Capital Adequacy and Earnings Conservatism of Rural Banks in the Province of Bali, Indonesia

Abstract

Rural bank is a highly regulated industry by the government in Indonesia. The minimum of capital adequacy is one aspect of which is determined by the government, in this case Bank Indonesia. The purpose of this study is to examine the effect of the capital adequacy to earnings conservatism. Capital adequacy ratio is considered as a measure of the company’s specific political spotlight as a proxy for the banking industry. This study is conducted in rural banks in the province of Bali. This research samples are determined by using stratified random sampling technique, obtained 60 units of rural banks with 120 observations. This study used the analysis technique of multiple linear regression. The analysis results showed that the capital adequacy ratio has negative effect on earnings conservatism. These results proved that the higher the government’s attention to the rural banks, causing an increase in earnings conservatism. This is to avoid the high political cost by the rural banks.

Keywords: Capital adequacy ratio, Earnings conservatism, Political cost