Pertanika J. Soc. Sci. & Hum.

28 (2): 745 - 762 (2020)

SOCIAL SCIENCES & HUMANITIES

Journal homepage: http://www.pertanika.upm.edu.my/

Firm Characteristics, Corporate Governance and Management

Compensation Disclosure: Evidence from Indonesia
Ersa Tri Wahyuni1*, Asangki Nindya1, Gatot Soepriyanto2, Ilya Avianti1 and
Zubir Azhar3
1
Department of Accounting, Faculty of Economics and Business, Universitas Padjadjaran,
Bandung 40132, Indonesia
2
Department of Accounting, Faculty of Economics and Communication, Bina Nusantara University,
Jakarta 11480, Indonesia
3
School of Management, Universiti Sains Malaysia, 11800 USM, Penang, Malaysia

ABSTRACT
This study aimed to examine the effect of firm characteristics and corporate governance
on the quality of management compensation disclosure in Indonesia. The adoption of
International Accounting Standards (IAS) 24 “Related Party Disclosures” in Indonesia in
2011 had required disclosures about key management compensation, which was not required
by the previous standard. The research was conducted by examining the top 100 listed
companies’ data that ranged between 2011 and 2014. Our findings suggest that institutional
ownership and firm size are positively associated with the disclosure level of management
compensation. We also found that the proportion of independent audit committee was
negatively associated with the level of management compensation disclosure. Finally, we
found no evidence that the audit quality had affected the level of management compensation
disclosure. Our research has shed light on the determinants of management compensation
disclosure in an emerging country with a two-tier board system where arguably the financial
reporting environment is opaquer than the more developed countries.
Keywords: Audit Committee, IAS 24, institutional ownership, management compensation

INTRODUCTION
ARTICLE INFO
Article history: Management compensation is an interesting
Received: 03 October 2019
Accepted: 12 March 2020 subject and has attracted many researchers
Published: 26 June 2020
especially those in the developed countries
E-mail addresses:
[email protected] (Ersa Tri Wahyuni) to explore this topic (Al-Shaer & Zaman,
[email protected] (Asangki Nindya)
[email protected] (Gatot Soepriyanto)
2019; Andjelkovic et al., 2002; Basu, 2007;
[email protected] (Ilya Avianti) Brunello et al., 2001; Grosse et al., 2017;
[email protected] (Zubir Azhar)
* Corresponding author Kaplan, 1998; Laing & Weir, 1999; Ma et

ISSN: 0128-7702
e-ISSN 2231-8534 © Universiti Putra Malaysia Press
 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

al., 2019; Unite et al., 2008). Mandatory and academic studies in Indonesia
disclosure on management compensation (Chou & Buchdadi, 2018; Darmadi,
has been regulated in many developed 2011; Kartadjumena & Rodgers, 2019).
countries such as the US (Conyon, 2011), Indonesia provides an attractive research
and the UK (Al-Shaer & Zaman, 2019). ground for this subject as it is among
Research on management compensation the emerging countries where financial
in emerging countries, however, remains reporting environment is relatively more
limited due to data availability issues opaque than developed economies with
(Darmadi, 2011; Utami & Kusuma, 2020). low market incentives for the preparers
Indeed, firms are reluctant to disclose to produce a good quality financial report
company information related to key (Ball et al., 2003; Lourenco, 2018). Thus,
management compensation as it could lead the new accounting standard’s requirement
to confidential proprietary information to disclose management compensation may
leakage (Aobdia, 2018; Donahue, 2008). be seen as an effort to improve the quality
Upon the decision to converge national of accounting information and transparency.
accounting standard with International However, the presence of the mandatory
Financial Reporting Standards (IFRS) in requirement to disclose management
2008, Indonesia had adopted International compensation does not necessarily guarantee
Accounting Standards (IAS) 24 “Related full compliance. Robinson et al. (2011)
Party Disclosures” in 2011 into its local reported the disclosure deficiency amongst
standard of Pernyataan Standar Akuntansi 336 US firms as identified by the Securities
Keuangan (PSAK) 7. The standard and Exchange Commission (SEC) after
requires the disclosure of key management mandatory disclosure of management
compensation and also the disclosure of compensation in 2006. Another study
related parties’ relationships, transactions by Alfijri et.al (2014) reported that the
and balances, including commitments, mandatory disclosure rate of companies
in the financial statements. The level of in the UAE was only 57%. As such, it is
detail for management compensation reasonable to expect that the new accounting
disclosure is increased among Indonesian standard in Indonesia does not necessarily
listed companies after the adoption of IAS lead to full compliance amongst companies,
24 (Utama & Utama, 2014). This study especially in the early years of adoption.
aims to examine the effect of institutional Indeed, Indonesia’s level of disclosure on
ownership, audit committee, audit quality a firm’s governance is among the lowest in
and size to the disclosure of management ASEAN countries (Laksono, 2016). More
compensation among top Indonesian listed specifically, Laksono (2016) had reported
companies. that Indonesia ranked lowest among other
Top management compensation is a countries in ASEAN with the average index
very attractive subject both for legislators of Executive Director Remuneration and

746 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

Compensation Disclosure of 0.1900. The discussion section. Finally, we conclude the

highest score is Thailand with a value of paper and provide future recommendations
0.2728. While Malaysia is in the middle for future research.
with a value of 0.2206. These findings
implied that the corporate governance Literature Review
practice in Indonesia is still low compare Agency Theory. The agency theory is one
to other countries in ASEAN, especially of the theories underlying the study of the
in terms of management compensation extent of disclosure which explains the
disclosure. relationship between agent and principal.
On the other hand, management The agency relationship presented by
compensation needs to be disclosed Jensen and Meckling (1976) describes the
for several reasons. First, disclosure of contractual relationship that arises between
information on compensation for key one or more shareholders (principal) to
management is part of the principle of another party which is manager (agent),
good corporate governance and may assist where the agent is required to perform
the company to improve the governance. services on behalf of the principal and
Second, disclosure of the information is involves delegation of authority to the
required by shareholders as a tool for the agent in making business decisions. The
decision making process. Disclosure of principal acts as a provider of facilities
incomplete key management compensation and funds to run the company, while the
information will result in the commissioner’s agent is obliged to manage and execute
decision in granting compensation to key the corporate management function. In the
management uncontrolled (Donahue, supervisory function, the agent is obliged to
2008). As claimed by Donahue (2008), the report periodically to the principal for the
absence of key management compensation business he or she has undertaken. While
information disclosure would result in the the principal has to assess the performance
risk of an outrage cost (key management of agents through financial statements
compensation exceeding the prescribed submitted.
limit). Principle-agent model explains
The remaining of our paper is structured the reason for complex management
as follows. The ensuing section reviews the compensation such as share options and
literature which has guided for us to develop performance bonus, instead of just a flat
research hypotheses. We then describe the salary (Gayle et al., 2018). Management
research methodology adopted for this compensation mix is designed to motivate
study before presenting the results derived the agent in increasing the principle’s
from the statistical tests performed. Such value. The literature on agency theory and
results are related to the extant literature in executive compensation over the last two
which further elaboration is presented in the decade has argued that CEO compensation

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 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

should be aligned to firm performance reduce agency conflict by controlling the

(Grossman & Hart, 1992; Holmstrom, management through an effective monitoring
2000; Jensen & Murphy, 1990). It is by process. The percentage of certain shares
disclosing management compensation that owned by an institution can affect the
the information asymmetry may be reduced process of preparing the financial statements,
due to the agency problem, especially for which does not rule out the existence of
minority investors. accruals in the interests of the management
(Birt et al., 2019; Kusumaningtyas et
Corporate Governance. Corporate al., 2019). The institutional investors’
governance has attracted the attention of impact on corporate management can be
academic researchers and business world in significant and used to align management
recent years after the financial crisis of 2008 interests with shareholders or reduce agency
(Grosse et al., 2017; Ma et al., 2019; Ng et conflicts. The relatively large percentage of
al., 2016). According to the International institutional share ownership may affect the
Auditing and Assurance Standards Board disclosure of company reporting through
(2013), governance describes the role the General Meeting of Shareholders
of the person(s) or organization(s) with (GMS). Rachmawati and Triatmoko (2015)
responsibility for overseeing the strategic stated that corresponding to the monitoring
direction of the entity and obligations function, institutional investors were
related to the accountability of the entity. A believed to have more capability to monitor
good corporate governance system should management actions better than individual
provide effective protection of security in investors. Institutional investors have better
getting a higher return on investments for resources than individual investors, such
all shareholders, be it creditors or minority as experts to analyze investments, greater
shareholders (Bhaumik et al., 2019; Ng et capital, and more sophisticated equipment.
al., 2016). Furthermore, Ng et al. (2016) This is why institutional ownership is used
stated that with the structured mechanisms in this research as a proxy for corporate
in place, it would directly or indirectly shape governance, it can reduce agency conflict
the corporate governance system to enforce by improving the quality of corporate
these rules more effectively in any country. governance.

Institutional Ownership. Institutional Independent Audit Committee. Corporate

ownership is defined as shares ownership governance has an important role to
by parties in the form of institutions such mitigate the negative effect of related
as insurance companies, banks, investment party transaction to the accounting quality
companies, and other parties related to (Hasnan et al., 2016). Audit committees
institutional ownership. Institutional are formed to assist the commissioners in
ownership is a tool that can be used to carrying out their duties related to internal

748 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

control, financial reporting, and corporate Firm Characteristics. In this study, the
behaviour standards. The audit committees firm characteristic is represented with
are expected to improve the quality of audit quality and firm size. Based on
financial reporting, ensuring that directors research conducted by Aljifri et al (2014),
make decisions based on accounting policies, these characteristics were selected on the
practices and disclosures, reviewing the basis that they met the following three
scope and results of internal and external preconditions: (1) the variable encompasses
audits, and overseeing the financial reporting sound theoretical reasons for explaining
process. By having an effective audit the association between the variable and
committee, commissioners can escalate corporate disclosure, (2) the variable is
the quality of financial reporting. Also, the relevant to the socio-economic environment
audit committee assists the commissioners of Indonesia; and (3) sufficient data about
to carry out their duties and responsibilities the variable was available. An auditor
to oversee the company’s internal controls, can be the mechanism for controlling
resolve the audit issues, and allow the the behaviour of management, thus it’s
commissioner time to focus more on other characteristics. The auditing process has
issues. This is why an independent audit an important role in reducing agency costs
committee is used in this research as a proxy by limiting the opportunistic behaviour of
for corporate governance, it can reduce management. This is why audit quality is
agency conflict by improving the quality of used as a proxy for firm characteristics.
corporate governance. Disclosing detailed information is costly,
Based on the Decision of the Chairman and thus may not be affordable for small
of Bapepam and LK Number: Kep-643/ firms, large firms are usually diverse in the
BL/2012 on the Establishment and Guidance scope of their business, the types of products
of the Implementation of the Work of the and geographical coverage (Aljifri et al.,
Audit Committee is arranged the subjects 2014). Furthermore, a considerable amount
about audit committee. Audit Committee of information is required for management
membership consists of at least three purposes and can be generated internally.
members, and one of them is an independent This is why firm size is also used as a proxy
commissioner who also doubles as chairman for firm characteristics.
of the committee. Other members are
independent external parties of which at Audit Quality. An auditor can be the
least one of them has accounting and/or mechanism for controlling the behaviour
finance capabilities. Furthermore, a prior of management. The auditing process has
study suggested that independent audit an important role in reducing agency costs
committee members would ensure higher by limiting the opportunistic behaviour of
quality financial reporting (Lary & Taylor, management. Auditing process by external
2012). auditors verify the claim made by the agent

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 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

and ensure the shareholders that the numbers argued that the size of the company had a
presented in the financial statements are significant association with the company’s
fair. Public accountants as external auditors disclosure (Probohudono et al., 2013).
who are relatively more independent
of management than internal auditors Management Compensation. Motivating
have so far been expected to minimize the agent to act in the principal’s interest is
profit engineering cases and improve the the key challenge arising from the separation
credibility of accounting information in of ownership and control. The main
financial statements (D’Angelo, 1981; instrument to encourage management to
Jordan et al., 2017). Big accounting firms act for the wealth of shareholders is through
have attracted a much larger fee than the compensation contract. The disclosure of
small firms as the big accounting firms management compensation increases the
signalled a better audit quality (Fung et al., trust of the investors (Seow et al., 2019).
2019). The auditor’s quality dimension most Management compensation disclosure has
frequently used in research is the size of the been required and used by the regulators as
public accounting firm because the firm’s the mean to improve corporate governance.
reputation is considered as the most relevant Market regulators have demanded more
to proxy audit quality (Challen & Siregar, disclosure requirements for top management
2017; Jiang et al., 2018; Jordan et al., 2017). as part of the corporate governance reform.
For example, is the requirement by the
Firm Size. Firm size is a description of the US SEC in 2017 for public companies to
size of a company. Sudarmadji and Sularto disclose the ratio of CEO’s compensation to
(2007), argued that the size of the company the median compensation of its employees
reflected in total assets, total sales or market (Securities and Exchange Commission,
capitalization. The greater the total assets, 2015). US SEC has required disclosure
sales and market capitalization owned by for management compensation since the
the company, the greater the size of the 1970s and evolves (Espahbodi et al., 2016).
company. Of the three measurements, the However, in Indonesia, mandatory disclosure
relative asset value is considered to have for top management compensation is
a higher level of stability than the total required since 2011 with the adoption of
sales and market capitalization value in IAS 24.
determining the size of a company. The
large company arguably will provide more Hypotheses Development
disclosures than a smaller company. Wider Management compensation disclosure as an
disclosure indicates that companies have instrument to reduce the agency problems
applied the principles of good corporate has also been used by the regulator to
governance which also may reduce the improve the corporate governance of the
asymmetry information. The previous study companies. The company’s with better

750 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

corporate governance attract more trust Indonesia Stock Exchange (IDX). This study
from the shareholders by disclosing their chose Kompas 100 because the selected
top management compensation (Seow company had large market capitalization
et al., 2019). Thus we are interested to values, also had good fundamentals and
investigate if the corporate governance of performance. Thus companies in Kompas
the companies is associated with the level 100 index supposedly have better financial
of management compensation disclosure. reporting quality, bigger remuneration, and
The firm’s characteristics as proxied by the better corporate governance. Secondary data
firm’s size and audit’s quality may also be is employed in this research to be analyzed.
associated with the level of management This study used the data presented in the
compensation disclosure. Considering the published corporate financial statements
preceding discussion, we formulate our obtained from the IDX website (www.
hypothesis as follow: idx.co.id) or the official website of each
H 1: I n s t i t u t i o n a l o w n e r s h i p i s company. These archival data were collected
associated with the level of management from 2011 to 2014 (time series) as well
compensation disclosure. as cross-section as it includes several
H2: The independent Audit Committee is companies with diverse industries. With
associated with the level of management time-series data and cross-section in this
compensation disclosure. research then used pooling data or panel
H3: Audit quality is associated with data.
the level of management compensation
disclosure. Population and Sample
H4: The firm size is associated with The populations in this research were all
the level of management disclosure companies listed on the Indonesia Stock
compensation. Exchange and included in Kompas 100 in
2011-2014. The sample used in this research
MATERIALS AND METHODS was chosen by the purposive sampling meet
Research Design and Sources of Data the following criteria:
This research used Logit Regression to (i) All companies listed in Indonesia
test the previously formulated hypotheses Stock Exchange (BEI) in 2011-
about the effect of ownership structure, 2014 and included in Kompas 100.
independent audit committee, audit quality (ii) Companies are included in Kompas
and company’s size on the extent of key 100 in 2011-2014 consistently
management compensation disclosures in (iii) The company has submitted/
companies registered in Kompas 100. The published annual financial reports
Kompas100 Index is a stock index of 100 and annual reports that have
shares of public companies traded on the been audited regularly and have
complete financial data as required

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 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

by this research and can be accessed The extent of disclosure of key

through the internet management compensation in the company’s
(iv) The company has an independent financial statements is measured using
institutional shareholder and scores as in previous studies conducted by
independent audit committee from Akmyga and Mita (2015), and Astasari and
outside the company. Nugrahanti (2015). The disclosure score is
Based on these criteria, 212 observations divided into five namely:
in 5 years (2011-2014) were used as research (i) A score of 0 is given if the firm
samples. does not disclose key management
compensation in the financial
Research Model statements
To test the hypothesis, this study employed a (ii) Score 1 is given if the company only
logit regression technique with the following presents total compensation without
empirical model: a description of reward categories
(iii) Score 2 is given when the company
discloses the total compensation of
𝐶𝑂𝑀𝑃𝐷𝐼𝑆𝐶𝑖,𝑡 = 𝛼 + 𝛾1 𝐼𝑁𝑆𝑇𝑂𝑊𝑁𝑗,𝑖,𝑡
each commissioner and director
+ 𝛾2 𝐴𝑈𝐶𝑂𝑀𝑗,𝑖,𝑡 (iv) Score 3 is given when the company
+ 𝛾3𝐴𝑈𝑄𝑈𝐴𝐿𝑗,𝑖,𝑡 discloses the total compensation
by providing a description/reward
+ 𝛾4 𝑆𝐼𝑍𝐸𝑗,𝑖,𝑡 + 𝜀 category
(v) Score 4 is given when the company
Note:
discloses the total compensation
COMPDISCi = a broad level of disclosure
and provides details of sub amounts
of key management compensation in the
per category of employee benefits.
company’s financial statements i. The
disclosure level than divided into high The operational definition of each
and low disclosure to differentiate the independent variable used in this study is
level. The firm will be given 1 if the described as follows:
disclosure score is equal 4, and 0 if the (a) I n s t i t u t i o n a l O w n e r s h i p
disclosure score is 0, 1, 2 or 3. (INSTOWN). This variable is
I N S TO W N i = p r o p o r t i o n o f t h e measured by using the percentage
company’s institutional ownership i of the number of shares owned by
AUCOMi = the proportion of the institution from all share capital
independent audit committee members of the company in circulation
from outside the company (Bangun et al. as cited in Astasari
AUQUALit = quality audit company i & Nugrahanti, 2015).
in year t. (b) Independent Audit Committee
SIZEi = firm size i (AUCOM). This variable is

752 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

measured using the ratio of the size of the company is by the natural
number of independent audit logarithm of the company’s total
committee members to the total assets at the end of the year.
number of audit committee
members present in the company RESULTS AND DISCUSSION
(Mujiyono & Nany, 2010). Descriptive Statistics
(c) Audit Quality (AUQUAL). Audit
Figure 1 shows that in general the disclosure
Qualityit is the quality of corporate
of management compensation in Indonesia
audit i in year t. Following
was improving over the years from 2011 to
DeAngelo (1981), audit quality can
2014. Companies with a score of 1 resulted
be measured by a public accounting
a significant decreasing in number from
firm’s size. Audit Quality is coded
2011 to subsequent years. The number of
1 if the company is audited by Big
companies with score 2 and score 3 did not
4 and is 0 if it is not audited by Big
seem to decrease and increase significantly.
4.
There was a significant increase in the
(d) Firm Size (SIZE). Firm size is a
number of companies with a score of 4 from
scale that determines the size of the
2011 to the next year. This indicates that
company that can be reviewed from
the extent of disclosure of key management
the value of equity, sales value, the
compensation in the financial statements of
number of employees and the total
the company is increasing.
value of assets which is a context
Table 1 presents the descriptive statistics
variable that measures the demands
for the dependent variable (COMPDISC)
of service or product organization
and the independent variables (INSTOWN,
(Kusnia, 2013). Following Minnick
AUCOM, AUQUAL and SIZE). From the
and Noga (2010) in measuring the
table, it can be seen that on average, firms in

30

25
Score 1
20 Score 2
15 Score 3
Acore 4
10

0
2011 2012 2013 2014

Figure 1. The quality of management compensation disclosure

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 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

Table 1
Descriptive statistics

N Mean SD Q1 Median Q3
COMPDISC 212 0.44 0.5 0 0 1
INSTOWN 212 70.53 21.29 55.88 71.46 90.24
AUCOM 212 0.60 0.12 0.50 0.67 0.67
AUQUAL 212 0.76 0.43 1 1 1
SIZE 212 13.46 0.56 13.07 13.34 13.77
Notes: COMPDISC= management compensation disclosure level. A firm with high disclosure (i.e., disclosure
score = 4) is coded 1 and 0 otherwise; INSTOWNn= the percentage of institutional ownership; AUCOM =
the percentage of the independent audit committee in the board; AUQUAL= audit quality, represents 1 if a
firm is audited by Big 4 audit firm, and 0 otherwise; SIZE= natural log of total assets.

our sample had 44% of high-level disclosure presented in the upper and lower diagonal
in key management compensation. The of Table 2 respectively. COMPDISC is
average (median) institutional ownership positively correlated with INSTOWN,
(INSTOWN) in our sample was 70.53% AUQUAL AND SIZE (p<0.05, Pearson and
(71.46%), suggesting that the majority Spearman Correlations) suggesting that as
of firms in our sample were owned by institutional ownership, audit quality and
institutional shareholders. Next, the average size increase, compensation disclosure
(median) of audit committee proportion also increased. COMPDISC, however, is
from an independent party (AUCOM) in our negatively correlated with AUCOM (p<0.05,
sample was 60% (67%). Further, firms in our Pearson and Spearman Correlations)
sample, on average, 76% were audited by suggesting that as the number of independent
Big Four audited firms (AUQUAL). Finally, audits committee member increased, the
the mean of SIZE as a proxy of firm size was extent of compensation disclosure decreased.
13.46 (median=13.34). the correlation statistics generally indicate
that compensation disclosure increased
Correlation Statistics with INSTOWN, AUQUAL, SIZE and
Pearson and Spearman correlations between decrease with AUCOM. Finally, the highest
the dependent and independent variables are correlation observed in Table 2 was between

Table 2
Correlation matrix

COMPDISC INSTOWN AUCOM AUQUAL SIZE VIF

COMPDISC 0.39* -0.29* 0.17* 0.31* 1.28
INSTOWN 0.40* -0.12 0.27* 0.37* 2.10
AUCOM -0.28* -0.11 -0.27* -0.26* 1.72
AUQUAL 0.20* 0.23* -0.26* 0.37** 2.34
SIZE 0.31** 0.34* -0.23* 0.37* 3.82
Correlations: Pearson (Spearman) Correlations are Presented in the Upper (Lower) Diagonal.
Notes: * significant at 1 percent level ** significant at 5 percent level

754 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

COMPDISC and INSTOWN (0.40, Pearson that the increase in the audit committee
Correlation, significant at the 1% level). proportion will lead to a decrease in the
In testing for potential multicollinearity, level of key management disclosure. Next,
the highest variance inflation factor (VIF) the result for AUQUAL revealed that
scores relate to SIZE (3.82), which was the coefficient was negative (-0.119) but
lower than the conservative threshold of 10 not significant at any conventional level
beyond which multicollinearity concerns (z-statistic=-0.280). It suggests that the audit
could arise among independent variables quality does not affect the level of disclosure
(Kennedy, 1992). on key management compensation. The
result for SIZE as independent variable
Logit Regression Results showed that the coefficient was negative
Table 3 reports the results from the estimation (-0.949) and significant at 5% level
of empirical model, which regresses the level (z-statistic=-2.830). It suggests a larger
of key management compensation disclosure firm will be more likely to disclose more
on independent variables (INSTOWN, on key management compensation. Finally,
AUCOMM, AUQUAL, and SIZE). The the pseudo-R-squared values from the
result based on INSTOWN as independent regression specifications reported in Table
variable revealed that the coefficient was 3 indicated that the explanatory variables
positive (0.046) and significant at 1% level collectively explained around 22.48% of
(z-statistic=-4.98). This result suggests that the total variation in the decision of firms
as institutional ownership increases the to disclose more or less of key management
level of key management compensation compensation. This table presents results
disclosure will also increase. The result from the estimation of empirical model,
for AUCOM shows that the coefficient which regressed the high level of disclosure
was negative (-3.369) and significant at (COMPDISC) on independent variables
the 5% level (z-statistic=-2.38). It suggests (INSTOWN, AUCOM, AUQUAL and SIZE).

Table 3
Logit regression results
Robust
Variable Coefficient z-Statistic Prob.
Std. Error
INSTOWN 0.046 0.009 4.980* 0.000
AUCOM -3.369 1.414 -2.380** 0.017
AUQUAL -0.119 0.422 -0.280 0.778
SIZE 0.949 0.335 2.830** 0.005
C -14.231 4.528 -3.140 0.002
Pseudo R2 0.2248
N 212
Notes: * significant at 1% level ** significant at 5% level

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 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

DISCUSSION banks, investment companies, and other

This study tested four hypotheses if parties related to institutional ownership.
institutional ownership (INSTOWN), Institutional shareholders gain more benefit
audit committee (AUCOM), audit quality than individual investors, especially major
(AUQUAL) and firm size (SIZE), had institutional shareholders or above 5%.
a significant effect on the management Institutional investors arguably have better
compensation disclosure. The study found resources than individual investors, such
that institutional ownership, audit committee as experts to analyze investments, greater
and firm size had a significant effect on the capital, and more sophisticated equipment.
management compensation disclosure. Large institutional shareholders are assumed
Institutional ownership arguably can to have long-term investment orientation
be used in reducing agency conflict by which immediately affects their higher
controlling the management through an concern toward the development of the
effective monitoring process. Percentage company by monitoring the company. The
of certain shares owned by the institution relatively large percentage of institutional
may affect the process of preparing share ownership may affect the disclosure
financial statements that do not rule out of company reporting through the General
any actualization according to the interests Meeting of Shareholders (GMS). Effective
of the management (Birt et al., 2019; Hanafi monitoring processes by institutional
& Setiawan; 2018; Kusumaningtyas et al., shareholders can influence the process of
2019). By the intervention of institutional preparing financial statements, including
stakeholders, it is expected that greater key management compensation disclosures.
disclosure of the extent in key management The general purpose of establishing
compensation will be better. audit committees, among others, is to
The institutional ownership variable has improve the quality of financial reporting,
a significant positive effect on the extent of ensuring that directors make decisions
disclosure of key management compensation based on accounting policies, practices
on the results of this study. This is in contrast and disclosures, reviewing the scope and
to Astasari and Nugrahanti (2015) research results of internal and external audits,
findings that institutional ownership and overseeing the financial reporting
had a significant negative impact on the process. With an effective audit committee,
extent of disclosure of key management commissioners can improve the quality
compensation in the financial statements. of financial reporting. The results of this
Institutional share ownership has proven to study indicate that the audit committee
improve the quality of corporate information has a negative and significant association
disclosure. Institutional ownership defined with the key disclosure of key management
as share ownership by parties in the form of compensation. This result is differing
institutions such as insurance companies, from the previous research conducted by

756 Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020)
 Management Compensation Disclosure

Astasari and Nugrahanti (2015) which statements more widely. Akmyga and Mita
found that the audit committee had no (2015) stated that the public accounting
effect on the extent of disclosure of key firm measures had a significant effect on
management compensation in the financial the extent of disclosure of key management
statements. Mujiyono and Nany (2010) compensation in the financial statements. It
also found that the audit committee did is important to note that the Non-Big 4 Public
not affect the area of voluntary disclosure. Accounting Firms in this research were PKF
Similarly, the results of Wulandari and International, Moore Stephens, Mazars,
Budiartha (2014) showed that the audit HLB International, BDO International,
committee did not affect the integrity of the RSM International, DFK International, and
financial statements. This signifies the role others. The Public accounting firm is an
of independent audit committee members internationally affiliated Public accounting
has not been effective in improving the firm, which has good credibility. This shows
quality of corporate financial statement that the Non-Big 4 also has the same good
disclosure. The more independent members audit quality as big 4, so there might be
of the audit committee disclose financial no significant difference in audit quality
statements declining in quality. The many between Big 4 and Non-Big 4 Public
parties who give opinions/suggestions to Accounting Firm.
improve the quality of financial statement The results of this study indicate that
disclosure, even make the inputs, are not firm size variable provides a positive and
executed maximally, because it is not significant effect on the extent of disclosure
focused on one/two input only. of key management compensation. This
Further, the results of this study may occur due to the increasingly stringent
indicate that audit quality measured by regulations and public scrutiny make the
a public accounting firm’s size does not company try to keep its reputation more
affect the extent of disclosure of key transparent, especially for large companies,
management compensation in the financial as they are more visible and under greater
statements. That is, firms audited by Big scrutiny from the stakeholders. The result of
4 and Non-Big 4 firms provided the same this study is aligned with previous studies
extent on key management compensation such as Omar and Simon (2011), Agca and
disclosure. The results of this study are not Onder (2007), and Alsaeed (2006), which
in line with previous research conducted indicated that firm size had a significant
by Basset et al. (2007), DeAngelo (1981), effect on the disclosure of the company’s
Nelson and Percy (2005), Wang and Chen financial statements. However, this study
(2004) that companies audited by large is in contrast with the finding of Jaafar et
public accounting firms (Big 4) might al. (2014) who found firm size harmed the
disclose mandatory information in financial director’s remuneration disclosure.

Pertanika J. Soc. Sci. & Hum. 28 (2): 745 - 762 (2020) 757
 Ersa Tri Wahyuni, Asangki Nindya, Gatot Soepriyanto, Ilya Avianti and Zubir Azhar

CONCLUSIONS ACKNOWLEDGEMENT
This study aimed to examine the effect We appreciate the funding support from
of firm characteristics and corporate Academic Leadership Grant of Universitas
governance on the quality of management Padjadjaran for this research and comments
compensation disclosure in Indonesia. Using from the reviewer and audience in the 5th
212 firm-year observations in four years International Conference on Management,
after mandatory disclosure of management Hospitality, Tourism and Accounting
compensation in 2011, we documented some (IMHA) Conference 2018. We would like
evidence that institutional ownership and also to thank our research assistant Pera
firm size were positively associated with Yulianingsih for her assistance.
the disclosure level of key management
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