Does independent director’s cash compensation matter? Evidence from corporate fraud
Abstract
This study empirically investigates the relationship between independent directors’ cash compensation and the likelihood of corporate fraud. Using data of 2542 Chinese firms and 17239 firm years from 2010 to 2017, the findings of logistic regression, firm-fixed effects, instrumental variable specification, and propensity score matching models show that there is a negative association between cash compensation of independent directors and corporate fraud. Our findings suggest that if independent directors are treated with higher cash compensation, it enhances the board’s independence and makes the effective monitoring over management behaviors and financial reporting process. On contrary to non-SOEs, the findings also document that the negative association between independent directors’ compensation and corporate fraud is pronounced in SOEs. The study not only shows the impact of independent director’s compensation on firm fraud beyond agency and contract theories but also creates policy implications regarding independent director’s compensation in particular scenario of emerging economies.
Keyword : independent directors’ cash compensation, corporate fraud, financial reporting quality, non-equity incentives, state ownership, China
How to Cite
Radwan, A., Tian, G., Garefalakis, A., Koutoupis, A., & Kyriakogkonas, P. (2022). Does independent director’s cash compensation matter? Evidence from corporate fraud. Journal of Business Economics and Management, 23(4), 977–996. https://doi.org/10.3846/jbem.2022.16217
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Crutchley, C. E., & Minnick, K. (2012). Cash versus incentive compensation: Lawsuits and director pay. Journal of Business Research, 65(7), 907–913. https://doi.org/10.1016/j.jbusres.2011.05.008
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Fich, E. M., & Shivdasani, A. (2007). Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics, 86(2), 306–336. https://doi.org/10.1016/j.jfineco.2006.05.012
Firth, M., Fung, P. M., & Rui, O. M. (2007). How ownership and corporate governance influence chief executive pay in China’s listed firms. Journal of Business Research, 60(7), 776–785. https://doi.org/10.1016/j.jbusres.2007.01.014
Galyfianakis, G., Garefalakis, A., & Mantalis, G. (2017). The effects of commodities and financial markets on crude oil. Oil & Gas Science and Technology, 72(1), 1–10. https://doi.org/10.2516/ogst/2016024
Garefalakis, A., & Dimitras, A. (2016). The Contribution of Management Commentary Index (Ma.Co.I) in Annual Banking Reports (ABR) and the Chronicle of the Great Greek Crisis. Theoretical Economics Letters, 6(5), 1060–1087. https://doi.org/10.4236/tel.2016.65103
Garefalakis, A., Dimitras, A., & Lemonakis, C. (2017). The effect of Corporate Governance Information (CGI) on Banks’ reporting performance. Investment Management and Financial Innovations, 14(2), 63–70. https://doi.org/10.21511/imfi.14(2).2017.06
Garefalakis, A., Dimitras, A., Floros, C., & Lemonakis, C. (2016). How narrative reporting changed the business world: Providing a new measurement tool. Corporate Ownership and Control, 13(4), 317–334. https://doi.org/10.22495/cocv13i4c2p5
Garefalakis, A., Lappa, E., Mantalis, G., Xanthos, G., & Alexopoulos, G. (2015). ‘Is the adoption of IFRS, an essential element concerning the Mediterranean European Union’s Banks? European Journal of Scientific Research, 136(2), 169–177.
Giannarakis, G., Sariannidis, N., & Garefalakis, A. (2011). The content of Corporate Social Responsibility information: The case of Greek telecommunication sector. International Business Research, 4(3), 33–44. https://doi.org/10.5539/ibr.v4n3p33
Haß, L. H., Müller, M. A., & Vergauwe, S. (2015). Tournament incentives and corporate fraud. Journal of Corporate Finance, 34, 251–267. https://doi.org/10.1016/j.jcorpfin.2015.07.008
Haß, L. H., Vergauwe, S., & Zhang, Z. (2019). State-ownership and bank loan contracting: Evidence from corporate fraud. The European Journal of Finance, 25(6), 550–567. https://doi.org/10.1080/1351847X.2017.1328454
He, L. R., & Fang, J. X. (2016). Subnational institutional contingencies and executive pay dispersion. Asia Pacific Journal of Management, 33(2), 371–410. https://doi.org/10.1007/s10490-015-9429-9
Hope, O.-K., Lu, H., & Saiy, S. (2019). Director compensation and related party transactions. Review of Accounting Studies, 24(4), 1392–1426. https://doi.org/10.1007/s11142-019-09497-w
Huang, C. (2008). Worldwide corporate convergence within a pluralistic business legal order: Company law and the independent director system in contemporary China. Hastings International and Comparative Law Review, 31(1), 361–436.
Huang, W., & Boateng, A. (2017). Executive shareholding, compensation, and analyst forecast of Chinese firms. Applied Economics, 49(15), 1459–1472. https://doi.org/10.1080/00036846.2016.1218432
Huang, Z., Lou, Y., & Taitel, M. (2013). A case application of propensity score matching in the outcomes evaluation of medication therapy management at retail pharmacy. Presented at the SAS Global Forum. http://support.sas.com/resources/papers/proceedings13/215P-2013.pdf
Jensen, M. C. (2001). Foundations of organizational strategy. Harvard University Press.
Jensen, M. C. (2005). Agency costs of overvalued equity. Financial Management, 34(1), 5–19. https://doi.org/10.1111/j.1755-053X.2005.tb00090.x
Jia, C., Ding, S., Li, Y., & Wu, Z. (2009). Fraud, enforcement action, and the role of corporate governance: Evidence from China. Journal of Business Ethics, 90(4), 561–576. https://doi.org/10.1007/s10551-009-0061-9
Jiang, L., Kling, G., & Bo, H. (2021). Does executive compensation affect firms’ acquisition decisions? Evidence from China. Asia Pacific Business Review, 27(5), 731–748. https://doi.org/10.1080/13602381.2020.1834736
Johnson, S. A., Ryan, H. E., & Tian, Y. S. (2003). Executive compensation and corporate fraud [Unpublished paper]. Lousiana State University, Baton Rouge, LA.
Johnson, S. A., Ryan, H. E., & Tian, Y. S. (2009). Managerial incentives and corporate fraud: The sources of incentives matter. Review of Finance, 13(1), 115–145. https://doi.org/10.1093/rof/rfn014
Karpoff, J. M., Lee, D. S., & Martin, G. S. (2014). The consequences to managers for financial misrepresentation. In R. Di Pietra, S. McLeay, & J. Ronen (Eds.), Accounting and regulation (pp. 339–375). Springer. https://doi.org/10.1016/j.jfineco.2007.06.003
Kim, J. Y., Roden, D. M., & Cox, S. R. (2013). The composition and compensation of the board of directors as predictors of corporate fraud. Accounting and Finance Research, 2(3), 142–154. https://doi.org/10.5430/afr.v2n3p142
Kong, D., Xiang, J., Zhang, J., & Lu, Y. (2019). Politically connected independent directors and corporate fraud in China. Accounting & Finance, 58(5), 1347–1383. https://doi.org/10.1111/acfi.12449
Lanis, R., & Richardson, G. (2018). Outside directors, corporate social responsibility performance, and corporate tax aggressiveness: An empirical analysis. Journal of Accounting, Auditing & Finance, 33(2), 228–251. https://doi.org/10.1177/0148558X16654834
Larcker, D. F., & Rusticus, T. O. (2010). On the use of instrumental variables in accounting research. Journal of Accounting and Economics, 49(3), 186–205. https://doi.org/10.1016/j.jacceco.2009.11.004
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