Earnings Quality: The Association of Board diversity, Executive Compensation, Debt Covenant, and Investment Opportunity Sets

Abstract

Reliability of the corporate’s financial statement earnings is an important information for stakeholders. According to the agency theory, there is a difference of interest between the corporate and stakeholders. Earnings quality is the answer to see it and accomplish the difference interest problem. This research investigates the influence of board diversity, executive compensation, debt covenants, and investment opportunity sets on earnings quality. Data were taken from industrial manufacturing corporates listed in the Indonesia Stock Exchange (IDX) and selected 325 observations from 2012 to 2016. It was found that the board diversity and debt covenants had a positive associations with the earnings quality. It is explained that the presence of board diversity and debt covenants gave a positive level of earnings quality in the manufacturing industry. However, board diversity was not well-regulated in Indonesia. Investment opportunity set has a negative association with earnings quality. The negative association meant that investors did not know and were tricked because management apparently did earnings management. Moreover, executive compensation had no proven effect on earnings quality. Because money is not the main purpose for the top level in the corporate, in the same manner as Mashlow’s hierarchy of needs theory is that the top level in corporate focus on self-actualization.