Purpose: Manager’s cash compensation is the most representative means provided as an incentive to harmonize the interests of shareholders and agents. One of the earnings management measures caused by management’s intervention in artificial financial reporting is book-tax differences. The purpose of this study is to analyze the effect of managerial compensation on the difference between the profit of financial reporting and the profit of tax reporting. Research design, data, and methodology: This study analyzed the relationship between managers cash compensation and earnings quality through book-tax differences. In this study, 6,691 firms and the year were analyzed for securities market and KOSDAQ market. Results: As a result of analysis, managers’ compensation was measured as cash compensation of registered executives. As a result, there was a significant negative relationship between manager compensation and book-tax differences. This implies that as the level of cash compensation increases, the earnings quality decreases. In the case of non-registered executives’ cash compensation, there was a significant negative relationship in the securities market, but not in the KOSDAQ market. Finally, in the case of managers overpayment, the higher the level of overpayment, the smaller the difference between book-tax differences. Implications: This study is an empirical analysis of the relationship between managerial compensation, book-tax differences, and contributes to the result that management cash compensation can play a good role on conflict of shareholders and agents.
Hwang et al. (Sat,) studied this question.
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