The Impact of Independent and Overlapping Board Structures on CEO Compensation, Pay-Performance Sensitivity and Earnings Management

Quarterly Journal of Finance and Accounting, Forthcoming

37 Pages Posted: 8 Mar 2012 Last revised: 29 Aug 2012

See all articles by Jui-Chin Chang

Jui-Chin Chang

Texas A&M International University

Huey-Lian Sun

Morgan State University - Department of Accounting and Finance

Mi (Meg) Luo

Villanova University

Date Written: March 8, 2012

Abstract

Due to the Sarbanes-Oxley Act (SOX), new rules that require independent directors on corporate boards and committees are likely to create overlapping board structures (when a director serves on more than one committee). The purpose of this study is to examine the effects of independent and overlapping board structures on CEO compensation, CEO pay-performance sensitivity, and accrual management. Our results support Laux and Laux (2009) that overlapping compensation committees take conservative actions by granting CEOs less equity-based compensation to reduce the monitoring cost of financial reporting. However, contrary to Laux and Laux (2009), we do not find that overlapping compensation committees have any effect on CEO pay-performance sensitivity. Furthermore, our results show that SOX might reduce risk taking because independent compensation committees grant CEOs more cash-based and less equity-based compensation after SOX. In addition, although SOX improves the audit committee’s oversight functions, our findings support Laux and Laux (2009) that overlapping audit committees have an association with accruals management.

Keywords: corporate governance, independence of boards and committees, overlapping board structure, CEO compensation, discretionary accruals, earnings management

Suggested Citation

Chang, Jui-Chin and Sun, Huey-Lian and Luo, Mi, The Impact of Independent and Overlapping Board Structures on CEO Compensation, Pay-Performance Sensitivity and Earnings Management (March 8, 2012). Quarterly Journal of Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2018622 or http://dx.doi.org/10.2139/ssrn.2018622

Jui-Chin Chang (Contact Author)

Texas A&M International University ( email )

Texas
United States
956-326-2501 (Phone)

Huey-Lian Sun

Morgan State University - Department of Accounting and Finance ( email )

Baltimore, MD 21251
United States
443-885-3971 (Phone)
410-319-3721 (Fax)

Mi Luo

Villanova University ( email )

800 Lancaster Avenue
Villanova, PA 19085
United States

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