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臺大管理論叢
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decisions.
3. Hypothesis Development
Given that equity compensation might reduce an audit committee’s monitoring
effectiveness, why do some companies still compensate audit committee members with
stocks and options? This study argues that the following factors might be related to a
company’s tendency to give its audit committee members equity-based compensation:
agency conflict in a company, overlapping membership on audit and compensation
committees, and the proportion of audit committee members who are also top executives in
other companies.
3.1 Agency Conflicts
Conflicts exist between shareholders and corporation executives, including not only
managers but also directors (Engel, Hayes, and Wang, 2010), because of separation between
ownership and control rights, divergent management and shareholder objectives, and
information asymmetry between shareholders and corporations (Dey, 2008). These
conflicting interests can be collectively referred to as agency conflicts. Similar to managers,
these agency conflicts along with sufficient latitude in reviewing firms’ accounting processes
give audit committee members incentives and opportunities to maximize their own utility,
even when those actions do not maximize shareholder wealth (Watts and Zimmerman, 1986).
Based on Lynch and Williams (2012) finding, the optimal response to calls for equity
compensation for board members might differ based on the responsibility of each board
member. While using equity compensation for board members involved in making strategic
decisions for the firm may be appropriate and more likely to result in positive outcomes, the
advantages of compensating audit committee members, whose responsibility is to ensure the
integrity of financial reporting, with equity compensation might not be so obvious. When a
firm’s agency conflicts are high, audit committee members will have more opportunities to
benefit themselves. Offering these members stocks and options may further deteriorate this
situation. The independence of audit committee members may be impaired; hence the
negative effects of equity-compensation, such as the likelihood of earnings management,
internal control weaknesses, accounting restatements, and impairment of audit committee
members’ accounting expertise on earnings quality may be stronger (Bedard et al., 2004;
Vafeas, 2005; Archambeault et al., 2008; Cullinan et al., 2010; Krishnan and Yu, 2014). As
stated by Gompers, Ishii, and Metrick (2003) and Dey (2008), firms improve their corporate
governance by adopting policies and procedures to protect their investments when facing