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臺大管理論叢
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27
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369
compensation on the objectivity of audit committee members and reproduce three regimes:
cash compensation, unrestricted stock or vested-in-the-money options, which are linked to
current shareholders, and restricted stock or unvested options, which are linked to future
shareholders. They find that committee members who do not receive stock-based
compensation are the most objective, leading to the lowest bias in financial reporting, while
the compensation structure linked to current shareholders is associated with aggressive
financial reporting. On the other hand, compensation linked to future shareholders is shown
to have overly conservative reporting. The results suggest that the relation between audit
committee compensation and earnings management may vary based on the form of
compensation.
Along these lines, two studies using pre-SOX data provide similar results. Bedard et al.
(2004) suggest that earnings management is positively associated with the proportion of
audit committee members’ equity holdings that are options exercisable in the short term.
Stock options may reduce the effectiveness of the committee’s monitoring of earnings
management and allow an increase in either current earnings (Positive Earnings
Management) or future earnings (Negative Earnings Management). Because audit committee
members may have a short-term perspective with respect to their ownership stake and
because equity-based compensation permit outsiders to become insiders, the independence of
audit committee members might be impaired. Archambeault et al. (2008), who examine
whether options given to audit committee members are associated with accounting
restatements, discover that short-term and long-term options are related to higher likelihood
of restatement.
Cullinan, Du, and Jiang (2010) use a post-SOX sample of firms that have internal
control weaknesses in 2004-2005 to examine the relationships between internal control
weakness and the option compensation of the audit committee. They conclude that firms that
compensate audit committee members with stocks and options are significantly more likely
to report an internal control weakness.
2.3 Overlapping Membership on Audit and Compensation Committee
Can directors who concurrently serve on audit committees and compensation
committees better fulfill their responsibilities? The evidence provided by prior studies is
mixed. On one hand, overlapping membership on the two committees may generate a
“knowledge sharing” effect, which is useful in carrying out their duties respectively. For
example, Carter, Lynch, and Zechman (2009) find that concurrent membership on audit and