Audit Committee’s Cash Compensation and Earnings Management: The Moderating Effects of Institutional Factors

Abstract

This paper investigates the relationship between the audit committee’s cash compensation and accrual earnings management. Using a sample of Chinese listed firms over the period 2007 to 2017, findings show a positive association between cash compensation of the audit committee and accrual earnings management. It suggests that high cash compensation to audit committee directors compromises their monitoring role related to financial reporting quality, and high cash compensation to audit committee’s directors leads to an alignment in the audit committee’s interests with those of managers. We also examine the implications of ownership structure and institutional environment on this relationship. Results show that state-ownership significantly moderates the association between the audit committee’s cash compensation and accrual earnings management. We also investigate whether this relationship is influenced by the regional development level or not. Results reveal no difference in this positive association for firms located in more versus less developed regions. Our findings can be of broad interest to regulators in improving corporate governance.