The study investigates the interrelationship 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.

The hypothesis of financial constraints suggests that firms will be denied profitable investment dueto inaccessible to external capital markets as debt and equity financing are no longer perfectsubstitutions after firms utilize internal capital. In view of reduced investments during globalfinancial crisis in 2008-2009, the study investigates 157 firms, whether they face the issues offinancial constraints in Malaysia. In general, non-family firms rely heavily on the external debtmarket while family controlled firms utilizing internal cash and reducing their dependence on debtmarket for their investments, confirming financial constraints in family firms. However, thepresence of CEO duality does not exaggerate the problem of financial constraints, but rather leadsfamily firms to become stagnant in their investments. Independent directors appear to beineffective in governing family firms in issuing finances for investment. Apparently, their presencein family firms reduces firms’ investment opportunities either through internal cash and externaldebt financing, which could reduce shareholders’ value in the long-term.Keywords: Investments; Financial Constraints; Corporate Governance; Duality; IndependentDirector; Family Controlled firms.

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