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Executive Compensation, Earnings Management and Over Investment in Malaysia

Author

Listed:
  • Ei Yet Chu

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

  • Saw Imm Song

    (Universiti Teknologi Mara, 13500 Pulau Pinang)

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.

Suggested Citation

  • Ei Yet Chu & Saw Imm Song, 2012. "Executive Compensation, Earnings Management and Over Investment in Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 8(Supp. 1), pages 13-37.
    • Handle: RePEc:usm:journl:aamjaf00811_13-37
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    References listed on IDEAS

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    Cited by:

    1. Mehdi Bouras & Mohamed Imen Gallali, 2017. "Earnings Management, Equity-based Compensation, Economic Conjuncture and Governance Mechanisms: A Comparative Study between France and the United States," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 585-600.
    2. Gatot Soepriyanto & Engkos Achmad Kuncoro & Arfian Erma Zudana & Livia Averine, 2022. "Does Executive Compensation Affect Accounting Irregularities? Evidence From Listed Firms in Indonesia," SAGE Open, , vol. 12(3), pages 21582440221, July.
    3. Ali Saleh Ahmed Alarussi, 2021. "Effectiveness, Efficiency and Executive Directors’ Compensation Among Listed Companies in Malaysia," SAGE Open, , vol. 11(4), pages 21582440211, October.
    4. Redhwan Al‐Dhamari & Abdulsalam Saad Alquhaif & Bakr Ali Al‐Gamrh, 2022. "Modelling the impact of audit/remuneration committee overlap on debtholders' perceptions of accounting information quality: The role of CEO power," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2898-2920, July.
    5. Bao Quan Lock & Ei Yet Chu & Saw Imm Song & Lian Yin Lee, 2019. "Exchange Rate Movements, Earnings Management and Stock Returns in Malaysia," Capital Markets Review, Malaysian Finance Association, vol. 27(1), pages 53-68.

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