Executive Compensation, Earnings Management and Over Investment in Malaysia

Abstract

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.

Controlling Shareholders’ Proxy and Multiple Directorships: Insight Evidence from Related Party Transactions

“…This study defines controlling shareholders as individuals, organizations or a group of families who have a minimum holding of 23 percent of direct ownership in a firm. The use of 23 percent as a baseline to the ownership structure aligned with prior reviews such as Morck et al (1988), Barclay et al (2007), Chen and Chuang (2009), and in Malaysia like Sulong and Nor (2010), Yunos, Smith, and Ismail (2010), Chu and Song (2012), and Lim et al (2014). They argued that effective control for Malaysia occurs at around 20 percent.…”

Directors' Influence on Pay-Based Performance

“…To date, there is limited literature which focuses on the executive directors' influence. Most literature tend to focus on the determinants of executive directors' remuneration by looking at industrial environment and investment strategies (Bergstresser & Philippon 2006;Chu & Song 2012;Jing et al 2010). Therefore, the outcome derived from this study can add to literature.…”

“…One of the issues that has been most discussed in literature that looks at directors' remuneration is firm performance (Abdullah 2006;Canarella & Gasparyan 2008;Conyon 1997;Jensen & Murphy 1990;Unite, Sullivan, Brookman, Majadillas & Taningco 2008;Yatim 2012). Scholars (such as Chu & Song 2012;Yatim 2012) have also made the consensus that directors should only be rewarded if and when the company is making a profit, or when the firm/ company has performed according to the firm/company's strategic objectives. Nonetheless, it was found that firm performance has no association with the level of rewards paid (Fernandes 2005).…”

“…The firm's performance can also be negatively related to the earnings management (Abdullah et al 2014;Chu & Song, 2012;Cornett et al 2008 ). This occurs when profit is adjusted so that the desired directors' remuneration will be met.…”

“…The dependent variable being observed in this study include all the major components of the executive and non-executive directors' remuneration which include salary, bonus, fees and benefits-in-kind, a measure that is consistent with prior studies (Abdullah 2006;Abdul Rahman & Abdul Wahab 2009;Lee & Isa 2015;Yatim 2012;). The reward for the directors which is in the form of remuneration (salaries, bonuses, fees and benefits-in-kind) is usually paid up by most Malaysian listed companies and this is also known as Total Cash Compensation (Abdullah 2006;Chu & Song 2012;Shuto 2007) a term which will also be applied in this study.…”