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Equity†Based Compensation of Outside Directors and Corporate Disclosure Quality

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  • Partha Sengupta
  • Suning Zhang

Abstract

We examine the relationship between a firm's disclosure quality and equity†based compensation of independent members of the board of directors. The dimensions of disclosure quality we focus on are management's earnings guidance and information flowthrough financial analysts. Using both levels and changes specifications, we find the average ratio of equity†based pay to total pay of independent board members to be positively related to a firm's disclosure quality. Our findings are robust to the inclusion of management's equity†based compensation, other governance measures, and financial controls, and robust to instrumental variable tests of endogeneity. Furthermore, we find directors’ equity†based compensation to be negatively associated with the firm's cost of equity capital. Our results are consistent with equity†based compensation providing incentives to independent directors to push for better disclosure quality.

Suggested Citation

  • Partha Sengupta & Suning Zhang, 2015. "Equity†Based Compensation of Outside Directors and Corporate Disclosure Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 1073-1098, September.
    • Handle: RePEc:wly:coacre:v:32:y:2015:i:3:p:1073-1098
    DOI: 10.1111/1911-3846.12115
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    Cited by:

    1. Roberto Barontini & Stefano Bozzi & Guido Ferrarini, 2017. "Executive remuneration standards and the “conformity gap” at controlled corporations," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(3), pages 573-597, September.
    2. Xinming Liu & Gerald J. Lobo & Hung‐Chao Yu, 2021. "Is Audit Committee Equity Compensation Related to Audit Fees?," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 740-769, March.
    3. Ole-Kristian Hope & Haihao Lu & Sasan Saiy, 2019. "Director compensation and related party transactions," Review of Accounting Studies, Springer, vol. 24(4), pages 1392-1426, December.
    4. Maria Goranova & Lori Verstegen Ryan, 2022. "The Corporate Objective Revisited: The Shareholder Perspective," Journal of Management Studies, Wiley Blackwell, vol. 59(2), pages 526-554, March.
    5. Maryam Safari & Jacqueline Birt & Yi Xiang, 2022. "The sociology of compensation inequality in upper‐echelon positions: evidence from Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2615-2649, June.
    6. Liu, Sun, 2017. "The impact of equity incentive plans on analysts’ earnings forecasts and stock recommendations for Chinese listed firms: An empirical study," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 1-13.
    7. Ni, Yensen & Huang, Paoyu & Chen, Yuhsin, 2019. "Board structure, considerable capital, and stock price overreaction informativeness in terms of technical indicators," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 514-528.
    8. Han, Feng & Qin, Qi & Peabody, S. Drew, 2022. "Does incentive conflict between CEOs and CFOs benefit firms? Implications for corporate decision-making," Research in International Business and Finance, Elsevier, vol. 63(C).
    9. Ralf Winkler & Maximilian Behrmann, 2019. "Aufsichtsratsvergütung und Überwachungseffektivität: Empirische Befunde für börsennotierte Gesellschaften in Deutschland [Supervisory Board Compensation and Monitoring Effectiveness: Evidence from ," Schmalenbach Journal of Business Research, Springer, vol. 71(3), pages 381-414, November.
    10. Luo, Jin-hui & Dong, Huaili & Liu, Yue, 2023. "Does high cash compensation compromise the independence of outside directors? Evidence from directors' dissenting votes in China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).

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