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Board Committees, CEO Compensation, and Earnings ManagementChristian LauxVienna University of Economics and Business Administration Volker LauxUniversity of Texas at Austin - Department of Accounting November 5, 2008 Accounting Review, Vol. 84, No. 3, 2009 Abstract: We analyze the board of directors' equilibrium strategies for setting CEO incentive pay and overseeing financial reporting and their effects on the level of earnings management. We show that an increase in CEO equity incentives does not necessarily increase earnings management because directors adjust their oversight effort in response to a change in CEO incentives. If the board's responsibilities for setting CEO pay and monitoring are separated through the formation of committees, the compensation committee will increase the use of stock-based CEO pay, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.
Keywords: corporate governance, executive compensation, earnings management, board oversight JEL Classification: G34, J33, M41, M43 Accepted Paper SeriesDate posted: November 13, 2008 ; Last revised: May 20, 2009Suggested Citation |
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