Compensation of Independent Directors and the Effectiveness of Corporate Governance
ZHANG Tianshu, CHEN Xinyuan, HUANG Jun
School of Accountancy, Shanghai University of International Business and Economics; Institute of Accounting and Finance, Shanghai University of Finance and Economics
Abstract:
Usinging the data of listed companies from 2003 to 2013, this paper investigates the effect of the compensation of independent directors on corporate governance. When the compensation of independent directors is too low, the underpayment problem decreases the incentive of directors to fulfill their responsibilities, leading to a lower sensitivity of manager turnover and firm performance and a higher level of earnings management. Moreover, when the compensation of independent directors is too high, the overpayment problem reduces the independence of independent directors, also resulting in a lower sensitivity of manager turnover and firm performance and a higher level of earnings management. Finally, we investigate the influencing mechanism of the compensation of independent directors. We find that underpayment decreases the incentive of independent directors to attend board meetings and overpayment makes independent directors less likely dissent the proposals of board meetings.
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