Proceedings of the 6th International Conference on Tourism, Economics, Accounting, Management, and Social Science (TEAMS 2021)

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

Proving the Prospect Theory

Authors
Elizabeth Jessica1, *, Vania Nanda Djaja1, Yulius Jogi Christiawan1
1Department of Business Accounting, Petra Christian University, Surabaya, Indonesia
*Corresponding author. Email: d12180018@petra.ac.id
Corresponding Author
Elizabeth Jessica
Available Online 25 November 2021.
DOI
10.2991/aebmr.k.211124.021How to use a DOI?
Keywords
CEO compensation; Earnings management; Leverage conditions; Prospect theory
Abstract

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 condition.

Copyright
© 2021 The Authors. Published by Atlantis Press International B.V.
Open Access
This is an open access article under the CC BY-NC license.

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Volume Title
Proceedings of the 6th International Conference on Tourism, Economics, Accounting, Management, and Social Science (TEAMS 2021)
Series
Advances in Economics, Business and Management Research
Publication Date
25 November 2021
ISBN
978-94-6239-465-0
ISSN
2352-5428
DOI
10.2991/aebmr.k.211124.021How to use a DOI?
Copyright
© 2021 The Authors. Published by Atlantis Press International B.V.
Open Access
This is an open access article under the CC BY-NC license.

Cite this article

risenwbib
TY  - CONF
AU  - Elizabeth Jessica
AU  - Vania Nanda Djaja
AU  - Yulius Jogi Christiawan
PY  - 2021
DA  - 2021/11/25
TI  - The Effect of CEO Compensation on Earnings Management: Is It Affected by Leverage Condition?
BT  - Proceedings of the 6th International Conference on Tourism, Economics, Accounting, Management, and Social Science (TEAMS 2021)
PB  - Atlantis Press
SP  - 137
EP  - 145
SN  - 2352-5428
UR  - https://doi.org/10.2991/aebmr.k.211124.021
DO  - 10.2991/aebmr.k.211124.021
ID  - Jessica2021
ER  -