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臺大管理論叢
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27
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1
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365
impaired because equity-based compensation aligns the interests of committee members and
top managers. Specifically, audit committee members who receive equity-based
compensation are more likely to compromise when they have disputes with executives over
financial reporting. For instance, Magilke, Mayhew, and Pike (2009) claim that there is a
logical inconsistency between what is considered optimal to maintain auditor independence
and what is considered optimal for the committee that oversees the auditor. Given the logic
for banning auditors from owning stock in the company, it seems rational to apply the same
logic to the audit committee members. If owning stock can bias the auditor and management,
it seems reasonable to infer that it can also bias the audit committee. Some empirical
research supports this idea. According to Bedard, Chtourou, and Courteau (2004) and also
Lynch and Williams (2012), a positive relation between earnings management and
exercisable option holdings by audit committee members is noted. Moreover, Yang and
Krishnan (2005) and Vafeas (2005) both find that stock ownership by audit committee
members is positively related to earnings management. Archambeault, Dezoort, and
Hermanson (2008) also find a positive association between short-term and long-term stock
option grants for audit committee members and the likelihood of accounting restatement.
Despite the possible compromise of audit committee members’ monitoring role
resulting from the use of equity-based compensation plans, why do some notable firms still
offer their audit committee stocks and stock options? This study examines the factors that
affect a firm’s decision to pay audit committee members with equity-based compensation.
We propose three factors that might contribute to this decision: (i) agency conflict in firms,
(ii) overlapping membership in audit committees and compensation committees, and (iii)
audit committee members who are also top executives of other companies.
Agency conflicts result from separation between ownership and control rights, divergent
management and shareholder objectives, and information asymmetry (Dey, 2008). As
conflicts increase, there are more opportunities and incentives for audit committee members
to benefit at the expense of shareholders, resulting in a greater likelihood of bias and of
compromise with management while conducting their duties. To prevent this negative
influence, firms with high agency conflict might prefer not to pay their audit committee
members with stocks and options.
Moreover, if some audit committee members also sit on compensation committees,
these audit committee members can determine their own compensation, and we expect that
they will prefer equity-based compensation because they can increase their own wealth by
advocating risky strategies to increase the value of the stock option holdings (Deutsch,