The Moderating Role of Corporate Governance in the Relationship between Executive Compensation and Earnings Management in Indonesia: Evidence from Jones and Kothari Models

Abstract

This study examines the relationship between accrual-based earnings management and executive compensation in Indonesian listed companies and assesses whether corporate governance moderates that relationship. The analysis covers the 2022-2024 period and uses 207 firm-year observations from 69 companies with complete financial, compensation, and governance disclosures. Earnings management is proxied by discretionary accruals estimated using the Jones model and is later re-tested with the Kothari model for robustness. Corporate governance is measured through a 32-item index derived from Indonesian good corporate governance guidelines. Ordinary least squares regression is employed with firm size, leverage, and return on assets as control variables. The findings indicate that discretionary accruals are not consistently associated with higher executive compensation across specifications. Firm size and return on assets are the most stable determinants of compensation. Moderation and split-sample tests suggest that governance quality shapes the compensation-reporting relationship, although the strength of the evidence is sensitive to the earnings-management proxy used. Overall, the study highlights the importance of stronger governance and more transparent compensation design in reducing reporting risk.