Two essays on CEOs' and directors' compensation structure and firms' financial reporting

Abstract

These essays explore the impact of CEO’s and Director’s compensation structure on firms’ reporting quality. Since equity-based compensation facilitates the alignment of interests between shareholders and the agents (i.e., CEO and outside director), I predict that CEO and outside director incentivized with equity-based compensation lower information asymmetry either by increasing voluntary disclosures or by reducing accruals management. Chapter 2 examines how chief executive officer (CEO) and outside director equity-based compensation jointly affects management earnings forecast (MF) disclosure. My results reveal that either CEO or director equity-based compensation increases the likelihood and frequency of MF disclosure and enhances the accuracy of MFs in general. However, an increase in director (CEO) equity-based compensation is not effective when CEO (director) equity-based compensation is already high. These results indicate that one mechanism acts not as a complement but a substitute for the other in enhancing the quantity and quality of MFs. Overall, my evidence suggests that equity-based compensation of CEOs and that of outside directors affect firms’ voluntary information disclosure but the two effects are interdependent. Chapter 3 investigates whether the equity-based compensation of the audit committee and CEO affects earnings management. Contrary to prior evidence, my evidence shows that equity-based compensation of both audit committee members and CEO is negatively related to managing accruals upward, suggesting that equity-based compensation of audit committee members, as well as that of CEOs, deters upward accruals management. Further, this negative relation is more pronounced, particularly for the audit committee, when firms are suspects of earnings management and when their audit risk is higher. Overall, my results suggest that equity-based compensation of both audit committee and CEO plays an enhanced role in reducing earnings management unde...