Do CEO and Directors Conspire to Manage Earnings? The Perspective of Compensation Structure

Prior studies have found that stock-based compensation is positively related to financial statements misreporting (Burns & Kedia, 2008). The board of directors is to supervise executive officers and formulate appropriate compensation contracts to reduce agency costs. However, Brick, Palmon & Wald (2006) argue that board courtesy culture proposed by Jensen (1993) is related to board compensation. Highly paid directors go for their self-interests and are often unwilling to rock the boat, so that they are likely to collude with top executives. Therefore, this study is to investigate the relationship between the board and CEO's compensation, and further examines whether performance-based compensation induces board chair to conspire with the CEO to manage earnings. We show that the characteristics of board of directors, CEOs, and company have a significant effect on the compensations of directors and CEOs. When the board size is large, a CEO also serves as a board chair, the longer the CEO tenure, then director cash compensation and total compensation are less. Excess director total compensation has a significant positive influence on CEOs’ cash compensation, incentive awards, total compensation and the exercise value of stock options. CEO’s various compensations and the exercise value of stock options, related to excess director compensation, have significantly positive effects on aggregate earnings management. We infer that the increase in CEO compensations related to excess director compensation may indicate that the CEO ignores stockholders’ interests and manipulates earnings to window-dress financial statements for self-interest. Meanwhile, the board of directors, based on a mutually beneficial relationship, is unwilling to disclose CEO’s earnings manipulation and even colludes with the CEO.補正完