Jerry Sun

The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance

Our findings imply that shareholders and directors should be concerned about the composition of compensation committees as we find that compensation committee quality varies depending on compensation committee size and other characteristics of the committee members. Our findings also imply that for compensation committee members, there are greater challenges in monitoring CEO compensation contracts for firms with high growth or that incur losses. Further, our findings imply that even when all compensation committees are regulated to be fully independent, there are still quality differences among these independent compensation committees.We contribute to the agency-based research on CEO compensation by: 1) directly examining the impact of compensation committee quality on the sensitivity of CEO cash compensation to accounting earnings; 2) examining whether the role of compensation committee quality varies across firms; and 3) developing a broader and richer measure of compensation committee quality.Using a sample of 812 US firms, we find that CEO cash compensation is more positively associated with accounting earnings when firms have high compensation committee quality. We also find that the positive effect of compensation committee quality on the association between CEO cash compensation and accounting earnings is less for high growth firms or loss-making firms.We examine the effect of compensation committee quality on the association between CEO cash compensation and accounting earnings and the moderating effects of growth opportunities and earnings status.EmpiricalWe examine the effect of compensation committee quality on the association between CEO cash compensation and accounting earnings and the moderating effects of growth opportunities and earnings status.Using a sample of 812 US firms, we find that CEO cash compensation is more positively associated with accounting earnings when firms have high compensation committee quality. We also find that the positive effect of compensation committee quality on the association between CEO cash compensation and accounting earnings is less for high growth firms or loss-making firms.We contribute to the agency-based research on CEO compensation by: 1) directly examining the impact of compensation committee quality on the sensitivity of CEO cash compensation to accounting earnings; 2) examining whether the role of compensation committee quality varies across firms; and 3) developing a broader and richer measure of compensation committee quality.Our findings imply that shareholders and directors should be concerned about the composition of compensation committees as we find that compensation committee quality varies depending on compensation committee size and other characteristics of the committee members. Our findings also imply that for compensation committee members, there are greater challenges in monitoring CEO compensation contracts for firms with high growth or that incur losses. Further, our findings imply that even when all compensation committees are regulated to be fully independent, there are still quality differences among these independent compensation committees.

Auditor industry specialization, board governance, and earnings management

Purpose - The purpose of this study is to investigate the interaction effect of auditor industry specialization and board governance on earnings management. This study examines whether board independence is more or less effective in constraining earnings management for firms audited by industry specialists than for firms audited by non-specialists. Design/methodology/approach - The US data were collected from the RiskMetrics Directors database and the Compustat database. Regression analysis was used to test the research proposition. Findings - It was found that earnings management is more negatively associated with board independence for firms audited by industry specialists than for firms audited by non-specialists, consistent with the notion that there is a complementary relationship between auditor industry specialization and board governance. The findings suggest a positive interaction effect of auditor industry specialization and board governance on accounting quality. Originality/value - This study contributes to the literature by documenting explicit evidence that high quality boards can be more effective through hiring industry specialist auditors. This study also suggests that it may be worth investigating the interaction effect among different corporate governance mechanisms on accounting quality.

The Effect of Audit Experience on Audit Fees and Audit Quality

Prior research on audit experience focuses on behavioral studies that are conducted by running experiments. Although these studies provide evidence on the role of experience in completing specific audit tasks, they do not shed light on how experience affects a complete audit engagement. We conduct an archival study to examine the effect of audit experience on audit fees and audit quality. Using unique data from China, where the signees of the audit report can be identified and linked with a government database containing personal information about certified public accountants, we find that experience is positively associated with audit fees and negatively associated with absolute discretionary accruals. Furthermore, we extend the research on personal characteristics of audit partners by considering the incremental effects of gender, education, engagement tenure, industry specialization, and client importance after controlling for overall audit experience. Overall, our results suggest that the auditors’ personal characteristics may serve as a signal of the level of care that will be exercised during the audit process. Our results also have implications for China’s recently announced regulation that would require localization of Big 4 offices in China.

Governance Role of Analyst Coverage and Investor Protection

This study examines whether investor protection affects the governance role of analysts in constraining earnings management. Using a sample of 50,966 company-year observations from 24 countries for 1990–2007, the study finds that earnings management is more negatively associated with analyst coverage in weak investor protection countries than in strong investor protection countries. The findings suggest that analyst coverage plays a more important governance role in countries where investor protection is weak (i.e., a substitute relationship exists between analyst coverage and investor protection). In examining the relationship between analyst coverage and earnings management, recent research has found that high analyst coverage is associated with less earnings management in the United States, suggesting that analyst coverage can play a governance role in capital markets. The research on analysts’ governance role is limited, however, especially in an international context. This study examines whether investor protection affects the governance role of analysts in constraining earnings management. Using a sample of 50,966 company-year observations from 24 countries for 1990–2007, I found that earnings management is more negatively associated with analyst coverage in weak investor protection countries than in strong investor protection countries. The results are robust to several additional analyses. My findings suggest that analyst coverage plays a more important governance role in countries where investor protection is weak (i.e., a substitute relationship exists between analyst coverage and investor protection). This study contributes to the literature in two ways. First, it extends the limited research on the governance role of analysts. It focuses on international data and the impact of investor protection on analysts’ governance role. By examining the relationship between analyst coverage and earnings management in an international context, this study provides further evidence on the substitute relationship between analyst coverage and investor protection and thus expands the research on the international governance role of analysts. Second, it adds to the growing literature on international analysts. Prior research has focused on investigating the effect of country-level institutions on analyst coverage and forecast accuracy. This study extends that research by examining the relationship between investor protection and the effectiveness of analyst coverage in constraining earnings management.

Independent Audit Committee Members’ Board Tenure and Audit Fees

An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.

The Effect of Analyst Coverage on the Informativeness of Income Smoothing

This study examines whether analyst coverage affects the informativeness of income smoothing. I find that income smoothing enhances earnings informativeness more greatly for firms with high analyst coverage than for firms with low analyst coverage. The results suggest that income smoothing more efficiently communicates private information to investors when firms are followed by more analysts, consistent with the notion that analysts play an important information intermediary role in enhancing the informativeness of income smoothing.

Ultimate ownership structure and corporate disclosure quality: evidence from China

Purpose - The purpose of this paper is to examine whether the type of ultimate controllers (i.e. private vs state) affects corporate disclosure quality and whether the relationship between the type of ultimate controllers and corporate disclosure quality is moderated by the separation of ownership and control. Design/methodology/approach - This study employs the data of 405 Chinese listed firms in 2005. Annual reports were reviewed to collect the data including the type of ultimate owners, cash-flow rights, and control rights; and the ratings of corporate disclosure quality were obtained from the Shenzhen Stock Exchange website. Ordered logistic regression tested the hypotheses. Findings - It was found that corporate disclosure quality is lower for firms ultimately controlled by individuals than for firms ultimately controlled by the state. Also, the negative effect of private ultimate ownership on corporate disclosure quality is stronger for firms with high deviation of cash-flow rights and control rights. Practical implications - These findings suggest that privatizing state-owned companies may increase the expropriation of minority shareholders by controlling shareholders if the privatization does not reduce the separation of cash-flow rights from control rights. Thus, it may be necessary to strengthen the governance role of minority shareholders and constrain the divergence between cash-flow rights and control rights of the ultimate owners when state-owned companies are privatized. Originality/value - This study contributes to the literature on the expropriation of minority shareholders by examining the main effect of the type of ultimate controllers and the interactive effect of ultimate ownership type and the divergence of ownership and control on corporate disclosure quality.

Investment opportunity set, board independence, and firm performance : The impact of the Sarbanes-Oxley Act

Purpose - – The purpose of this paper is to investigate the impact of Sarbanes-Oxley Act (SOX) on high growth firms’ corporate governance. Specially, the study examines whether there is a negative impact of SOX on the interactive effect of board independence and investment opportunity set on firm performance. Design/methodology/approach - – Sample firms were selected from the Investor Responsibility Research Center Directors’ database. Both accounting- and market-based firm performance measures are used. Regressions are run to test the hypothesis. Findings - – It was found that the impact of SOX on the interaction effect of board independence and investment opportunity set on firm performance is negative. Originality/value - – The results suggest that the impact of SOX in corporate governance and regulatory environment mitigates the effect of board independence on the relationship between investment opportunity set and firm performance, consistent with the notion that the enactment of SOX increases monitoring costs of board governance especially for high-growth firms.