Audit Committee Stock Options and Financial Reporting Quality after the Sarbanes-Oxley Act of 2002

Posted: 3 Oct 2011 Last revised: 20 May 2015

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

James C. Hansen

Weber State University Goddard School of Business and Economics

Chad Simon

Utah State University - School of Accountancy

Jason L. Smith

University of Nevada, Las Vegas

Abstract

The Sarbanes-Oxley Act (SOX) and its associated regulations significantly expanded the oversight role of audit committees and improved independence, but regulators bypassed restrictions on audit committee equity incentives. We examine the association of audit committee members' equity incentives and financial reporting quality in the post-SOX time period. We find that audit committee members' stock-option awards and holdings are positively associated with the likelihood of meeting/beating analyst earnings forecasts. On average, a company whose audit committee holds the mean value of exercisable option holdings is associated with a 10.0 percent increase in the likelihood of meeting or just beating its consensus analyst forecast. This effect increases to 17.8 percent for companies with high-growth opportunities. These results suggest that — even in the post-SOX era — the stock-option incentives provided to independent audit committee members are associated with reduced financial reporting quality.

Keywords: audit committee quality, financial reporting quality, independence, financial reporting oversight

Suggested Citation

Campbell, John L. and Hansen, James C. and Simon, Chad A. and Smith, Jason L., Audit Committee Stock Options and Financial Reporting Quality after the Sarbanes-Oxley Act of 2002. Campbell, J.L., J. Hansen, C.A. Simon, and J.L. Smith. “Audit Committee Stock Options and Financial Reporting Quality after the Sarbanes-Oxley Act of 2002” Auditing: A Journal of Practice and Theory 34 (2): 91-120.. Available at SSRN: https://ssrn.com/abstract=1937170 or http://dx.doi.org/10.2139/ssrn.1937170

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

James C. Hansen

Weber State University Goddard School of Business and Economics ( email )

1337 Edvalson St. Dept 3803
Ogden, UT 84408
United States
801-626-6433 (Phone)

Chad A. Simon

Utah State University - School of Accountancy ( email )

School of Accountancy
Jon M. Huntsman School of Business
Logan, UT 84322-3540
United States

Jason L. Smith (Contact Author)

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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