Abstract: 

This research has a purpose to provide empirical evident about political cost hypothesis and debt/equity hypothesis. Political cost  hypotesis said that some firms that are more vulnerable to political cost than the others manage income downward to avoiding the attention of government and regulator. Debt/equity hypothesis said that the larger the debt/equity ratio, the more likely the firms is to increase current period reported earning or optimist financial statement .

The conservatism proxy used in this research is first, accruals obtained from differences between net income and cash flow. Second, market to book value ratio. The statistic method which is used to test on the research hypothesis is Multinomial Logit.The result of research shows that: first, the small firms are more politically sensitive than larger firms or financial statement more conservative. Second, the larger a firms debt/equity ratio, the more likely the firm’s manager is to report financial statement more optimist. 

Keywords: financial statement conservatism, political cost, debt/equity ratio, multinomial logistic.