Title: Outside director compensation and earnings quality
Authors: Chan Du; Ting-Ting Lin
Charlton College of Business, University of Massachusetts, Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747, USA
School of Accountancy, Ohio University, Copeland 522, Athens, OH 45701, USA
Abstract: We examine the impact of outside director compensation on firm's financial reporting quality. Prior studies on outside board directors show mixed results on the impact of outside director compensation on earnings quality (Perry, 1999; Bryan and Klein, 2004; Cullinan et al., 2008; Archambeault et al., 2008; Magilke et al., 2009). We find that total compensation and the portion of equity-based compensation to total compensation are positively related to earnings quality. In addition, independent board leadership enhances the relation between outside director's equity-based compensation and earnings quality. These results suggest that increasing outside director compensation provides stronger incentive to board monitoring and ensures the quality of earnings, which is consistent with optimal contracting hypothesis. Lastly, we find that a greater portion of outsider directors on both the board overall and the audit committee actually hinders the incentive effect of the high compensation to quality of earnings.
Keywords: outside directors; director compensation; earnings quality; independent board leadership; optimal contracting hypothesis; financial reporting quality; equity-based compensation; board monitoring.
Int. J. of Accounting and Finance, 2015 Vol.5, No.3, pp.205 - 229
Date of acceptance: 01 Sep 2015
Available online: 09 Mar 2016