IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925. Volume 12, Issue 4 Ser. IV (Jul. –Aug. 2021), PP 41-50 www.iosrjournals.org DOI: 10.9790/5933-1204044150 www.iosrjournals.org 41 | Page Effects of Profitability, Financial Leverage, and Dividend Policy on Income Smoothing Practice with Firm Size as a Moderator among Listed Manufacturing Companies in Indonesia Hebert Kosasih 1 , Nagian Toni 2 , Enda Noviyanti Simorangkir 3 1,2,3 (Universitas Prima Indonesia, Indonesia) Abstract: This study aims to determine income smoothing practice in manufacturing companies listed on Indonesia Stock Exchange (IDX). In addition, this study also looks at whether there is a difference between companies that do not perform income smoothing and companies that do income smoothing. Variables tested include profitability, financial leverage and dividend policy with firm size as the moderating variable. This study involves manufacturing companies listed on Indonesia Stock Exchange during the 2017-2019 period. Sample selection is done by using purposive sampling method. This research utilizes external data which is obtained from the website www.idx.co.id. The data analysis process is carried out by calculating PLS Algorithm using smartPLS and doing the hypothesis test. The results conclude that profitability has significant effect on income smoothing, financial leverage has no effect on income smoothing, dividend policy has no effect on income smoothing, and firm size is able to moderate profitability effect on income smoothing. However, firm size is unable to moderate the effect of financial leverage and dividend policy on income smoothing. Keywords: income smoothing, profitability, financial leverage, dividend policy, firm size. --------------------------------------------------------------------------------------------------------------------------------------- Date of Submission: 20-07-2021 Date of Acceptance: 04-08-2021 --------------------------------------------------------------------------------------------------------------------------------------- I. Introduction Business has grown rapidly which has led to increasingly fierce competition among companies. This condition encourages management to provide the best performance when leading the company. The performance of a company is very influential on the market value which has a direct impact on the high or low value of the investment. The purpose of the financial statements is to provide information about the financial position, performance, and cash flows of an entity that is useful to various users of the report in making economic decisions. Financial statements are a form of accountability for the authority received by the company's management in managing the company's resources. The company's management certainly wants to give a good impression, reduce profit fluctuations and attract market attention even though the financial information presented in the financial statements is expected to be understandable, relevant, accurate, reliable, comparable and can describe the condition of the company in the past and future projections. Hutagaol et al (2012: 345) explain that management is encouraged to voluntarily disclose material information that can assist investors in making investment decisions. According to Martinez (2011: 714), investors will predict future earnings through a valuation model from the disclosure of this information to determine stock price targets with buy, sell, or hold recommendations. Yuliana and Alim (2017: 61) states that investors will invest in companies that provide high returns. Kartikawati et al. (2019: 105) stated the importance of earnings information for investors because the profits obtained by the company can be used as the basis for assessing the company's performance. According to Muljono and Suk (2018: 223), during a condition where the company is experiencing financial difficulties, management will try to do earnings management to achieve the desired profit. In practice, income smoothing practices include not reporting a share of earnings in good periods by creating reserves and then reporting these earnings in bad periods. The occurrence of income smoothing practices is based on the freedom to choose the accounting method or principles regulated in PSAK 25. Earnings management can be explained by using the agency theory approach which states that earnings management practices are influenced by conflicts of interest between management (agent) and owners (principals) that arise. when all parties seek to achieve or maintain the level of prosperity they desire. To minimize the emergence of agency conflicts within the company, a good corporate governance mechanism is needed in managing the company. The practice of income smoothing is a common phenomenon as management attempts to reduce fluctuations in reported earnings. Income smoothing is one option that can be used by management to reduce fluctuations in earnings reporting and manipulate accounting variables or by conducting real transactions. In