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Auditor independence, executive pay and firm performance
Author(s) -
Iyengar Raghavan J.,
Zampelli Ernest M.
Publication year - 2008
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2007.00226.x
Subject(s) - executive compensation , accounting , chief executive officer , incentive , simultaneity , business , audit , auditor independence , earnings , credibility , pay for performance , earnings management , economics , microeconomics , internal audit , management , joint audit , physics , classical mechanics , political science , law
This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.