Executive Compensation, Earnings Management and Over Investment in Malaysia

Ei Yet Chu and Saw Imm Song
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Saw Imm Song: Universiti Teknologi Mara, 13500 Pulau Pinang

Asian Academy of Management Journal of Accounting and Finance (AAMJAF), 2012, vol. 8, issue Supp. 1, 13-37

Abstract: The study investigates the inter-relationship between executive compensation, earnings management and over investment. Using a sample of 196 Malaysian public listed firms, the findings show a positive endogenous relationship between executive compensation and over investment. Measuring equity compensation in incentive ratio, for each percent of over investment, one percent improvement in share prices will increase 23% of executive directors' equity value. Over investment, however, leads to a decline in executive directors' equity value in large shareholders controlled firms. In addition, one percent of over investment can explain 12% of earnings management. Nevertheless, earnings management does not explain executive directors' compensation. In summary, aligning over-investment with executive compensation schemes has implied that the existing compensation is insufficient for executive directors to align their interest with the objective to maximise shareholders' value.

Keywords: executive compensation; earnings management; investment; large shareholders; Malaysia (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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