Outside Director Independence, Auditor Independence and Executive Cash Bonus Compensation

44 Pages Posted: 6 Dec 2009 Last revised: 14 Feb 2010

See all articles by Christoph Watrin

Christoph Watrin

University of Muenster - Accounting Center; University of Muenster - Accounting Center

Christiane Pott

University of Muenster

Tobias Tebben

University of Muenster - Accounting Center

Date Written: December 4, 2009

Abstract

This paper examines the association between managers’ cash bonuses and discretionary accounting choices in a sample of German stock corporations from 2005 to 2007. We investigate managers’ earnings management behavior with respect to their bonus compensation and the independence of outside directors and auditors in mitigating potential bonus-increasing accounting choices by managers. In line with prior research, auditor independence is proxied by the amount of non-audit service fees received, whereas outside director independence is captured by whether outside directors receive earnings-based bonuses. We find that positive discretionary accruals are more strongly associated with executive cash bonuses if the independence of outside directors or external auditors is impaired. Overall, our results suggest that the effectiveness of monitoring institutions depends on the monetary incentives in place.

Keywords: discretionary accruals, earnings management, executive compensation, auditor independence, outside director, bonus

JEL Classification: M40, M41

Suggested Citation

Watrin, Christoph and Watrin, Christoph and Pott, Christiane and Tebben, Tobias, Outside Director Independence, Auditor Independence and Executive Cash Bonus Compensation (December 4, 2009). Available at SSRN: https://ssrn.com/abstract=1518317 or http://dx.doi.org/10.2139/ssrn.1518317

Christoph Watrin

University of Muenster - Accounting Center ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

University of Muenster - Accounting Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

Christiane Pott

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Tobias Tebben (Contact Author)

University of Muenster - Accounting Center ( email )

Universitaetsstr. 14-16
Muenster, 48143
Germany

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