Director Excess Compensation and Investment Efficiency: The Economic Role of Accounting

Abstract

We examine the relationship between director excess compensation and corporate investment efficiency, and the role of accounting quality in this relationship. We utilize a costminimization stochastic frontier approach to estimate director excess compensation. On average, over the 2007-2018 period, directors are paid approximately $59,290 more than their efficient compensation level. We find that overpaying directors aggravates agency problems and exacerbates overinvestment. Next, using an accounting quality index based on five accounting quality proxies pertaining to earnings management, value relevance, and asymmetric timely loss recognition, we document that accounting quality moderates the detrimental impact of director excess compensation on corporate investment. Our study adds to the literature on the negative effects of director excess compensation and the positive economic role of accounting.

Keywords: Corporate investment, Investment efficiency, Director compensation, Excess compensation, Accounting quality. JEL codes: D81, G31, G34, J33, M41 Corporate investment, Investment efficiency, Director compensation, Excess compensation, Accounting quality D81, G31, G34, J33, M41