Board Committees, CEO Compensation, and Earnings Management
Vienna University of Economics and Business Administration
University of Texas at Austin - Department of Accounting
November 5, 2008
Accounting Review, Vol. 84, No. 3, 2009
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, M43Accepted Paper Series
Date posted: November 13, 2008 ; Last revised: May 20, 2009
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