Is there an association between director option compensation and the likelihood of misstatement?

✍ Scribed by Charles P. Cullinan; Hui Du; Gail B. Wright

• Publisher: Elsevier Science
• Year: 2008
• Tongue: English
• Weight: 337 KB
• Volume: 24
• Category: Article
• ISSN: 0882-6110
• DOI: 10.1016/j.adiac.2008.05.003

✦ Synopsis

Oversight bodies in the United States (US) have addressed the issue of director independence in recent years. Bebchuk et al. [Bebchuk, L., Grinstein, Y., Peyers, U. (2006). Lucky directors. (Working paper Harvard University Law School) SSRN # 952239.] found that director oversight may be impaired if directors receive option grants under favorable terms because these grants may create a mutuality of interest between directors and managers. We assess whether option grants to independent directors reduce oversight of financial reporting. Using a sample of 105 US firms that misstated their revenue matched with a sample of non-misstatement firms, we find that companies whose independent directors do not receive stock options are less likely to misstate revenues than companies who meet the Sarbanes-Oxley definition of independence. Our results show that compensating outside directors with stock options may weaken their independent oversight.