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Board Committees, CEO Compensation, and Earnings Management


  • Christian Laux
  • Volker Laux


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.

Suggested Citation

  • Christian Laux & Volker Laux, 2009. "Board Committees, CEO Compensation, and Earnings Management," Working Paper Series: Finance and Accounting 181, Department of Finance, Goethe University Frankfurt am Main.
  • Handle: RePEc:fra:franaf:181

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    References listed on IDEAS

    1. Gunter Franke & Jan Pieter Krahnen, 2007. "Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Chapters,in: The Risks of Financial Institutions, pages 603-634 National Bureau of Economic Research, Inc.
    2. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
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    More about this item


    Corporate Governance; Executive Compensation; Earnings Management; Board Oversight;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other

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