How risk and regulation shape the market response to persistent earnings: evidence from Indonesia

This study examines whether systematic risk and the regulatory environment moderate the relationship between earnings persistence and the Earnings Response Coefficient (ERC). Using an 11-year panel of 2,915 firm-year observations from 265 companies listed on the Indonesia Stock Exchange (IDX, 2011–2021), we estimate fixed-effects panel regressions with firm and year effects, using three profitability-based proxies for earnings persistence (ROE, ROA, OPM) and heteroscedasticity-robust standard errors. Results show that persistent earnings positively and significantly affect ERC, and that this effect strengthens when firms face higher systematic risk and operate under more demanding regulatory conditions. The positive moderating role of systematic risk is attributed to the pro-cyclical return dynamics associated with high-beta stocks, while the regulatory environment amplifies ERC by improving the visibility and verifiability of persistent earnings signals. The study contributes to the earnings quality and capital market literature by providing joint, firm-level evidence that risk and institutional conditions interact to shape investor responses to earnings announcements in an emerging market, a moderating combination that has received limited empirical attention outside developed markets.