Director Compensation and the Reliability of Accounting Information

Abstract

This paper studies the effect of incentive-based compensation on directors' monitoring of management. Using total accruals to measure the level of earnings management, I find that director stock option compensation is associated with higher levels of total accruals. I interpret this result to suggest that director stock options are more likely to align interests of directors with those of managers and that this convergence of interest manifests in lower transparency and reliability of financial information. The results suggest that director stock option compensation provides incentive for directors to compromise their task in the financial reporting process. Copyright (c) 2009, The Eastern Finance Association.

The Composition and Compensation of the Board of Directors as Predictors of Corporate Fraud

“…Boumosleh (2009) found director stock options positively associated with earnings management and concluded that option compensation provides financial incentives for a director to fail to diligently monitor the financial reporting process. Bebchuk et al (2010) studied a duplicitous corporate practice that grants options to directors and CEOs when the stock prices were at their lowest value.…”

“…Proponents of stock option compensation (Jensen 1993) argue that it aligns shareholders' and directors' interests, thereby motivating vigilant supervision of management to enhance the firm's stock price. However, a growing body of literature (Archambeault et al, 2008;Boumosleh, 2009;Cullinan et al, 2008) indicates that stock option compensation actually aligns the interests of directors with those of top managers, instead of shareholders, and thereby reduces director independence.…”

“…Directors may struggle to perform in this monitoring role when the form of their compensation compromises their independence. The literature provides evidence that an improperly aligned compensation scheme, such as stock and stock options, compromises a director's independence and impairs their ability to provide objective oversight (Hamdani & Kraakman, 2007;Archambeault et al, 2008;Cullinan et al, 2008;Boumosleh, 2009;Bebchuk, Grinstein, & Peyer, 2010;Persons, 2012;Bierstaker, Cohen, DeZoort, & Hermanson, 2012 ).…”

“…The paper contributes to the existing literature by examining fraud in the post-Sarbanes-Oxley period, while most research (Beasley, 1996;Dechow, Sloan, & Sweeney, 1996;Persons, 2012;Vafeas, 2005) has been based on earlier periods. In addition, our sample is based on all SEC violations during this period, compared to other studies (Archambeault, DeZoort, & Hermanson, 2008;Boumosleh 2009;Cullinan, Du, & Wright, 2008;Srinidhi, Gul, & Tsui, 2011;Vafeas, 2005) that looked at samples of firms with selected violations or financial restatements not necessarily associated with fraud. This study is also unique in that it combines characteristics of both the composition and compensation of the board of directors and the associated audit committee.…”

Three Essays on Corporate Governance and Meeting-Beating or Missing Analyst Forecasts

“…The National Association of Corporate Directors (NACD) encourages greater equity (of at least 50%) in a director's compensation structure (NACD 2001) for two primary reasons. The NACD argues that greater equity compensation will better align directors' interests with those of shareholders by directing focus on long-term rather than short-term performance goals (Daily and Dalton 2002;Boumosleh 2009). However, the ultimate intent of greater equity compensation is to motivate directors to perform their governance responsibilities more effectively so that agency conflicts between management and shareholders are mitigated.…”