The Effect of CEO Compensation on Earnings Management: Is It Affected by Leverage Condition? Proving the Prospect Theory

The connection between CEO compensation and earnings management has long become the object of research, ever since a study by Healy in 1985. Generally, the study on earnings management would use agency theory. Still, this study applies prospect theory which serves to explain the behavior of people or organizations when making decisions in a high-risk, uncertain situation. An organization suffering from loss will attempt to take risk, while an organization enjoying a gain will be averse to risk. A company with high leverage is in an unfavorable position compared to one with low leverage. Leverage describes a company’s debt situation. The more debt there is, the more obligations the company must fulfill, such as profit numbers. It is then presumed to be the cause for CEO to start managing earnings. This study aimed to prove if leverage condition also influences the relation between CEO compensation and earnings management. The study was done on 217 non-financial companies listed in Indonesia Stock Exchange (IDX) in 2019 and 2020. The data analysis technique utilized panel data regression with the program Gretl. This study prove that the more compensation a CEO receives, the less inclined they are to do earnings management. However, in companies with high leverage, this correlation weakens, meaning CEOs would be more willing to manage earnings. The results of this study are expected to help shareholders in deciding CEO compensation when in a high-leverage conditio

Hubungan kompensasi CEO terhadap manajemen laba: Apakah kondisi pandemi Covid-19 ikut memengaruhi?

The relationship between CEO compensation and earnings management has been studied by the researchers since Healy’s research in 1985. In its development, there are many conditions that can affect this relationship. One of the conditions is the condition of the Covid-19 pandemic. This Co-vid-19 pandemic has a significant role in the economic downturn, which in turn, it could affect the company’s profit target. Profits that do not reach the target may lead the CEOs to do earnings management. This study is aimed to determine the effect of the Covid-19 pandemic on the relationship between CEO compensation and earnings management. Earnings management is measured using discretionary accrual proxy with Modified Jones Model. The study was done on 217 non-financial companies listed in Indonesia Stock Exchange (IDX) in 2019 and 2020. The data analysis technique utilized panel data regression with the program GRETL. This study proved that the more compensation the CEOs receive, the less inclined they are to do earnings management. However, during the Covid-19 pandemic, this relationship tends to weaken, meaning that the CEOs would be more willing to manage earnings. The result of this study is expected to help shareholders in deciding CEO compensation in the midst of a pandemic situation

Hubungan Kompensasi CEO terhadap Manajemen Laba: Apakah kondisi Pandemi Covid-19 ikut mempengaruhi?

The relationship between CEO compensation and earnings management has been a long research study since Healys research in 1985. In its development, there are many conditions that can affect this relationship. One of the conditions that are expected to be involved is the condition of the Covid-19 pandemic. The Covid-19 pandemic has a significant role in the economic downturn, which in turn could affect the companys profit target. Profits that do not reach the target may lead the CEOs to do earnings management. This study is aimed to determine the effect of the Covid-19 pandemic on the relationship between CEO compensation and earnings management. Earnings management is measured using discretionary accrual proxy with Modified Jones Model. The study was conducted on 217 non-financial companies listed on the Indonesia Stock Exchange (IDX) in 2019-2020. Technical analysis of the data uses panel data regression with the GRETL program. The results showed that the greater the compensation received by the CEO, the lower the level of earnings management. Not to mention, the results of this study indicate that the Covid-19 pandemic conditions weaken the negative relationship between CEO compensation and earnings management. In other words, the negative relationship between CEO compensation and earnings management is stronger in conditions before the pandemic than during the pandemic. The results of this study are expected to help shareholders in deciding the provision of compensation to the CEO in the midst of a pandemic situatio

Hubungan kompensasi CEO terhadap manajemen laba: Apakah kondisi pandemi Covid-19 ikut memengaruhi?

The relationship between CEO compensation and earnings management has been studied by the researchers since Healy’s research in 1985. In its development, there are many conditions that can affect this relationship. One of the conditions is the condition of the Covid-19 pandemic. This Co-vid-19 pandemic has a significant role in the economic downturn, which in turn, it could affect the company’s profit target. Profits that do not reach the target may lead the CEOs to do earnings management. This study is aimed to determine the effect of the Covid-19 pandemic on the relationship between CEO compensation and earnings management. Earnings management is measured using discretionary accrual proxy with Modified Jones Model. The study was done on 217 non- financial companies listed in Indonesia Stock Exchange (IDX) in 2019 and 2020. The data analysis technique utilized panel data regression with the program GRETL. This study proved that the more compensation the CEOs receive, the less inclined they are to do earnings management. However, during the Covid-19 pandemic, this relationship tends to weaken, meaning that the CEOs would be more willing to manage earnings. The result of this study is expected to help shareholders in deciding CEO compensation in the midst of a pandemic situation