Director Compensation and Related Party Transactions
45 Pages Posted: 13 Aug 2018
Date Written: July 26, 2018
This paper examines whether independent directors’ compensation is associated with related party transactions (RPTs). We focus both on directors’ total compensation and on their equity-based compensation. Employing hand-collected data for S&P 1500 firms, we find that independent directors’ compensation is significantly associated with the occurrence of RPTs. Specifically, we predict and find that level of compensation (equity-based compensation) is positively (negatively) associated with the occurrence of RPTs. Next, we decompose the compensation measures into “market” (i.e., predicted) level and “excessive” components and find that the results are driven by the excessive components. These findings suggest that overcompensating the directors reduces their independence and their board monitoring efficacy. In additional analyses we find that the effects of director compensation on RPTs are stronger for RPTs with directors compared with RPTs with non-directors, and for non-business RPTs compared with business RPTs. Last, we find that our results are stronger for directors who have authority to approve RPTs. Specifically, we find that for firms that delegate the RPT approval authority to the Audit Committee, the compensation of the Audit Committee independent directors is more strongly associated with the occurrence of RPTs than that of non-Audit Committee directors.
Keywords: Related Party Transactions, Director Compensation, Board Monitoring, Corporate Governance, Disclosure, Audit Committees, SFAS 57, Regulation S-X
JEL Classification: G30, G31, G32, M10, M41
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