Director compensation and related party transactions
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This paper examines whether independent directors’ compensation is associated with related party transactions. We focus both on directors’ total compensation and their equity-based compensation. Employing hand-collected data for S&P 1500 firms, we find that independent directors’ compensation is significantly associated with related party transactions. Specifically, we find that the level of compensation is positively related to these transactions, but we do not find equity-based compensation to be associated with them. Next, we decompose the compensation measures into “market” (i.e., predicted) level and “excessive” components and find that the results are driven by the excessive components. This association between related party transactions and director compensation is moderated by corporate governance mechanisms, suggesting that the association between the two reflects a conflict of interest between insiders and shareholders.
KeywordsRelated party transactions Director compensation Board monitoring Corporate governance Disclosure Audit committees SFAS 57 Regulation S-X
JEL classificationG30 G31 G32 M10 M41
We appreciate valuable comments from Russel Lundholm (the Editor), an anonymous reviewer, Gus De Franco, Mark Kohlbeck, Shibin Tang, Baohua Xin, Ping Zhang, and seminar participants at the Rotman School of Management, the EAA conference, AAA conference, CFEA conference, and the CAAA conference. Hope gratefully acknowledges funding from the Deloitte Professorship.
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