venkatachalam, 2007) (Healy & Palepu, 1990) suggest the relevance of the value of earnings and the relevance of

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cash flow values can affect the Idiosyncratic risk of the firm. (Lin & Wang, 2011) find that external financing activities are positively associated with risk. (Subramanyam, 1996) describes the Short-term and Long-term accruals accruals affect the risk. (Frankel & Litov, 2009) stated that accrual quality can increase or decrease stock price synchrony. (Ali & Paul Zarowin, 1992); (Fan & Yu, 2013) examine the information content of accruals against idiosyncratic risk.Idiosyncratic risk is influenced by monetary policy, characteristic factors of the company, the funding policy the company and the company's operating activities (Fu, 2009). Current operating accruals are the current changes in net cash operating assets and short-term investments minus changes in current operating liabilities. Operating assets when focusing on receivables and inventories. (Dechow, 1994) consider that the accounts most widely used in the manipulation of revenue through early recognition of revenue. Ang et al., (2006) found the idiosyncratic risk is negatively correlated with the size of the company. For accounts inventory, managers can defer recognize or allocate costs for inventory obsolescence (Bali, Cakici, Yan, & Zhang, 2005) As such, changes in inventory and accounts receivable account is considered a low persistency and a cause mispricing (Zhang, 2005). Research (Malkiel & Xu, 2006); (Jiang, Lee, & Anandarajan, 2008); (Ang et al., 2009); (Brockman et al., 2009); (Fu, 2009); ( Huang et al., 2011) with negative results. Publication of accounting information plays an important role in the flow of information. Transparent information will encourage investors to collect specific information. Condensed financial statements as both annual and quarterly information is an opportunity for management companies to declare the performance to all stakeholders of the company (Rura, Bambang, Made, & Rosidi, 2011). The role of the publication of information will make a choice based on a tradeoff between cost and efficiency for the acquisition of specific information. Idiosyncratic volatility occurs when investors rely on specific information. Companies with higher transparency have lower volatility. This indicates the volatility of the company reflects more firm-specific information rather than information about the market. Companies operating activities was measured using persistence operating current accruals provide an overview to investors about changes in current assets. Changes in current assets are company-specific information involve risks and can affect the idiosyncratic risk. Based on the above explanation, the hypothesis is formulated as follows. H1. Persistence operating current accrual positive effect on idiosyncratic risk H2. Persistence operating current accrual positive effect on asset pricing H3. Persistence operating current accrual positive effect pricing through idiosyncratic risk

on asset

Effect of framing in prospect theory Kahneman and Tversky (1979) is a phenomenon that indicates that the decision makers will respond in different ways to the problems of the same decision if the issue is presented in a different format (Basilico, 2014). (Miller & Rock, 1985); (Shroff, Venkataraman, & Zhang, 2013) tested positive influence on the expected return of investment on the stock. The study found that the increased investment associated with increased future cash flows that will come and have a positive effect with the expected return of the stock at the time of the announcement of the new investment. The positive effects

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of investment on stock returns is found in research (Arena, Haggard, & Yan, 2008); (Liow & Addae-Dapaah, 2010); (Hui, Nelson, & Yeung, 2015). (Bolton, Chen, & Wang, 2011) found no evidence to support the management of opportunistic accounting reported to reduce costs.Investment activity is activity involving the acquisition or disposal of long-term assets and other investments not included in cash equivalents. The negative relationship was found in the study of (Jiang, Lee, & Anandarajan, 2008); (Berrada & Hugonnier, 2013) . Investing activities reflect cash expenditures with respect to the resource that aims to generate income and future cash flows. The persistence of non-current operating accrual is the amount of low and medium accrual reliability. Based on the above explanation formulated the following hypotheses. (Morck, Yeung, & Yu, 2000) concluded that the returns stocks are synchronous in developing countries than developed countries. Capital markets in developing countries are considered less function as an information processor and less efficient than developed countries. The share price in the stock market is very dependent on the information held and collected by market participants as well as how they interpret that information.This information may include information firm-specific , information market-specific , as well as information about industry-specific . If more specific information that goes into the company's stock price, the stock price volatility will be low and if more specific information entering the market or industry, then the stock price volatility will be high. The fifth hypothesis is formulated as follows.The fifth hypothesis is formulated as follows.The fifth hypothesis is formulated as follows. H4. Persistence non current operating accrual positive effect on idiosyncratic risk H5. Persistence non current operating accrual positive effect on asset pricing H6. Persistence non-current operating accrual positive effect on asset pricing through idiosyncratic risk The third component is the accrual of financial accruals. This is a change in financial assets (long-term investment and short-term investments) minus financial liabilities (such as long-term debt and short-term debt). Positive relationship with the accrual of financial persistence Idiosyncratic risk can be found in the research (Cogley, 2002)); (Angeletos, 2007). However, long-term investments, such as long-term receivables can be used to manipulate earnings (Richardson, Sloan, Soliman, & Tuna, 2005); (Miller & Rock, 1985b); (C. Chen, 2004) explains that the market will react negatively to the announcement of the funding of the cash because it will affect cash flows from operations were lower for the foreseeable future, but that he also identified the presence of other signals that affect the cash flow of funding that dividend changes which is very closely related to the expected return of the stock. (Bradshaw, Richardson, & Sloan, 2006) examined the relationship between external financing activities, the return of shares in the future, the future profitability and analyst forecasts. The empirical results show the company's external financing activities was negatively correlated with future stock returns and profitability, does not identify individual components of the funding. (Resutek, 2010) further divide the activities of external financing to debt financing and equity financing. The findings show that significant financing component is negatively correlated with stock returns in the future when verifying the effects of external financing activities, debt financing and equity financing to stock return in the future. However, external

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financing activities,debt financing or equity financing was not significantly associated with future stock returns by controlling the total accruals (Patricia M. Dechow, Richardson, & Sloan, 2008) Contributions (Bradshaw et al., 2006) is their attention to clean the internal financing activities rather than external financing activities, the debt to equity ratio. They found the net external financing activities negatively correlated with future stock returns and future profitability, and positively correlated optimistic analyst estimates. (Richardson et al., 2005) shows if the net external financing activities was negatively related to future returns. Return the current share may be influenced by past stock price and performance, and thus are expected to explain the relevance of the value of returns stock or the company's future performance.Financing activities are activities that result in changes in the composition of equity and loan companies. Financing cash flow is useful in predicting claims on future cash flows by the suppliers of capital. In consideration of the relevance of the value of current earnings and cash flow, due to the effects of information of relevance value, a negative correlation between the flow of net external financing activities, net debt financing, and equity financing clean and stock returns in the future become weak; and idiosyncratic risk having a negative impact on the value of the company's shares in the future. Based on the above explanation formulated the following hypotheses.In consideration of the relevance of the value of current earnings and cash flow, due to the effects of information of relevance value, a negative correlation between the flow of net external financing activities, net debt financing, and equity financing clean and stock returns in the future become weak; and idiosyncratic risk having a negative impact on the value of the company's shares in the future. Based on the above explanation formulated the following hypotheses.In consideration of the relevance of the value of current earnings and cash flow, due to the effects of information of relevance value, a negative correlation between the flow of net external financing activities, net debt financing, and equity financing clean and stock returns in the future become weak; and idiosyncratic risk having a negative impact on the value of the company's shares in the future. Based on the above explanation formulated the following hypotheses.Based on the above explanation formulated the following hypotheses.Based on the above explanation formulated the following hypotheses. H7. Persistence financial accrual positive effect on idiosyncratic risk H8. Persistence financial accrual positive effect on asset pricing H9. Persistence financial accrual positive effect on asset pricing through idiosyncratic risk (Allen, Larson, & Sloan, 2010) showed that for high subjectivity in determining accruals, current profit is likely to persist when it consists of accruals and more likely to survive mainly consist of cash flows. Penman and Zhang (2006) considers the persistence of earnings as an indicator of good quality, that high-quality earnings are predictable and sustainable earnings. (Pincus et al., 2007) examines whether accrual anomalies are phenomena occurring in every capital market of different countries. Positive relationship of accrual anomaly and idiosyncratic risk in the research of (Khovansky & Zhylyevskyy, 2013); (Kim, Kim, Kwon, & Lee, 2015). They found that overweighting accruals are not always followed by underweighting of cash components and accrual anomalies resulting from overweighting the accrual component occurs only in four countries, namely the United States, United Kingdom, Canada, and Australia. Accrual anomalies are more common in common law countries. Decision-making decisions are in management, the process of recording accruals in a company is so subjective that the accrual component in profit is highly vulnerable to earnings management practices (Sloan, 1996; (Malagon, Moreno, & Rodríguez, 2015); (Berggrun, Lizarzaburu, & Cardona, 2016).

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Free management adds or decreases profits by setting the time of recognition. Risk becomes one of the main factors investors consider when investing. Investors perceive a stock is considered liquid if it can be sold immediately and can receive the results in accordance with market prices. A study that measures stock liquidity with four tools is a relative ratio based on the volume required to move stock prices, firm size measured through market value of equity, bid-ask spreads based on the cost of conducting transactions immediately, and the liquidity ratio Measured from the ratio of trading volume to the absolute changes of the price over a certain time interval. The results show that the correlation between the four tools is high, indicating that they can be used as a proxy for liquidity. The results of abnormal return positive research for low-berakrual company and abnormal negative return for high-berakrual company. This research was continued by (Fairfield, 2006); (Lev & Nissim, 2006) by reexamining the existence of accrual anomalies in the United States. Researchers create several portfolios based on company size and book to market ratio. Analysts tend to judge the accrual component to have the same persistence level as the cash component. The accrual anomaly can be an indication of the inefficiency of the Indonesian capital market. Based on the above explanation the hypothesis can be formulated as follows. H10. Accrual anomaly positive effect on idiosyncratic risk H11. Accrual anomaly positive effect on asset pricing H12. Accrual anomaly positive effect on asset pricing through idiosyncratic risk Effect of Idiosyncratic Risk Of Asset Pricing (Lin & Wang, 2011) discusses the relevance of the effect of profit values (relevance incremental value) and the incremental value relevance of idiosyncratic volatility of cash flows and the effects of external financing activities, debt financing, and equity of the company at risk idiosikratik. (Lin & Wang, 2011) predicts an idiosyncratic volatility using finacial in( Huang, Wald, & Martell, 2013) examined the impact of the liberalization of the financial markets on the share price and idiosyncratic risk in emerging markets. (Nartea et al., 2011) found a positive relationship idiosyncratic volatility of the return of shares in the Southeast Asian market. Positive results can also be found in the research (Cotter, Sullivan, & Rossi, 2015); (Herskovic, Kelly, Lustig, & Nieuwerburgh, 2015) Some studies have questioned the use of idiosyncratic volatility as a measure of market efficiency (Hirshleifer, Hou, & Teoh, 2012); (Schrand & Zechman, 2012); (Fan & Yu, 2013). This study tried to examine the relationship between idiosyncratic volatility and stock prices, could not find a positive relationship. (Lee & Mauck, 2016) proposed a link nonlinear between idiosyncratic volatility and stock price information. The importance of idiosyncratic volatility in corporate decision to the attention in recent years. States with the protection of property rights are better tend to have synchronicity return lower ultimately leads to firm-specific information is reflected in the stock price resulting in a higher market efficiency. Idiosyncratic risk increase accounting transparency of a country. This suggests that the efficiency of capital allocation positively correlated with idiosyncratic risk and return of stocks in the country. Supposedly idiosyncratic risk a key consideration in shaping investor asset pricing .

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In the perspective of prospect theory, in the domain of losses investors behave risk seeking . In the domain loss curve shape prospect theory of utility function is convexity, so the demand for stocks with high idiosyncratic volatility is greater. In conditions of equilibrium, demand a rational investor is not perfectly elastic so that the demand for stocks with high idiosyncratic volatility will be greater so that the stock price is higher. For testing, the stock was separated in groups of capital loss and capital gain (positive and negative values CG ). Based on the description above,then the hypothesis can be formulated as follows. H13. Idiosyncratic risk positive effect on asset pricing IV RESEARCH METHOD 4.1 Research Design This study aims to test empirically the variable persistence current operating accrual, noncurrent operating accrual persistence, persistence financial accruals and accrual anomaly on asset pricing through idiosyncratic risk . Design research is research explanatory that establish causal relationships between variables. 4.2 Population and Sample The population is all companies listed on IDX in the period 2010-2015 recorded 154 companies. The sample in this study determined using purposive sampling , the sampling technique with consideration or certain criteria, namely: the Company were sampled company listed on the Stock Exchange in 2010-2015 without delisting. The Company is not late in issuing audited financial statements as of December 2010 to 2015. 4.3 Types and Sources of Data Data used in this study is a documentary data in the form of annual and quarterly financial statements of companies listed on the Indonesian Stock Exchange (BEI) in the period 20102015. While the source of the data used in this research is secondary data in the financial statements obtained from www.idx.co.id 4.4 Data Collection Methods Data collection methods used in this study is a content analysis is the method of data collection and analysis techniques of observation of the content or message of a document that aims to identify the characteristics or the information in the document. 4.5. Operational Definition and Measurement of Variables A. A(Fama & French, 2006)sset Pricing (Fama & French, 2006) using the dividend accounting defines the equity market value as follows.

discount

models and clean

surplus

B. Persistence Current Operating Accrual (Richardson et al., 2005) developed from Sloan Research (1996) by connecting reliability in the measurement of accrual persistence of earnings and stock prices. (Richardson et al., 2005) equation fix Total Accrual used in Sloan (1996) further describes the accrual component.

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In this equation, ΔCO translated into changes in current assets excluding cash and short-term investments (ΔCOA) minus the change in short-term liabilities excluding short-term debt ( ΔCOL ). [ΔCurrent Assets- ΔCash and Short Term Investments] - [ΔCurrent LiabilitiesΔDebt in Current Liabilities] C. Persistence of Non-Current Operating Accrual The persistence of non-current operating accrual ( ΔNCO) is the change in non-current assets do not include investment in non-equity long-term and advances (ΔNCOA) reduced by changes in long-term liabilities, excluding long-term debt (ΔNCOL). [ΔTotal Assets - ΔCurrent Assets- ΔLong Term Investments and Advances] [ΔTotal Liabilities- ΔCurrent Liabilities - ΔLong Term Debt] D. Persistence Financial Accrual Persistence financial accrual (ΔFIN) represents a change in short-term investments (ΔSTI) and long (ΔLTI) minus the change in short-term debt, long-term debt, and preferred stock (ΔFINL) [ΔLong Term Investments and Advances + ΔShort Term Investments] - [ΔLong ΔDebt in Term Debt + Current Liabilities) E. accrual Anomaly Accrual and Abnormal accruals using Jones model to estimate normal and abnormal accruals accruals: Accruals measured by discretionary accruals (DACC) is calculated by menselisihkan total accruals (TACC) and nondiscretionary accruals (NDACC). In calculating the DACC , use Modified Jones model because this model is considered to be better among other models to measure accruals ( Dechow, Sloan, & Sweeney, 1995). In this study, total accrual to the Modified Jones Model . TACC it = EBXT it - OCF it TACCit / Tai, t-1 = α1 (1 / tai, t-1) + α2 ((ΔREVit) / Tai, t -1 ) + α 3 (PPE it / TA i, ε it NDACC it = α 1 (1 / TA i, t1 ) + α 2 ((ΔREV it - ΔREC it ) / TA i, t1 ) + α 3 (PPE it / TA i, t1 ).

t-1

) +

DACC it = (TACC it / TA i, t-1 ) - NDACC it TACC it = Total Accrual is measured as the difference between net income before extraordinary item (EBXT it ) with operating cash flow (OCF it ) F. variable Mediation idiosyncratic risk Five-factor model of Fama French (Fama & French, 2014) carried out by regressing excess return using five factors:. Rit -RFt = ai + bi (R Mt R Ft) + the + hi HMLt SMBt RMW + ri + ci CMA + ei 3. the difference between the return of the market portfolio,

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4. difference return of portfolio of small stocks to the portfolio return small stock large stock deductible (Small Minus Big - SMB), 6. the difference between the return of the portfolio with a ratio Book To Market (BTM) high-yielding portfolio with lowBTM ratio (High Minus Low- HML) 7. RMW difference between returns on portfolio diversification and low profitability 8. CMA difference between returns lower stock portfolio diversification with high investment company.

4.6 Data Analysis Techniques Based on the framework of research already cited the method chosen for data analysis in this research is path analysis (path analysis) with the help of software AMOS (Analysis of Moment Structure) version 24 V. RESULT AND DISCUSSION 5.1 Descriptive Statistics Descriptive statistical analysis used to determine the description of the study variables: the magnitude of Current Operating Accrual, Non-Accrual Current Operating, Financial Accrual, Accrual Anomaly, Idiosyncratic Risk and Asset Pricing . The value seen in the descriptive statistic is the maximum, minimum, average, and standard deviation. Descriptive statistical tests in this study can be seen in Table 5.1 below.

Table 5.1 Statistics dekriptif descriptive statistics Variable N

Minimum

Maximum

Mean

Std. Deviation

AssetPricing

457 1.396394611 5.471841892

3.4134952400

, 798262616000

IdiosyncraticRisk

457 -3.72573075

-1.1268501230

, 757497250000

CurrentOperatingAcc

457 3.403534684 8.622597605

, 856604160

6.22805142500 , 890578603000

NonCurrentOperatingAcc 457 3.972781608 9.325747687

6.5179912040

, 916559883000

FinancialAccrual

457 3.000209497 8.182414140

5.7389967230

, 929645022000

AccrualAnomaly

457 -3.0911

-, 957 498

, 6672935

Valid N (listwise)

457

, 3540

Source: Data Olah (2017) Testing Assumptions 5.2 Outliers Ouliers in multivariate evaluation of this research is done by using chi-square on the DF (degree of freedom) produces a value of chi-square 12, 009. So all the observations that have a greater Mahalanobis Distance value of chi-square 12, 592 are outliers in multivariate analysis. The test results assuming overall outliers can be seen in Table 5.2 below. Table 5.2 Results of Tests Outlier

15

Information Early testing Remove Outlier_1 Remove Outlier_2 Remove

N 552 541

outlier 11 6

Chi-square 523.0 535

The multivariate 22.135 normality 12.295

Conclusion Not fulfilled Not fulfilled

535

11

505

11.188

Not fulfilled

524 491

33 18

524 520

10.101 9,750

Not fulfilled Not fulfilled

473 Outlier_6 Remove 461 Outlier_7 Modification 457 Source:Indices Procesed Data (2015)

12

518 516 6.078

9.060 8.590 , 282

Not fulfilled Not fulfilled fulfilled

Outlier_4 Remove Outlier_5 Remove

2

5.3 Testing Modification Indices The purpose of this test by way of modifications to the model in order to pass some test tools can be a great result as a decrease in number Chi-square, an increasing number of GFI. Interest modification is to see whether modifications made to lower the Chi-square value, the smaller the chi-square value indicates the Fit models with existing data. Table 5.3 covariances: (Group number 1 - Default model) The combination of variables

Estimate

SE

CR

P

Accrual Financial , 554 , 047 11.891 *** Current Operating Accrual NonCurrentOperatingAcc , 419 , 035 12.094 *** Accrual Anomaly The table shows the results of testing modifivation indeces result of a recommendation of the AMOS program variable operating current Financial accruals and accrual to do the modification process Table 5.4 CMIN Model

NPAR

CMIN

DF

P

CMIN / DF

default models saturated models Independence models

23 27 12

6.078 , 000 2191.150

4 0 15

, 193

1,520

, 000

146.077

Table modification test results show the value of CMIN chi-square of 6.078 dengn probability P value of 0.193 indicates the model FIT with the data already available. Based on table 5.3 above is known that at the time of the initial sample testing as many observations obtained with the value 3. 264 0bsevasi Mahalanobis Distance p1 and p2 smaller probability of 0.05. Rare further is to eliminate the data based on the value mahalanobis distancenya for each observation. Once all the data you see the extreme high and low omitted from the observation based on the Mahalanobis Distance , then the rest of the sample obtained by observation as much as 457 samples. so in this study the problem of outliers has been overcome.Based on the test has been obtained value of chi-square of 6.078 0.10 and VIF Asset 0,440 via Idiosyncratic 58 36 473 Pricing via Idiosyncratic 0,011; 0,028;0,029 0.392725 0.347261 0.69452 Accrual Anomaly -> Asset 0,440 RiskRisk 52 11 222 Pricing via Idiosyncratic 0,828; 0,039; 12.34421 0.0 0.0 0,440 0,029 programs 647 calculators BETA Version 3 (2015) Source: Calculations with the aid of statistics http;//www.danielsoper.com/statcalc3/calc.aspx?id=31 Based on the calculation results in Table 5:8 Sobel test can be explained as follows: 1. The indirect effect of the Current Operating Accrual Asset Pricing has a p-value (two tailed probability) Sobel test of 0.00026394 alpha 0.05 4. The indirect effect of the Asset Pricing Accrual Anomaly has a p-value (two tailed probability) Sobel test of 0.0