Rank-and-File Accounting Employee Compensation and Financial Reporting Quality

81 Pages Posted: 10 May 2022 Last revised: 8 Jan 2024

See all articles by Chris Armstrong

Chris Armstrong

Stanford Graduate School of Business

John D. Kepler

Stanford Graduate School of Business

David F. Larcker

Stanford Graduate School of Business; Stanford University - Hoover Institution; European Corporate Governance Institute (ECGI)

Shawn Shi

University of Washington - Michael G. Foster School of Business

Date Written: January 2, 2024

Abstract

We use a proprietary database with detailed, employee-specific compensation contract information for rank-and-file corporate accountants who are directly involved in the financial reporting process to assess their influence on their firms’ financial reporting quality. Theory predicts that paying above-market wages can both attract employees with more human capital and subsequently encourage better performance. Consistent with audit committees structuring accountants’ compensation so as to mitigate financial misreporting that might otherwise occur, we find that firms with relatively well-paid accountants tend to issue higher-quality financial reports. Moreover, this relationship is more pronounced when firms’ senior executives have stronger contractual incentives to misreport and when the audit committee is more independent from management.

Keywords: Managerial incentives for the accounting function, financial misreporting, accounting quality, human capital

JEL Classification: G34, J3, M12

Suggested Citation

Armstrong, Chris S. and Kepler, John and Larcker, David F. and Shi, Shawn, Rank-and-File Accounting Employee Compensation and Financial Reporting Quality (January 2, 2024). Rock Center for Corporate Governance at Stanford University Working Paper Forthcoming, Stanford University Graduate School of Business Research Paper , Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4100807 or http://dx.doi.org/10.2139/ssrn.4100807

Chris S. Armstrong

Stanford Graduate School of Business ( email )

655 Knight Way
E316
Stanford, CA 94305-5015
United States

HOME PAGE: http://https://www.gsb.stanford.edu/faculty-research/faculty/christopher-s-armstrong

John Kepler (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

David F. Larcker

Stanford Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Shawn Shi

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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