薪酬委員會獨立性與董事會層級公司治理

科技部補助專題研究計畫成果報告

期末報告

薪酬委員會獨立性與董事會層級公司治理

計 畫 類 別 ： 個別型計畫 計 畫 編 號 ： MOST 104-2410-H-004-022-執 行 期 間 ： 104年08月01日至105年08月31日 執 行 單 位 ： 國立政治大學會計學系 計 畫 主 持 人 ： 俞洪昭 共 同 主 持 人 ： 周庭楷 報 告 附 件 ： 出席國際學術會議心得報告

中　華　民　國　105　年　12　月　30　日

以及 NYSE 與 NASDAQ 訂定新 的薪酬委員會獨立性規定。在2013 年1 月11 日， SEC 核准了NYSE 以及NASDAQ 的上市公司薪酬 委員會修正條文，明確要求所有上市公司之薪酬委員會成員必須完 全獨立。本研究即在探討該2013 年之薪酬委員會獨立性規定，是否會影響公司董事會層級之公司治 理。

依循過去文獻，本研究以 CEO 薪酬以及CEO turnover 來衡量董事 會層級之公司治理水準。本研究對 於相關文獻有以下四項貢獻：第一，雖然過去有研究亦試圖探討與 薪酬委員會相關之立法事件是否影 響CEO 之薪酬，但是這些立法事件與薪酬委員會獨立性之間的關係 薄弱，導致實證結果並無顯著結 論。由於本研究所採用之2013 年薪酬委員會獨立性立法事件係完全 針對薪酬委員會獨立性設計，因 此提供了一個絕佳的機會可以精準地探討薪酬委員會獨立性是否會 影響董事會層級之公司治理。第 二，過去研究所採用之樣本期間過於老舊，導致其實證結果可能無 法提供有現代價值之政策性意涵。

由於2002 年通過的Sarbanes-Oxley Act (SOX) 改變了公司的財務 報導以及管制環境，採用SOX 通過 之前的樣本所得到之實證結果，並不一定能適用於SOX 通過之後的 環境。本研究採用2010~2014 年 的樣本，試圖提供較新之實證結果供主管機關參考。第三，本研究 控制影響薪酬委員會效率的三個因 素：開會次數、產業專家知識以及薪酬委員會成員是否同時擔任審 計委員會成員。最後，本研究採用 difference-in-difference 的方法來控制薪酬委員會成員、CEO 薪 酬與CEO turnover 的自我選擇偏誤問題。 中 文 關 鍵 詞 ： 董事會層級公司治理, 薪酬委員會, CEO 薪酬, CEO 流動性, 獨立 性

英 文 摘 要 ： Section 952 of the Dodd-Frank Act of 2010 directs the national securities exchanges to adopt new listing

standards applicable to compensation committees. On January 11, 2013, the SEC approved the NYSE and the NASDAQ listing standards relating to the independence of compensation committees. In its approval orders, the SEC explicitly emphasized that all listed firms should comply with the NYSE’s and NASDAQ’s

independence standards. This study examines whether these 2013 independence standards on compensation committees affect firms’ board-level governance. Following prior studies, this study adopts two measures of board-level governance: CEO compensation

also examine whether independence-related legislation events affect CEO compensation, the association between these regulations and compensation committee independence is very weak, leading to insignificant results. The 2013 independence standards provide a much stronger association based on which I

can better test whether independence of compensation committees affects board-level governance. Second, the sample periods selected by prior studies are too out-of-dated to draw useful policy implications in the post-SOX period. Because SOX has significantly changed the financial reporting and regulatory environment, including the roles of the boards and their committees, it is not clear whether findings based on pre-SOX era are applicable to the current era. I adopt a sample between 2010~2014 to test the effects of the 2013 independence standards on CEO compensation and turnover. Third, I control three compensation committee-specific characteristics: meeting times, industry

expertise, and overlapping between compensation committee and compensation committee. Finally, I use the differences-in-differences approach to control for any economic shocks that occurred during the legislation event and that could have affected CEO compensation and turnover in all firms. 英 文 關 鍵 詞 ： Board-level governance, Compensation committee, CEO

科技部補助專題研究計畫成果報告

（□期中進度報告/



期末報告）

薪酬委員會獨立性與董事會層級公司治理

計畫類別：



個別型計畫 □整合型計畫

計畫編號：MOST

1042410H004022

執行期間：2015 年 8 月 1 日至 2016 年 8 月 31 日

執行機構及系所：

國立政治大學會計學系

計畫主持人：

俞洪昭

共同主持人：周庭楷

計畫參與人員：

黃志斌 (碩士級專任助理人員)

本計畫除繳交成果報告外，另含下列出國報告，共 _1_ 份：

□執行國際合作與移地研究心得報告



出席國際學術會議心得報告

□出國參訪及考察心得報告

科技部補助專題研究計畫成果自評表

請就研究內容與原計畫相符程度、達成預期目標情況、研究成果之學術或應用價

值（簡要敘述成果所代表之意義、價值、影響或進一步發展之可能性）

、是否適

合在學術期刊發表或申請專利、主要發現（簡要敘述成果是否具有政策應用參考

價值及具影響公共利益之重大發現）或其他有關價值等，作一綜合評估。

1. 請就研究內容與原計畫相符程度、達成預期目標情況作一綜合評估



達成目標

□ 未達成目標（請說明，以 100 字為限）

□ 實驗失敗

□ 因故實驗中斷

□ 其他原因

說明：

2. 研究成果在學術期刊發表或申請專利等情形(請於其他欄註明專利及技轉之

證號、合約、申請及洽談等詳細資訊)

論文：□已發表□未發表之文稿



撰寫中 □無

專利：□已獲得□申請中 □無

技轉：□已技轉□洽談中

□無

其他：（以 200 字為限）

3. 請依學術成就、技術創新、社會影響等方面，評估研究成果之學術或應用價

值（簡要敘述成果所代表之意義、價值、影響或進一步發展之可能性，以 500

字為限）

。

This study contributes to the literature in the following ways. First, The 2013 independence standards provide a much stronger association based on which I can better test whether independence of compensation committees affects board-level governance. Second, the sample periods selected by prior studies are too out-of-dated to draw useful policy implications in the post-SOX period. I adopt a sample between 2010~2014 to test the effects of the 2013 independence standards on CEO compensation and turnover. Finally, I use the differences-in-differences approach to control for any economic shocks that occurred during the legislation event and that could have affected CEO compensation and turnover in all firms.

4. 主要發現

本研究

具有政策應用參考價值：

□否



是，建議提供機關_______

(勾選「是」者，請列舉建議可提供施政參考之業務主管機關)

本研究具影響公共利益之重大發現：



否 □是

0 

Board-level Governance

Hung-Chao Yu

Department of Accounting

College of Commerce

National Chengchi University

hjyu@nccu.edu.tw

(Preliminary Draft)

Compensation Committee Independence and

Board-level Governance

 

ABSTRACT

Section 952 of the Dodd-Frank Act of 2010 directs the national securities exchanges to adopt new listing standards applicable to compensation committees. On January 11, 2013, the SEC approved the NYSE and the NASDAQ listing standards relating to the independence of compensation committees. In its approval orders, the SEC explicitly emphasized that all listed firms should comply with the NYSE’s and NASDAQ’s independence standards. This study examines whether these 2013 independence standards on compensation committees affect firms’ board-level governance. The empirical results show that more independent compensation committees are negatively associated with CEO compensation and positively associated with CEO turnover.

Keywords: CEO compensation, CEO turnover, Compensation committee, Independence.

Data Availability: All the data used in this study are from Audit Analytics, Compustat, Execucomp,

In response to corporate scandals in 2001 and 2002, the US law-makers, regulators, and major stock exchanges have issued new board standards to enhance boards’ oversight effectiveness. The manner in which executives are compensated is an essential element of any corporate governance system (Monks and Minow 2011; Murphy 1999). A fundamental conflict of interest exists, however, between shareholders and executives with respect to executive compensation. On the one hand, shareholders want executive compensation to be as closely linked to corporate performance as possible. On the other hand, executives want their incentive compensation to be as high as possible. In fact, executive compensation practices have focused too strongly on short-term performance and have rewarded executives for making business decisions that bring excessive undue risks to the firms. This conclusion results in even greater shareholder scrutiny of compensation committees and their compensation-setting practices. As has been recognized by members of Congress, regulators, and industry leaders, independence is an essential characteristic for a compensation committee if it is to be well positioned to deal with this increased pressure and fulfill its duties to the shareholders. This is consistent with the notion that compensation decisions should be delegated to outside directors due to their unbiased judgments about executives’ quality (Fama 1980; Fama and Jensen 1983; Jensen 1993) and CEOs who involve in director nomination and serve as board chairs usually receive higher compensation (Bebchuk and Fried 2003, 2004; Core et al. 1999; Cyert et al. 2002; Grinstein and Hribar 2004).

Even though securities regulators and national exchanges have emphasized the importance of compensation committee independence since early 1990s (see Section 2 for details), many listed firms did not comply with these independence standards, resulting in widespread excessive executive compensation.1 This excessive executive compensation practice has been criticized as one major reason that caused the financial crisis in 2008~2009 (Balachandran et al. 2010) because        

1_{For example, in 2003 the shareholders of Walt Disney brought a derivative action alleging the board of directors}

"consciously and intentionally disregarded their responsibilities" regarding a $ 38 million cash and $ 3 million stock option payout to the company's former president, who spent only fourteen months on the job. Chhaochharia and Grinstein (2009) also reports that the fraction of firms complying with independent compensation committees ranges from 75% in 2000 to 86% in 2005.

insider participation in compensation committees compromise committee independence, resulting in contracts that are skewed in executives’ favor (Vafeas 2003). The concern over opportunistic behavior by firms’ insiders sitting on the compensation committees led to government intervention in the design of appropriate structure for the compensation committees. For example, Section 952 of the Dodd-Frank Act of 2010 directs the national securities exchanges to adopt new listing standards applicable to compensation committees. On January 11, 2013, the SEC approved the NYSE and the NASDAQ listing standards relating to the independence of compensation committees. In its approval orders, the SEC explicitly emphasized that all listed firms should comply with the NYSE’s and NASDAQ’s independence standards. Importantly, all listed firms will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with these new listing standards.

This study examines whether the 2013 independence standards on compensation committees affect firms’ board-level governance. Following Adams and Ferreira (2009), I adopt two measures of board-level governance: CEO compensation and turnover. I choose CEO compensation as one measure because the NYSE and NASDAQ new listing standards clearly require that compensation committees assume the responsibility of determining CEOs’ compensation. Furthermore, because CEO contracts are fairly heterogeneous and complex, the compensation committees are likely to spend considerable time and effort discussing their details. Therefore, CEO compensation can better capture compensation committees’ function effectiveness (Adams and Ferreira 2009). I also choose CEO turnover as another measure because prior studies suggest that boards with stronger governance are more likely to fire entrenched CEOs who pursue personal gains at the expense of shareholders (e.g., Adams and Ferreira 2009; Hermalin and Weisbach 1998, 2003). Moreover, the sensitivity of CEO turnover to stock return performance could be considered a measure of the intensity of board monitoring (Adams and Ferreira 2009; Weisbach 1988).

Prior studies have investigated the effect of board structure on CEO compensation (e.g., Adams and Ferreira 2009; Bertrand and Mullainathan 2001; Core et al. 1999; Finkelstein and

provide inconclusive evidence. One major reason is that board structure is often endogenously determined by unobservable firm and CEO characteristics that, in turn, determine CEO compensation (Chhaochharia and Grinstein 2009; Hermalin and Weisbach 2003; Thorburn 1997). Because the approval of the 2013 independence standards is a regulation event, changes to board structure can be attributed to the new standards rather than to unobservable characteristics. Therefore, analyzing such an event help mitigate the endogeneity problem. By using the differences-in-differences approach, I compare changes in CEO compensation and turnover between firms that were already complying with early independence requirements and firms that were not complying with them.

The empirical evidence on the association between compensation committee independence and CEO pay is also mixed. For example, Newman and Mozes (1999) shows that the relation between CEO compensation and performance is more favorable toward the CEOs among firms that have insiders on the compensation committees. Conyon and Peck (1998) finds that the proportion of outside directors in a compensation committee is positively associated with CEO pay and sensitivity of pay to performance. In contrast, Conyon and He (2004) reports that insiders or CEOs from other companies who are members of the compensation committee have no impact on the level of CEO compensation or structure of equity incentives. Daily et al. (2003) shows that compensation committees consisting of affiliated directors do not award excessive pay or lower overall incentives to the CEOs. Clearly, these mixed results warrant further research. In this study, I use the 2013 independence standards to provide new evidence that is relevant to this debate.

My study is similar to three prior studies that use US legislative events to test whether independence requirements affect compensation committees’ decisions in determining CEO incentive contracts. On October 16, 1992, the SEC adopted its final rules requesting a new "Board Compensation Committee Report on Executive Compensation" through which a compensation committee would disclose detailed justifications for the executive compensation paid. Also, the

report should show the names of all compensation committee members and be included in firm’s annual proxy statement. Anderson and Bizjak (2003) examines whether these reforms changed compensation committees’ decisions toward CEO compensation. The empirical results do not find evidence supporting the notion that greater compensation committee independence affects CEO pay. Specifically, compensation committees consisting of insiders and CEOs do not award excessive pay or lower overall incentives to the CEOs. Somewhat different from Anderson and Bizjak (2003), Vafeas (2003) also adopts the SEC 1992 reforms as the event but finds a steady decline in the number of insider participation in compensation committees. After the reforms, there is an increase in CEO pay and in the sensitivity of salary pay to performance. In a more recent study, Chhaochharia and Grinstein (2009) chooses Sarbanes-Oxley Act of 2002 (SOX) and subsequent amended listing standards proposed by the NYSE and NASDAQ as the event to examine whether the independence requirements on the majority of board members and members of the audit, compensation, and nominating committees affect CEO compensation. The empirical results show that only the independence requirement on the majority of board members is significantly associated with a decrease in CEOs’ bonus and stock-based compensation. The requirement on compensation committee independence has no effect on CEO pay.

My study differs from the above three studies in four major aspects. First, the SEC’s 1992 reforms only encourage listed firms to include independent directors into the compensation committees and increase disclosure requirements when corporate insiders serve on the compensation committees. Therefore, the main purpose is the mandatory disclosure of executive compensation, the rationale for the executive compensation paid, and the relationship of the compensation paid to the company's performance. In contrast, the primary goals of SOX are to enhance auditor independence (see Title II of SOX) and strengthen corporate governance with an emphasis on the effectiveness of audit committees (see Sections 301, 303, and 407 of SOX). Therefore, audit committee independence is one major concern at the board level and has received much attention by the regulators and the accounting academics (e.g., Beasley et al. 2009; Bedard et

Williams 2004, 2008; Naiker and Sharma 2009; Naiker et al. 2013; Srinivasan 2005). Even though the NYSE and NASDAQ also amended their listing standards (which were approved by the SEC on November 4, 2003) to require that compensation committees be composed of independent directors, many firms did not comply with this rule due to the exceptions allowed by the standards (see Section 2 for details). Given the above discussions, it appears that the impacts of the SEC 1992 reforms, SOX provisions, and amended listing standards on compensation committee independence are relatively weak. This may explain why Anderson and Bizjak (2003) and Chhaochharia and Grinstein (2009) do not find significant association between compensation committee independence and CEO compensation. Different from these legislative events, the 2013 independence standards target directly to compensation committees mandating that all listed firms should have fully independent compensation committees. Therefore, the 2013 independence standards provide a stronger setting in which I can cleanly and directly test whether exogenously determined change in compensation committee structure affects CEO compensation and turnover.

Second, the sample periods selected by Anderson and Bizjak (2003) and Vafeas (2003) may be too out-of-dated (i.e., 1985~1998 and 1991-1997, respectively) to draw useful policy implications in the post-SOX period. Because SOX has significantly changed the financial reporting and regulatory environment, including the roles of the boards and their committees, it is not clear whether findings based on pre-SOX era are applicable to the current era. Carcello et al. (2011) suggests that post-SOX studies are necessary where similar issues have been investigated in the pre-SOX period. Thus, more recent empirical evidence is needed to understand whether compensation committee independence affects firms’ board-level governance in the post-SOX era. I adopt a sample between 2010~2014 to test the effects of the 2013 independence standards on CEO compensation and turnover. Third, the above three studies do not consider characteristics that may affect the effectiveness of compensation committees. My study controls for compensation committee-specific characteristics such as meeting times, industry expertise, and overlapping

between compensation committee and compensation committee (see Section 3.1 for details). Finally, Anderson and Bizjak (2003) and Vafeas (2003) do not control for endogeneity problem that may adversely influences the statistical validity of their tests. I use the differences-in-differences approach to control for any economic shocks that occurred during the legislation event and that could have affected CEO compensation and turnover in all firms.

The remainder of this research proposal is organized as follows. Section 2 introduces the history of regulations related to compensation committee independence. Section 3 describes the basic research design, including the measures of dependent and independent variables, the econometric models, and the sample selection procedures. Section 4 lists tasks to be finished if this research proposal is approved.

2. HISTORY OF REGULATIONS ON COMPENSATION COMMITTEES

On July 2, 1992, the SEC proposed substantial changes to its executive compensation disclosure rules (Release No. 33-6940). The most important part of this proposal is the new "Board Compensation Committee Report on Executive Compensation" requiring the compensation committee to disclose its specific rationale for executive compensation and the link between compensation and firm’s performance. The SEC proposed that this report should be included in the “Management's Discussion and Analysis” section of firm’s financial statements and believed this report would "… bring shareholders into the compensation committee or board meeting room and permit them to see and understand the specific decisions made through the eyes of the directors." Due to commenters’ strong arguments that this proposal would introduce undue intrusion into firms’ internal affairs and interfere with the functioning of the compensation committee, the SEC finally decided to require specific disclosure with respect to CEO rather than all named executives. In addition, the report has to show the names of all compensation committee members (but signatures are not required) and is required to be included in firms’ proxy statements for annual meeting purposes. The final rules were adopted on October 16, 1992 (Release No. 33-9089). One critical problem with the SEC 1992 reforms is that the subsequent amendments on NYSE and NASDAQ

board compensation report can be issued by the governance or nominating committee if compensation committees do not exist. In addition, there was no formal definition of “independence” for members of compensation committees. This is the legislative event used in Anderson and Bizjak (2003) and Vafeas (2003).

On February 13, 2002, Harvey Pitt, the then chair of SEC, requested that national exchanges should try to improve their governance listing standards (Press Release 2002-23). In response, the NYSE and the NASDAQ sent their proposed changes to the SEC in August 2002 and October 2002, respectively. The SEC approved these proposals with minor changes on November 4, 2003 (Release No. 34-48745). The main provisions of the final listing standards require all firms must have a majority of independent directors (defined as those who have no directly material relationship with the firm or as a partner, shareholder, or officer of an organization that has a relationship with the firm). Also, the compensation committee, nominating committee, and audit committee shall consist of independent directors and should have written charters that define the obligations of these committees. All audit committee members should be financially literate and at least one member has accounting or related financial management expertise. Finally, non-executive directors must meet regularly to oversee the management. There are three major problems with the amended listing standards. First, they allow for exceptions to the independence requirements if the board has determined that the appointment of an inside director to the nominations and/or compensation committee is in the best interests of the company and the firm has disclosed its determination in the proxy statement or annual report filed with the SEC. This exception condition provides boards with more flexibility to justify their incompliance with the independence requirements. Second, the NASDAQ listing standards still do not require firms establish compensation committees. Finally, even though the NYSE and NASDAQ have the authority to delist firms that do not comply with their governance requirements (see NYSE Governance Rule 202A, Section 13), they use this penalty only in very extreme case. Chhaochharia and Grinstein

(2009) uses the last problem as the reason to explain their puzzling result that not all firms complied with the exchanges’ amended listing standards but does not discuss the other two problems. This is the legislative event used in Chhaochharia and Grinstein (2009).

Because of the financial crisis during 2008~2009, the Dodd–Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) was signed into federal law by President Barack Obama on July 21, 2010. Section 952 of the Dodd-Frank Act added Section 10C (titled “Compensation Committees”) to the Securities Exchange Act of 1934 requiring the SEC to direct the national securities exchanges to change their listing standards on the authority of the compensation committee, the independence of the members of the compensation committee, and the consideration by the compensation committee of specific factors relating to the independence of compensation advisers. On June 20, 2012, the SEC adopted Rule 10C-1 to implement the provisions of the Dodd-Frank Act. Rule 10C-1 explicitly requires each exchange to adopt rules providing that each member of the compensation committee of a listed firm must be a member of the board of directors and must otherwise be independent. In addition, the compensation committee should have authority to retain, appoint, compensate, and oversee compensation advisors, as well as to consider the independence of these outside advisors.2 Because the NYSE’s existing standards already require each listed firm to have a separate compensation committee consisting solely of directors who satisfy the NYSE’s general independence requirements, the “enhanced independence” specified in Rule 10C-1 and the new listing standards require that, in affirmatively determining the independence of any director who will serve on the compensation committee, the board must consider all factors specifically relevant to determining whether a director has a relationship to the firm that is material to that director’s ability to be independent from management in connection

       

2_{However, the final listing standards emphasize that nothing in the rules requires a compensation adviser to be}

independent, only that the compensation committee consider the six factors (i.e., the provision of other services to the listed firm by the person that employs the compensation consultant, counsel or other adviser; the amount of fees the advisor receives from the listed firm as a percentage of the advisor’s total revenue; the advisor’s policies and procedures designed to prevent conflicts of interest; any business or personal relationship of the compensation consultant, counsel or other adviser with a member of the compensation committee; any listed firm stock owned by the consultant, counsel or adviser; and any business or personal relationship of the consultant, counsel or adviser with an executive officer of the listed firm) before selecting or receiving advice from such adviser.

the board should consider at least two relevant factors: (a) the sources of compensation of the director or other compensatory fee paid by the company to the director, and (b) whether the director is affiliated with the company or any of its subsidiaries or their affiliates (see Section 10C(a)(3)). Therefore, to be considered independent, members of the compensation committees must meet both the general independence criteria already included in the exchanges’ listing standards and the new compensation committee-specific criteria required by the new independence standards. The NYSE and NASDAQ submitted their proposed changes to the SEC on September 25, 2012. Both exchanges later submitted amendments to their proposals and the SEC finally approved the exchanges’ proposals, as amended, on January 11, 2013 (Release No. 34-68639). Companies have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new compensation committee independence requirements. These final listing standard changes reflect the latest development in an on-going campaign from all sides (e.g., Congress, the SEC, exchanges, proxy advisers, and shareholders) to hold corporate boards more accountable for their compensation-related procedures and decisions (Poerio et al. 2013). This is the legislative event used in this study.

The main provisions of the 2013 final listing standards are as follows: (1) The firm’s compensation committee is required to:

(a) be comprised solely of independent directors;

(b) have the authority to retain compensation advisers; and

(c) consider independence factors in selecting not only compensation consultants but also any other advisers, including outside legal counsel.

(2) The firm’s board of directors should affirmatively assess the independence of compensation committee members considering all relevant factors.

(3) The compensation committee must have a formal written charter reflecting the committee’s responsibilities (e.g., structure, processes, and membership requirements, determination of compensation of CEO and all other executive officers).

(4) Special considerations to compensation committee advisors:

(a) the compensation committee may, in its sole discretion, retain or obtain advice of a compensation consultant, independent legal counsel or other adviser;

(b) the compensation committee is directly responsible for the appointment, compensation, and oversight of the work of any such adviser;

(c) the company must provide appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to any such adviser; and

(d) in selecting any adviser, the compensation committee must take into consideration all factors relevant to that person’s independence from management.

(e) Compensation committee is not required to follow the advice of any such adviser.

Obviously, the above discussions indicate that the SEC’s 1992 final rules focused on the mandatory disclosure of CEO compensation and required the compensation committees to issue a report explaining how they determine executive pays and whether such pays are linked to firms’ performance. On the other hand, even though SOX and subsequent amendments in the NYSE and NASDAQ listing standards required that compensation committees be composed of independent directors, firms may use the exception conditions specified in the standards to justify their noncompliance decisions. Also, some firms may simply decide not to comply with the standards because the NYSE seldom penalized them for noncompliance (Chhaochharia and Grinstein 2009). Due to these reasons, it appears that the association between these legislative events and compensation committee independence is not as straightforward as it might seem. Therefore, Anderson and Bizjak’s (2003) and Chhaochharia and Grinstein’s (2009) finding that there is no association between compensation committee independence and CEO compensation may not be valid. Different from these early legislations, the NYSE and NASDAQ 2013 independence standards aim directly at enforcing the independence of compensation committees. I thus argue that these new independence standards create a much stronger association between a legislative event and compensation committee independence. This provides a good opportunity to examine whether compensation committee independence affects CEO compensation and turnover.

3. RESEARCH DESIGN

of the 2013 listing standards, there will be no impact for calendar-year reporting firms on their 2013 proxy season. However, prior studies show that, even though firms were not formally required to comply with the listing standards until the effective date, the publication of the proposed recommendations itself probably led many firms to start complying long before the effective date. For example, Chhaochharia and Grinstein’s (2009) uses year 2003 as the breaking point for examining differences in CEO compensation before and after the listing standards despite the fact that the amended standards were approved on November 4, 2003. This is consistent with the notion that many firms began to change their board structure once the recommendations were put forth by the national exchanges. Following this notion, I choose 2013 as the cut-off and regard 2013~2014 as the years after the new listing standards. Second, I do not consider years 2008~2009 because the variations in CEO compensation and turnovers tend to be substantially high during this financial crisis periods.

I hypothesize that if the 2013 independence standards imposed on the compensation committee affect board-level governance, boards that did not comply with these standards should respond more to the standards than boards that did comply with them. The measure of the level of compliance is whether the firm has a fully independent compensation committee in 2010~2012 (before the new independence standards were announced). The dependent variable of interest is board-level governance (denoted by GOVERNANCE). Following Adams and Ferreira (2009), GOVERNANCE can be captured by CEO compensation (denoted by CEO_COMP) and CEO turnover (denoted by CEO_TURN). To test my hypothesis, I run the following regression (1) over an unbalanced panel of firm-observations in the years 2010~2014:

) 1 ( . 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Effects Fixed Year Effects Fixed Industry EXERTISE OVERLAP MEETING TENURE CHAIR GENDER HOLDINGS AGE BOARDIND BOARDSIZE VOLA RETURN ROA SEGMENTS ALES S POST NONCOMPLY POST NONCOMPLY GOVERNANCE









































                       where

CEO_COMP = (a) Natural log of CEO’s total compensation or (b) the ratio of CEO’s equity-based compensation to total compensation in year t;

CEO_TURN = A dummy variable that equals one if the CEO leaves the CEO position in the following year (I also define CEO_TURN to be missing in the final year of the sample);

NONCOMPLY = A dummy variable that equals one if the firm did not have a fully independent compensation committee on the board in 2010~2012 and zero otherwise (a director is defined as an independent director if the director was not an employee of the firm during the previous 3 years, if the director does not have family affiliation of the officers of the firm, and if the director does not have any business transactions with the firm);

POST = A dummy variable that equals one if the firm-observation is in the period 2013~2014 and zero otherwise;

SALES = Natural log of firm’s net sales (in $millions) in year t−1; SEGMENTS = Number the firm’s business segments in year t−1;

ROA = Natural log of one plus net income before extraordinary items and discontinued operations divided by the book value of assets, all measured in year t−1;

RETURN = The firm’s raw stock return for year t−1 net of the CRSP value-weighted index, both compounded continuously;

VOLA = Standard deviation of monthly stock returns from CRSP over the previous five years from t−5 to t−1;

BOARDSIZE = Number of directors on the board in year t−1;

BOARDIND = Percentage of independent directors on the board in year t−1; AGE = The age of the CEO in year t−1;

HOLDINGS = Percentage of outstanding shares held by the CEO in year t−1;

GENDER = A dummy variable that equals one if the CEO is female and zero otherwise; CHAIR = A dummy variable that equals one if the CEO is also the chairman in year t−1

and zero otherwise;

TENURE = Natural log of (1 + number of years CEO served in the firm by year t−1); MEETING = Number of meetings held by the compensation committee in year t−1; OVERLAP = Percentage of compensation committee members who also sit in the audit

experts with work experience as CPAs, CFOs, vice presidents of finance, financial controllers, or any other major accounting positions; Industry-year fixed effects = The Fama–French (1997) 48-industry dummies interacted

with year dummies;



= Residual term.

Following prior studies (e.g., Chhaochharia and Grinstein 2009; Adams and Ferreira 2009), I use a natural logarithmic transformation of total compensation (including base salary, bonuses, options, restricted stocks, and other compensation) and the ratio of equity-based compensation to total compensation as two measures of CEO_COMP. Because the ratio of equity-based compensation is bounded between zero and one, I use its log transform (i.e., the log odds ratio) as the dependent variable. If the ratio is z, my dependent variable is ln(z/(1-z)+), where  is a very small number I add to ensure I do not attempt to take the logarithm of zero. In the above regression model (1), if the dependent variable is CEO_COMP, coefficient



3 represents the change in each of the two CEO compensation measures of the noncomplying firms in the post-regulation period (years 2013-2014) compared to the CEO compensation of the complying firms. A significantly negative



3 suggests that the 2013 independence standards improve compensation committee independence, leading to reduced CEO compensation. Similarly, if the dependent variable is CEO_TURN, coefficient



3 represents the change in CEO turnover of the noncomplying firms in the post-regulation period compared to the CEO turn of the complying firms. A significantly positive



3 suggests that the 2013 independence standards improve compensation committee independence, leading to higher CEO turnover. Note that I restrict my sample to turnover events that are not classified as turnover due to CEO death or retirement.

I also control for characteristics related to the firm, the board, and the CEO that have been reported in prior studies to have impacts on CEO compensation and turnover. For firm characteristics, I control for firm size (SALES), operation complexity (SEGMENTS), performance (ROA and RETURN), and firm risk (VOLA). I use the natural log of a firm’s net sales (in $millions)

to control for firm size. I also use two measures to control for firm’s performance: the natural log of the gross annual stock return and the natural log of the gross return on assets, which is defined as net income before extraordinary items divided by the book value of assets. Both performance measures are lagged 1 year to avoid measuring the effect of compensation on performance. For board characteristics, I consider board size (BOARDSIZE) and the percentage of independent directors on the board (BOARDIND). For CEO characteristics, I control for age, share ownership, gender, and whether CEO is also the chairman of the board. To control for CEO seniority, I use the natural log of one plus the number of years the CEO has served in the firm. Finally, I control for industry shocks that may affect the supply and demand for CEOs in different industries in different years by interacting industry dummies with year dummies. My industry classification follows that of Fama and French (1997). I also include firm fixed effects to control for any unobservable fixed firm characteristics that can affect compensation (e.g., the complexity of the tasks that the CEO faces) and turnover. In all the regressions I cluster the standard errors at the firm-period level for potential heteroskedasticity. For comparison purposes, I adjust for inflation by converting all compensation variables into 2010 dollars using the Consumer Price Index-All Urban Consumers (CPI-U), produced by the Bureau of Labor Statistics. By construction, there is a one-year lag between GOVERNANCE proxies and all control variables.

In addition to the above firm-specific control variables, I also include three variables that may influence the effectiveness of the compensation committee. This procedure is important because improving compensation committee effectiveness is the main purpose of the 2013 independence standards. First, because there is no prior study that has ever adopted proxies for compensation committee’s effort, I borrow from the audit committee literature (e.g., DeZoort et al. 2002; Engel et al. 2010; Menon and Williams 1994) and use the number of meetings held by the compensation committee in a given year (MEETING) to capture committee’s diligence. More diligent compensation committees are more likely to meet more frequently.

(OVERLAP) will tradeoff the costs between providing incentives to the CEOs and preventing CEOs’ earnings management. This tradeoff leads to a preference for offering less incentive compensation contracts to mitigate CEOs’ incentives in managing earnings. Hoitash and Hoitash (2009) provide empirical evidence consistent with the above prediction. Finally, even though the SEC’s 1992 rules and the 2013 independence standards allow firms to hire outside independent compensation advisors or consultants to help the compensation committees determine CEO compensation, the final decisions are made by the members of the compensation committees. Because shareholders prefer the CEOs to be compensated by their performance and CEOs’ operation performance is usually reflected in firms’ financial statements, compensation committee members who have accounting expertise shall be able to better evaluate CEOs’ true performance from accounting numbers and determine the appropriate level of CEO pays. Following prior research, I measure compensation committee’s accounting expertise (EXERTISE) as the percentage of compensation committee members who are accounting experts with work experience as CPAs, CFOs, vice presidents of finance, financial controllers, or any other major accounting positions (e.g., Krishnan and Visvanathan 2008; and Dhaliwal et al. 2010).

3.2 Effect of Equity-based Compensation on Compensation Committee Independence:

Even though the 2103 independence standards intend to enhance the independence of compensation committees, the efficacy of these standards may be enhanced or impaired if firms pay more equity-based compensation to their compensation committee members. On the one hand, corporate governance literature indicates that it is beneficial to have outside directors own stocks to align their interests with the shareholders (e.g., Fama and Jensen 1983; Monks and Minow 2001; Williamson 1984) and provide incentives for outside directors’ monitoring (e.g., Beasley 1996), resulting in better firm performance (e.g., Fich and Shivdasani 2006; Hanlon et al. 2003). In addition, compensation committee members may have incentives to maintain their reputation due to potential litigation exposure. Fama and Jensen (1983) and Zajac and Westphal (1996) point out that

a primary incentive for outside directors to effectively monitor managers is to enhance outside directors’ reputation. This is consistent with Yermack’s (2004) finding that 40% of total outside director incentives are related to reputation, which basically drives the chance to get and the risk to lose directorships. Further, some research finds that outside directors with a poor track record of monitoring are disciplined by the managerial labor market (e.g., Milgrom and Roberts 1992; Gerety and Lehn 1997). Finally, equity-based compensation could help firms in attracting talented compensation committee members who can determine appropriate CEO compensation. Overall, the above observations underscore the potential economic costs borne by compensation committee members as a result of their ineffective functioning. Therefore, members of compensation committees receiving more equity-based compensation shall face strong incentives to exercise due diligence to mitigate the risk of litigation and the consequential reputation loss.

On the other hand, it is possible that equity-based compensation may impair the effectiveness of compensation committees. This argument is supported by the reasoning that, because stocks and options tie compensation committee members’ wealth to firms’ short-term and long-term financial performance, the objectivity of compensation committee members in determining appropriate CEO compensation level may decrease when their compensation create conflicts that induce them to compromise independence, leading to weak board-level governance. The National Association of Corporate Directors (NACD 2001, 2003) currently promotes the use of equity-based compensation for directors (Archambeault et al. 2008; Magilke et al. 2009) and large U.S. companies have increased the use of stocks and options to compensate their non-executive directors, of which compensation committees are to be formed. However, there is a lack in the literature that examines the association between equity-based compensation and compensation committees’ effectiveness.3 More importantly, even though the 2013 independence standards mandate that all compensation        

3_{Recent studies have found that equity-based compensation creates incentives for audit committee members to tolerate}

earnings management by managers since audit committee directors directly benefit from such actions (e.g., Magilke et al. 2009). Empirical studies also show that option compensation is associated with higher likelihood of restatements (e.g., Archambeault et al. 2008) and earnings management (e.g., Bedard et al. 2004). In addition, clients whose audit committees have larger stock ownership are more likely to dismiss their auditors following first-time going concern opinion (Carcello and Neal 2003). Firms demanding less monitoring over financial reporting pay more equity-based compensation to their audit committees (Engel et al. 2010).

requirement when they are newly appointed, but become less independent when they receive equity-based compensation during their tenure periods. Therefore, the answers to the question of whether new regulations are needed to govern how compensation committees should be compensated to ensure their effectiveness over time bear important policy implications to the regulators and national exchanges.

Given these opposite predictions, the net effect of equity-based compensation on compensation committee independence is an empirical issue. This issue becomes even more important under the 2013 independence standards because the NYSE and NASDAQ explicitly require the boards consider “… the sources of compensation of the director or other compensatory fee paid by the company to the director...” in evaluating the independence of compensation committee members. To test if equity-based compensation enhances or harms compensation committees’ independence, I include the ratio of equity-based compensation to total compensation paid to the compensation committees (denoted by EBC) into regression model (1), leading to the following model (2):

) 2 ( . 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 3 2 1 0 Effects Fixed Year Effects Fixed Industry EXERTISE OVERLAP MEETING TENURE CHAIR GENDER HOLDINGS AGE BOARDIND BOARDSIZE VOLA RETURN ROA SEGMENTS ALES S EBC POST NONCOMPLY POST NONCOMPLY GOVERNANCE ₄











































                        where

EBC = Ratio of equity-based compensation to total compensation paid to the compensation committees in year t−1;

The definitions of all other variables are the same as those in model (1).

If equity-based compensation impairs the independence of compensation committees, coefficient



4 shall be positive when CEO_COMP is the dependent variable (i.e., the CEO will receive larger total compensation and higher portion of equity-based compensation) and be negative when CEO_TURN is the dependent variable (i.e., the CEO is less likely to be dismissed

when his/her performance is poor).

3.3 Data and Sample Selection:

The data source for CEO compensation, tenure, turnover, and chairmanship is the Execucomp database, which has all compensation information about firms that belong to the NYSE or that once belonged to the exchange. I do not consider firms listed at NASDAQ because its 2013 independence standards are different from those of the NYSE in three substantial ways. First, the NASDAQ standards only require firms to have a compensation committee of at least two independent directors. This requirement is not consistent with the definition of the variable NONCOMPLY, which is coded one if all members of a compensation committee are independent. Second, the NASDAQ standards do not implement the “enhanced independence” requirement that the boards must consider relevant factors to make affirmative determination about the independence of compensation committee members. Finally, the NASDAQ standards maintain the existing exception allowing a listed firm to have inside directors serving on its compensation committee.

The data source for board structure and director information (e.g., size, independence, compensation, memberships, age, gender, holdings, and education and prior work experience) comes from BoardEx. In particular, the database has information about whether the director is independent and about whether the director serves on the compensation and audit committees. My analysis spans the years 2010 to 2014 covering all companies listed at NYSE. To ensure that I do not capture changes in compensation due to firms entering and leaving the samples, and to ensure that the firms are subject to the 2013 independence standards, I include in the analysis only U.S. firms that existed in these two databases for the entire period and that are members of the NYSE. I will retrieve financial information for each firm from COMPUSTAT. All variables are adjusted for inflation using 2010 as the base year. Firm observations will be deleted if they: (a) do not have complete financial and compensation data and (b) do not pay equity compensation. To control for outlier problem, I winsorize observations that fall in the top and bottom 1 percent of the empirical distribution for both the dependent and independent variables (Bulter et al. 2004; Fan and Wong

Two major compensation components will be examined: stock awards (which include common stock with and without restrictions, deferred stock units, and phantom stock units) and option grants (which include short-term and long-term stock options). The value of stocks will be determined by multiplying the number of shares awarded by the closing price. Following Brick et al. (2006) and Core et al. (1999), I will compute the value of options using the 25 percent of their exercise price or the closing market price on the annual meeting date if exercise price is not available. I exclude meeting fees because they are often viewed as an opportunity cost of attending a meeting and, thus, are not similar to annual compensation (Adams and Ferreirs 2008).

3.4 Further Analyses:

3.4.1 Low vs. High External Monitoring

Prior research shows that the extent to which the decrease in CEO compensation is related to the existence of other external monitoring mechanisms in the noncomplying firms. I focus on two mechanisms that have been shown to affect CEO compensation. The first is the concentration of institutional holdings. Hartzell and Starks (2003) find that firms with high concentrations of institutional holdings tend to give more efficient compensation schemes to their managers. Following Dittmar and Mahrt-Smith (2007), I first calculate the sum of all ownership positions greater than 5% held by institutional investors for each firm in each year. These blockholdings, as collected from the 13-F filings by Thomson Financial, can be considered a measure of the extent active large shareholders oversee the management. Since large shareholders have greater incentive to monitor management, firms improve their governance from within by taking policies and procedures to protect their investments in the face of potential agency conflicts (Gompers et al. 2003). I then use the median value of these sums to partition the sample into two groups and code observations above (below) the median as having high (low) monitoring. Model (1) is estimated separately for each group.

(1999) show that when a blockholder sits on the board of directors, compensation to the manager is lower, consistent with Spatt’s (2006) conjecture that stronger incentives to directors are likely to make them more effective. Following Chhaochharia and Grinstein (2009), I define a director blockholder as a nonemployee director who holds 5% or more of the shares in the firm. I partition the sample into firms with and without a blockholder and re-estimate model (1) separately for each group. I hypothesize that noncomplying firms that have a large concentration of ownership by institutional investors or a nonemployee blockholder on the board should not decrease the firm’s CEO compensation as much as firms that do not have a large concentration of holdings.

3.4.2 Low vs. High Fraud Risk

Firms with a higher risk of fraud are of particular interest to investors, auditors, and regulators. I examine whether the effect of compensation committee independence on board-level governance varies with firms’ fraud risk. I use the F-score to proxy for fraud risk (Dechow et al. 2011). DeChow et al.’s (2011) F-score provides an ex ante indicator of a firm’s risk of having material accounting misstatements due to fraud. Specifically, a larger F-score indicates a higher probability of material misstatements. I partition the sample at the median value of the F-score and code observations above (below) the median as high (low) fraud risk and re-estimate model (1) separately for each partition. I hypothesize that noncomplying firms that have larger fraud risk should decrease the firm’s CEO compensation more than firms that have smaller fraud risk.

3.4.3 Low vs. High Managerial Ability

Demerjian et al. (2013) show that, because superior managers are more knowledgeable of their company and business, they will make better judgments and estimates, leading to higher earnings quality. Based on this conclusion, I hypothesize that firms having more capable CEOs will have less incentive to manipulate earnings because they do not need to do so to maintain their earnings levels. Therefore, the effect of compensation committee independence may become insignificant for noncomplying firms if these firms hire capable CEOs.

industry with an aim to make the MAS more comparable across time and industries. This measurement may not be applicable to my study because I want to examine whether, at the firm level, more capable CEOs have less incentive to manage earnings and, therefore, can possibly mitigate the positive effect of compensation committee independence on CEO compensation and turnover. To capture the salient features that capable CEOs shall increase their managerial ability over time and this continuing improvement in managerial ability enhances firm’s earnings quality in year t, I use the SIC 2-digit industry-year mean MAS to separate the sample into two groups and run model (1) separately.

4. EMPIRICAL RESULTS AND CONCLUSIONS

The empirical results show that more independent compensation committees are negatively associated with CEO compensation and positively associated with CEO turnover. Interested readers are welcomed to ask the author for a complete copy of this paper.

REFERENCES

Adams, R. B. and D. Ferreria. 2008. Do directors perform for pay? Journal of Accounting and Economics 46 (1): 154–71.

Adams, R. B. and D. Ferreria. 2009. Women in the boardroom and their impact on governance and performance. Journal of Financial Economics 94 (1): 291–309.

Anderson, R., and J. Bizjak. 2003. An empirical examination of the role of the CEO and the compensation committee in structuring executive pay. Journal of Banking and Finance 27(7): 1323-1348.

Archambeault, F.T. Dezoort, and D. Hermanson. 2008. Audit committee incentive compensation and accounting restatements. Contemporary Accounting Research 25 (4): 965–992.

Balachandran, S., B. Kogut, and H. Harnal. 2010. Did Executive Compensation Encourage Excessive Risk‐taking in Financial Institutions? Working paper. Columbia University. Beasley, M.S. 1996. An empirical analysis of the relation between the board of director

composition and financial statement fraud. The Accounting Review 71 (4): 443-466. Beasley, M.S., J.V. Carcello, R. Hermanson, and T. Neal. 2009. The audit committee oversight

process. Contemporary Accounting Research 26 (1): 65–122.

Bebchuk, L.A. and J.M. Fried. 2003. Executive compensation as an agency problem. Journal of Economic Perspectives 17: 71–92.

Bebchuk, L.A. and J.M. Fried. 2004. Pay Without Performance. Harvard University Press: Cambridge, MA.

Bedard, J.C., S.M. Chtourou, and L. Courtean. 2004. The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice & Theory 23 (2): 13–35.

Bertrand, M. and S. Mullainathan. 2001. Are CEOs rewarded for luck? The ones without principals are. Quarterly Journal of Economics 116: 901–932.

Brick, I. E., O. Palmon and J. K. Wald. 2006. CEO Compensation, director compensation, and firm performance: Evidence of cronyism. Journal of Corporate Finance 12 (3): 403-423.

Bronson, S., J. Carcello, C. Hollingsworth, and T. Neal. 2009. Are fully independent audit committees really necessary? Journal of Accounting and Public Policy 28 (4): 265–80. Butler, M., A. J. Leone, and M. Willenborg. 2004. An empirical analysis of auditor reporting and

its association with abnormal accruals. Journal of Accounting and Economics 37 (1): 139-165.

Carcello, J. V., and T. L. Neal. 2003. Audit committee characteristics and auditor dismissals following ‘‘new’’ going-concern reports. The Accounting Review 78 (1): 95–117.

Carcello, J. V., T.L. Neal, Z-V Palmrose, and S. Scholz. 2011. CEO involvement in selecting board members, audit committee effectiveness, and restatements. Contemporary Accounting Research 28: 396-430.

Chhaochharia, V. and Y. Grinstein. 2009. CEO compensation and board structure. Journal of Finance 64 (1): 231-261.

Conyon, M.J. and S. Peck. 1998. Board control, remuneration committees, and top management compensation. Academy of Management Journal 41: 146-157.

U.S. entrepreneurial firms. Journal of Management Accounting Research16: 35-56. Core, J.E., R.W. Holthausen, and D.F. Larcker. 1999. Corporate governance, CEO compensation,

and firm performance, Journal of Financial Economics 51 (2): 371–406.

Craig. S and K. Kelly. 2003. Greed Plans NYSE Board Overhaul. Wall Street Journal (October 29): A1.

Cyert, R., S.H. Kang, and P. Kumar. 2002. Corporate governance, takeovers, and top-management compensation: Theory and evidence. Management Science 48: 453–469.

Daily, C., J. Johnson, A. Ellstrand., and D. Dalton. 1998. Compensation committee composition as a determinant of CEO compensation. Academy of Management Journal 41(2): 209-220. Dechow, P., W. Ge, C. Larson, and R. Sloan. 2011. Predicting material accounting misstatements.

Contemporary Accounting Research 28: 17-82.

Demerjian, P.R., B. Lev, M.F. Lewis, and S.E. McVay. 2013. Managerial ability and earnings quality. The Accounting Review 88 (2): 463-498.

DeZoort, T., D. R. Hermanson, D. S. Archambeault, and S. A. Reed. 2002. Toward a theory of audit committee effectiveness: A synthesis of the empirical audit committee literature. Journal of Accounting Literature 21 (1): 38–75

Dhaliwal, D., V. Naiker, and F. Navissi. 2010. The association between accrual quality and the characteristics of accounting experts and mix of expertise on audit committee. Contemporary Accounting Research 27 (3): 787-827.

Dittmar, A. and J. Mahrt-Smith. 2007. Corporate governance and the value of cash Holdings. Journal of Financial Economics 83: 599-634.

Engel, E., R. Hayes, and X. Wang. 2010. Audit committee compensation and the demand for monitoring of the financial reporting process. Journal of Accounting and Economics 49 (1): 136-154.

Fama, E.F. 1980. Agency problems and the theory of the firm. Journal of Political Economics 88: 288–307.

Fama, E.F. and K.R. French. 1997. Industry cost of equity. Journal of Financial Economics 43: 153–193.

Fama, E.F. and M.C. Jensen. 1983. Separation of ownership and control. Journal of Law and Economics 26: 301–325.

Fan, J.P.H. and T.J. Wong. 2005. Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research 43 (2): 35-72.

Fich, E. M. and A. Shivdasani. 2006. Are busy boards effective monitors? Journal of Finance 61: 689-724.

Gompers, P., J. Ishii, and A. Metrick. 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118: 107-155.

Hartzell, J.C. and L.T. Starks. 2003. Institutional investors and executive compensation. Journal of Finance 58: 2351–2374.

Hermalin, B. and M. S. Weisbach. 1998. Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review 88 (1): 96-118.

Finkelstein, S. and D. Hambrick. 1996. Strategic Leadership: Top Executives and their Organizations. Minneapolis: West Publishing Company.

Gerety, M., and K. Lehn. 1997. The causes and consequences of financial fraud. Managerial and Decision Economics 18 (7/8): 587-99.

Grinstein, Y. and P. Hribar. 2004. CEO compensation and incentives: Evidence from M&A bonuses. Journal of Financial Economics 73: 119–143.

Hanlon, M., S. Rajgopal, and T.J. Shevlin. 2003. Are executive stock options associated with future earnings. Journal of Accounting & Economics 36 (1-3): 3-43.

Hoitash, U., and R. Hoitash. 2009. Conflicting objectives within the board: Evidence from overlapping audit and compensation committee members. Group Decision and Negotiation 18 (1): 57–73.

Hallock, K.F. 1997. Reciprocally interlocking boards of directors and executive compensation. Journal of Financial and Quantitative Analysis 32: 331–344.

Hermalin, B. and M. S. Weisbach. 2003. Boards of directors as an endogenously determined institution: A survey of the economic literature. Economic Policy Review, Federal Reserve Bank of New York: 7-26.

Krishnan, G., and G. Visvanathan. 2008. Does the SOX definition of an accounting expert matter? The association between audit committee directors’ accounting expertise and accounting conservatism. Contemporary Accounting Research 25 (3): 827-857.

Lambert, R., D. Larcker, and K. Weigelt. 1993. The Structure of Organizational Incentives. Administrative Science Quarterly (38): 438-461.

Laux, C and V. Laux. 2009. Board committees, CEO compensation, and earnings management. The Accounting Review 84 (3): 869–91.

Lennox, C., and C. Park. 2007. Audit firm appointments, audit firm alumni, and audit committee independence. Contemporary Accounting Research 24 (1): 235–58.

Magilke, M., W. Mayhew, and J. Pike. 2009. Are Independent audit-committee members objective? Experimental Evidence. The Accounting Review 84 (6):1959–1981.

Menon, K. and J.D. Williams. 1994. The use of audit committees for monitoring. Journal of Accounting and Public Policy 13 (2): 121 –39.

Menon, K. and D.D. Williams. 2004. Former audit partners and abnormal accruals. The Accounting Review 79 (4): 1095–118.

Menon, K. and D.D. Williams. 2008. Management turnover following auditor resignations. Contemporary Accounting Research 25 (2): 567–604.

Milgrom, P., and J. Roberts. 1992. Economics, Organizations, and Management. Englewood Cliffs, NJ: Prentice Hall.

Monks, R.A. and N. Minow. 2011. Corporate Governance, 5th Edition. John Wiley & Sons. Murphy, K., and T. Sandino. 2010. Executive pay and “independent” compensation consultants.

Journal of Accounting and Economics 49(3): 247-262.

Naiker, V., and D.S. Sharma. 2009. Former audit partners on the audit committee and internal control deficiencies. The Accounting Review 84 (2):559–87.

Naiker, V., D.S. Sharma, and V.D. Sharma. 2013. Do former audit firm partners on audit committees procure greater nonaudit services from the auditor?. The Accounting Review 88 (1): 297-326.

National Association of Corporate Directors (NCSD). 2001. Director compensation: Purposes, principles, and best practices. Washington DC: NACD.

2002-2003. Washington DC: NACD.

Newman, H. and H. Mozes. 1999.Does the composition of the compensation committee influence CEO compensation practices? Financial Management 28(3): 41-53.

Poerio, J.M., S.H. Harris, E.A. Razzano, and M.A. Gordon. 2013. NYSE and NASDAQ Issue Final Listing Rule Changes for Compensation Committees and Compensation Advisers. Stay Current (February), Paul Hasting LLP.

Sloan, A. 2003. Our Wall Street Editor's Take on Dick Grasso's Payday. Newsweek (September 22): 33-34.

Spatt, C. 2006. Executive compensation and contracting. Working paper, SEC and Carnegie Mellon University.

Srinivasan, S. 2005. Consequences of financial reporting failure for outside directors: Evidence from accounting restatements and audit committee members. Journal of Accounting Research 43 (2): 291–334.

Thorburn, K.S. 1997. Comment on top management compensation and the structure of the board of directors in commercial banks. European Finance Review 1: 261–264.

Vafeas, N. 2003a. Further evidence on compensation committee composition as a determinant of CEO compensation. Financial Management 32(2): 53-70.

Vafeas, N. 2003b.Length of board tenure and outside director independence. Journal of Business Finance and Accounting 30(7/8): 1043–64.

Wade, J., C. A. O’Reilly., and I. Chandratat. 1990. Golden parachutes: CEOs and the exercise of social influence. Administrative Science Quarterly 35 (4): 587–603.

Weisbach, M. 1988. Outside directors and CEO turnover. Journal of Financial Economics 20: 431–460.

Williamson, O.E. 1984. Corporate governance. Yale Law Journal 39: 1197-1230.

Yermack, D. 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40: 185–211.

Yermack, D. 2004. Remuneration, retention, and reputation incentives for outside directors. Journal of Finance 99 (5): 2381-2208.

Zajac, E. J. and J.D. Westphal. 1996. Director reputation, CEO-Board power, and the dynamics of board interlocks. Administrative Science Quarterly 41 (3): 507-529.

科技部補助專題研究計畫出席國際學術會議心得報告

日期：105 年 12 月 20 日

計畫編號

_MOST

1052410H004089

計畫名稱

減少審計委員會權益報酬是否可以增加重編公司盈餘之資訊內涵

出國人員

姓名

俞洪昭

服務機構

及職稱

國立政治大學會計學系教授

會議時間

2015 年 8 月 6 日

至

2015 年 8 月 9 日

會議地點

New York, NY, USA

會議名稱

(中文) 2016 美國會計學會年會

(英文) 2016 AAA Annual Meeting

發表題目

How Do Auditors React to Ineffective Audit Committees?

Evidence from Socially-tied CEOs and Audit Committee

Members

0

How Do Auditors React to Ineffective Audit Committees?

Evidence from Socially-tied CEOs and Audit Committee Members

Abstract

Motivated by the finding of prior research that social ties (resulting from past education, employment, or other non-professional activities) between CEOs and audit committee members will hamper audit committee oversight quality, we examine whether and how the auditors react to these social ties and what factors affect such reactions. Based on a large dataset of US-listed firms during 2004~2012, we document the following findings. First, at the aggregate level, CEO-audit committee social ties have increased 5% during the sample period. At the individual tie level, employment ties have doubled, from 8% in 2004 to 16% in 2012. Second, S&P 500 firms considerably reduced non-professional ties while non-S&P 500 firms substantially increased employment ties. Finally, while auditors consistently react to employment ties only, their reactions vary depending on firm types and whether firms’ audit committees have accounting experts. If there are accounting expert on the audit committees, the auditors will react by being more conservative to non-S&P 500 or resigning from S&P 500. If there is no accounting expert on the audit committees, the auditors will react by exerting more effort on non-S&P 500 firms. These results bear important implications for regulators and investors.

Keywords: Audit committee, Audit fees, Audit effort, Modified audit opinion, Social ties JEL Classification: M41, G14

Data Availability: The data used in this study are available from Audit Analytics, BoardEx,