Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/23445
Authors: 
Laux, Christian
Laux, Volker
Year of Publication: 
2007
Series/Report no.: 
Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting 181
Abstract: 
We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of performance-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.
Subjects: 
Corporate Governance
Executive Compensation
Earnings Management
Board Oversight
JEL: 
M41
G34
L29
D73
K22
D23
Document Type: 
Working Paper

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