Equity-based Compensation of Outside Directors and Corporate Disclosure Quality

42 Pages Posted: 7 Jun 2011 Last revised: 3 Dec 2014

See all articles by Partha Sengupta

Partha Sengupta

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: December 1, 2014

Abstract

We examine the relation between a firm’s disclosure quality and equity-based compensation of independent members of the board of directors. The dimensions of disclosure quality we focus on are management’s earnings guidance and information flow through financial analysts. Using both levels and changes specifications, we find the average ratio of equity-based pay to total pay of independent board members to be positively related to a firm’s disclosure quality. Our findings are robust to the inclusion of management's equity-based compensation, other governance measures, and financial controls, and robust to instrumental variable tests of endogeneity. Furthermore, we find directors' equity-based compensation to be negatively associated with the firm's cost of equity capital. Our results are consistent with equity-based compensation providing incentives to independent directors to push for better disclosure quality.

Keywords: Outside Director Compensation, Disclosure Quality, Equity-based Compensation, Management Forecasts, Cost of Capital

JEL Classification: M41, G30

Suggested Citation

Sengupta, Partha and Zhang, Suning, Equity-based Compensation of Outside Directors and Corporate Disclosure Quality (December 1, 2014). Available at SSRN: https://ssrn.com/abstract=1858862 or http://dx.doi.org/10.2139/ssrn.1858862

Partha Sengupta (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Mail Stop 6E-3
Washington, DC 20219-0001
United States
202-679-5525 (Phone)

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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