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Director Compensation and the Reliability of Accounting Information

Authors


  • I would like to thank David Reeb, Betty Simkins (guest editor), an anonymous referee, and seminar participants at the 2007 Eastern Finance Association and 2007 Financial Management Association annual meetings.

* Corresponding author: Department of Economics and Finance, School of Business, Lebanese American University, P.O. Box 13-5053, Beirut, Lebanon; Phone: 961-1-786456; Fax: 961-1-867098; E-mail: anwar.boumosleh@lau.edu.lb.

Abstract

This paper studies the effect of incentive-based compensation on directors' monitoring of management. Using total accruals to measure the level of earnings management, I find that director stock option compensation is associated with higher levels of total accruals. I interpret this result to suggest that director stock options are more likely to align interests of directors with those of managers and that this convergence of interest manifests in lower transparency and reliability of financial information. The results suggest that director stock option compensation provides incentive for directors to compromise their task in the financial reporting process.

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