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Executive Compensation, Earnings Management and Over Investment in Malaysia

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  • Ei Yet Chu

    ()
    (Graduate School of Business, Universiti Sains Malaysia, 11800 Pulau Pinang)

  • Saw Imm Song

    (Universiti Teknologi Mara, 13500 Pulau Pinang)

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    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.

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    Bibliographic Info

    Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

    Volume (Year): 8 (2012)
    Issue (Month): Supp. 1 ()
    Pages: 13-37

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    Handle: RePEc:usm:journl:aamjaf00811_13-37

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    Web page: http://web.usm.my/aamj/
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    Keywords: executive compensation; earnings management; investment; large shareholders; Malaysia;

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