Audit Committee Cash Compensation and Propensity of Firms to Beat Earnings by a Large Margin: Conditional Effects of CEO Power and Agency Risks

20 Pages Posted: 10 Oct 2017

See all articles by Maria F. Rickling

Maria F. Rickling

Stetson University

Divesh Sharma

Kennesaw State University, School of Accountancy

Date Written: November 2017

Abstract

This study examines the association between cash‐based compensation of directors on the audit committee and the propensity with which firms beat forecasted earnings by a large margin. We also examine how this association is affected by CEO power and three agency risk factors present in the firm, namely size, leverage, and performance. We find that greater cash in the compensation structure is negatively associated with the likelihood of actual earnings beating forecasted earnings by a large margin. In addition, we find that this negative association is modestly weaker in firms managed by a powerful CEO and stronger in firms that are exposed to more agency risks. Findings generally suggest compensation plans comprised predominantly of cash may promote objective financial reporting oversight performed by the audit committee and more specifically when CEOs are less powerful and need for monitoring is heightened. Our results have implications for investors, directors, regulators, governance activists, and future researchers.

Keywords: Agency, analyst forecast, audit committee, cash, CEO power, compensation, corporate governance, earnings management, managerial hegemony

Suggested Citation

Rickling, Maria F. and Sharma, Divesh Shankar, Audit Committee Cash Compensation and Propensity of Firms to Beat Earnings by a Large Margin: Conditional Effects of CEO Power and Agency Risks (November 2017). International Journal of Auditing, Vol. 21, Issue 3, pp. 304-323, 2017, Available at SSRN: https://ssrn.com/abstract=3050224 or http://dx.doi.org/10.1111/ijau.12098

Maria F. Rickling (Contact Author)

Stetson University

Gulfport, FL 33707
United States

Divesh Shankar Sharma

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

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