We investigate whether audit committee members of the board prove to be better monitors if they are also on the compensation committee, as they would be more attuned to compensation related earnings management incentives. Analyzing data on a sample of S&P 500 firms over the period 2003-2005, we find that ceteris paribus, firms with overlapping audit and compensation committees have higher financial reporting quality, proxied for by discretionary accruals than those without such overlap. Further, we find that there is an inverted U shaped relationship between overlapping magnitude and financial reporting quality, with an optimum overlap of about 47%. Our findings are robust to controlling for the percentage of CEOs' incentive compensation and using accounting restatements as another proxy for financial reporting quality. Overall, our results suggest that there is knowledge spillover from the compensation committee to the audit committee, as reflected in higher financial reporting quality. We interpret this to suggest that some overlapping of the committee memberships may be beneficial to audit committee monitoring effectiveness.
This paper studies earnings management using 363 closed–end mutual fund firm–years of data. Closed–end fund assets consist of unrestricted and restricted securities, and realized and unrealized income. While unrestricted securities are not subject to earnings management, restricted security values are largely discretionary. Managerial valuation of restricted securities is modeled as contingent on unrestricted returns relative to a performance benchmark. Four unrestricted performance regions are identified. Known multi–period compensation incentives become the basis for hypothesizing earnings management behaviors in the regions in the form of restricted security valuation. Across several benchmarks, the results are consistent with multi–period maximization rather than simpler single–period compensation maximization or income smoothing. Funds with extreme unrestricted performance show relatively larger income–decreasing earnings management, and funds with slightly–below benchmark returns show relatively larger income–increasing earnings management than those slightly above. These results clarify the relationship between complex earnings management behavior and managerial incentives.
Purpose -The purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001-2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). Design/methodology/approach -Using logistic regression models, the paper compares 147 ''freeze firms'' with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firm's competitive position. Findings -The potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision. Research limitations/implications -It is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158. Originality/value -This paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.
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