Abstract
Incentive theory states that tournament incentives facilitate competition between senior executives, and that only the best will receive large monetary rewards, as well as a superior position in the corporate hierarchy. The purpose of this study was to investigate the effect of tournament incentives on the possibility of fraud in the financial statements of manufacturing companies listed on the Indonesian stock exchange. This study tested 63 data obtained from 7 companies for 6 consecutive years. The data analysis technique in this study used SEM-PLS analysis using the WarpPLS 5.0 software . The results of this study indicate that tournament incentives have a positive effect on the possibility of fraud in financial statements. The greater the level of competition to get a certain position, the greater the possibility of fraud in the financialstatements.
Highlights
Jensen and Meckling state that agency theory refers to managers tend to be more concerned with personal goals than company goals, namely maximizing the value obtained by shareholders, this is what underlies the conflict between managers and shareholders
The theory of tournaments was developed by Lazear and Rosen [1] which was later expanded by Rosen [1]. This theory states that tournament incentives facilitate competition between senior executives, and that only the best will receive large monetary rewards, as well as a superior position in the corporate hierarchy
Several studies such as that conducted by [3] show that tournament incentives can lead to greater managerial risk taking, Harbring and Irlenbusch found that tournament incentives can lead to a higher tendency for errors in financial reporting, in addition to it causes fraud in finance[4]
Summary
Jensen and Meckling state that agency theory refers to managers tend to be more concerned with personal goals than company goals, namely maximizing the value obtained by shareholders , this is what underlies the conflict between managers and shareholders. Incentives tournament lead senior executives tend to be tempted to commit unethical conduct in carrying out his work, so the effect on stock prices in the future will come. Competition for high incentives makes senior executives work harder so that it has a positive impact on company performance. This is supported by a recent study conducted by Sun et al [2] show that tournament incentives have a negative effect on the risk of falling share prices. Senior executives who are members of the competition will strive to improve their performance, so that it will affect the performance and share price of the company Based on these two different research results, the researcher wanted to investigate further. The greater the level of competition to get a certain position, the greater the possibility of fraud in the financial statements
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