Director Compensation and Related Party Transactions

53 Pages Posted: 13 Aug 2018 Last revised: 30 Jan 2019

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Haihao Lu

University of Waterloo

Sasan Saiy

University of Waterloo

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2019

Abstract

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 RPTs. Specifically, we predict and find that level of compensation is positively related to RPTs, but we do not find equity-based compensation to be associated with 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. This association between RPTs and director compensation is moderated by corporate governance mechanisms, suggesting that the association between director compensation and RPTs reflects a conflict of interest between insiders and shareholders. We also find some evidence that the effects of director compensation on RPTs are stronger for RPTs with directors compared with RPTs with non-directors, for non-business RPTs compared with business RPTs, and for ex post RPTs compared to ex ante RPTs.

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

Suggested Citation

Hope, Ole-Kristian and Lu, Haihao and Saiy, Sasan, Director Compensation and Related Party Transactions (January 29, 2019). Available at SSRN: https://ssrn.com/abstract=3220629 or http://dx.doi.org/10.2139/ssrn.3220629

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Haihao Lu

University of Waterloo ( email )

Toronto, ON
Canada

Sasan Saiy

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

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