AGENCY CONFLICT OF FREE CASH FLOW ON EXECUTIVE COMPENSATION AND THE ROLE OF INSTITUTIONAL OWNERSHIP

Abstract

The study was to examine the effect of free cash flow and company performance on executive compensation with institutional ownership as a moderating variable. Executive compensation is an issue of fierce debate, making it a continuously interesting object to study. The sample was manufacturing companies listed on the Indonesia Stock Exchange for the 2016-2020 period selected using the purposive sampling technique. A sample of 147 companies was selected for 5-year period of data collection, resulting in 509 pooled data. The free cash flow variable was measured using the Ross’ (2013) measure, executive compensation was measured by overall compensation received by managers, company performance was measured by return on investment (ROA), and institutional ownership was measured by the institutions’ shareholding. Data were analyzed using multiple linear regression modified with moderating variables. Results showed that free cash flow and company performance had a positive effect on executive compensation. Institutional ownership was capable of moderating the positive effect of company performance on executive compensation, while the effect of free cash flow on executive compensation was not significant.

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