Are Independent Audit-Committee Members Objective? Experimental Evidence

40 Pages Posted: 30 Jun 2009 Last revised: 1 Jul 2009

See all articles by Matthew J. Magilke

Matthew J. Magilke

Claremont McKenna College - Robert Day School of Economics and Finance

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Joel Pike

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: March 11, 2009

Abstract

We use experimental markets to examine stock-based compensation's impact on the objectivity of participants serving as audit committee members. We compare audit committee member reporting objectivity under three regimes: no stock-based compensation, stock-based compensation linked to current shareholders, and stock-based compensation linked to future shareholders. Our experiments show that student participants serving as audit committee members prefer biased reporting when compensated with stock-based compensation. Audit committee members compensated with current stock-based compensation prefer aggressive reporting, and audit committee members compensated with future stock-based compensation prefer overly conservative reporting. We find that audit committee members who do not receive stock-based compensation are the most objective. Our study suggests that stock-based compensation impacts audit committee member preferences for biased reporting, suggesting the need for additional research in this area.

Keywords: Audit Committee, Stock Compensation, Independence

JEL Classification: J33, M41, M43, M49, G34

Suggested Citation

Magilke, Matthew J. and Mayhew, Brian W. and Pike, Joel, Are Independent Audit-Committee Members Objective? Experimental Evidence (March 11, 2009). Accounting Review, Vol. 84, No. 6, 2009, Available at SSRN: https://ssrn.com/abstract=1097714

Matthew J. Magilke

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

Joel Pike

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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