Board Committees, CEO Compensation, and Earnings Management

Christian Laux and Volker Laux

No 181, Working Paper Series: Finance and Accounting from Department of Finance, Goethe University Frankfurt am Main

Abstract: We analyze the board of directors' equilibrium strategies for setting CEO incentive pay and overseeing financial reporting and their effects on the level of earnings management. We show that an increase in CEO equity incentives does not necessarily increase earnings management because directors adjust their oversight effort in response to a change in CEO incentives. If the board's responsibilities for setting CEO pay and monitoring are separated through the formation of committees, the compensation committee will increase the use of stock-based CEO pay, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.

Keywords: Corporate Governance; Executive Compensation; Earnings Management; Board Oversight (search for similar items in EconPapers)
JEL-codes: D23 D73 G34 K22 L29 M41 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-acc, nep-bec and nep-law
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