Chih-Hsien Liao

Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees

Manuscript Type. Empirical. Research Question/Issue. This study examines the factors associated with the presence of the same directors across the compensation committee and the audit committee in US firms, and whether such common membership enhances or undermines effective governance. Research Findings/Insights. Using 4,572 firm�?year observations in the US during fiscal years 2004–2008, the results show that common membership is more likely to occur in firms with weak corporate governance and in firms lacking financial and committee resources, and is not associated with firms having a high demand for coordination between compensation and audit committees. We also find that firms with common membership have poorer earnings quality and weaker pay�?performance sensitivity than other firms. Theoretical/Academic Implications. Our study is one of the first to propose theoretical arguments and empirical evidence on the determinants as well as the consequences of common membership across compensation and audit committees. We fill the gap in the literature by examining the interplay between these committees. Practitioner/Policy Implications. This study offers practical implications for corporations. The findings indicate that common membership is not employed to fulfill the coordinative role between audit and compensation committees and can put the effectiveness of audit and compensation committees at risk. Therefore, firms who intend to strengthen compensation practices or improve financial reporting quality should re�?examine their committee structures to ensure proper task separation.

Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?

This study examines whether compensation committees adjust CEO/CFO compensation using the auditor opinions on internal control effectiveness (SOX 404 opinions), and whether the emphasis on internal controls depends on the level of compensation committees’ financial expertise. Following SOX 404, a firms CEO and CFO are required to evaluate the effectiveness of internal controls over financial reporting, subject to the auditors attestation. In light of recent accounting fraud, we expect and find that compensation committees adjust CEO/CFO compensation by reference to the SOX 404 opinions. Using different measures of financial expertise, we also find that the relationship is more pronounced in firms with higher levels of financial expertise. Our results suggest the importance of including directors with financial expertise on compensation committees.

Earnings Quality and Pay-Performance Sensitivity: Evidence from Employee Profit-Sharing Bonus in Taiwan

Using data on the widespread profit-sharing schemes in Taiwan, we explore whether companies take into consideration earnings quality in the pay-performance sensitivity of employee profit-sharing bonus, and whether corporate governance helps improve the alignment. Our results show that the sensitivity of profit-sharing bonus to earnings performance is increasing in earnings management. However, we find that in firms with strong governance the pay-performance sensitivity of managed earnings is significantly reduced. The results are robust to controlling for firm characteristics and to different earnings quality. Our study provides important implications for the effective use of profit-sharing plans.