The Impact of Executive Compensation, Ownership, and Capital Requirement on Earning Management

Evidence from Indonesia Banking Companies

Earnings management is the use of accounting techniques to produce financial statements that present an overly positive view of a company’s business activities and financial position. This study aims to find out the impact of executive cash compensation, ownership, and capital requirement (CR) on earnings management in Indonesian banks. This study uses panel data from banks whose shares are listed on the Indonesia Stock Exchange for 2013–2019 involving 30 banks with a total of 210 observations. Data was analyzed using the least square random impact regression and the Hausman test. The results showed executive cash compensation had a positive impact on discretionary accruals. Then, institutional ownership has a negative impact and CR had a positive impact on discretionary accruals. The findings in this research highlight that institutional ownership can reduce the level of discretionary accruals, but not managerial ownership. As a practical contribution, this finding proves the executive cash compensation can lead to earnings management. Thus, this research is useful in banks’ decision-making regarding the treatment of executive cash compensation to CEOs or directors, especially for banks with most institutional ownership. This finding is also useful for regulators in determining the minimum limit of capital requirement ratio to minimize unhealthy or problematic banks.