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Director compensation and related party transactions

Author

Listed:
  • Ole-Kristian Hope

    (University of Toronto
    BI Norwegian Business School)

  • Haihao Lu

    (University of Waterloo)

  • Sasan Saiy

    (University of Waterloo)

Abstract

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.

Suggested Citation

  • Ole-Kristian Hope & Haihao Lu & Sasan Saiy, 2019. "Director compensation and related party transactions," Review of Accounting Studies, Springer, vol. 24(4), pages 1392-1426, December.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:4:d:10.1007_s11142-019-09497-w
    DOI: 10.1007/s11142-019-09497-w
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    2. Fang, Lily & Huang, Sterling, 2024. "The governance of director compensation," Journal of Financial Economics, Elsevier, vol. 155(C).
    3. Haiyan Jiang & Gary Tian & Donghua Zhou, 2021. "The influence of the deregulation of short‐selling on related‐party transactions: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1022-1056, May.
    4. Chan, Konan & Chen, Vincent Y.S. & Huang, Yu-Fang & Liang, Jia-Wen, 2023. "Outside directors' equity incentives and strategic alliance decisions," Journal of Corporate Finance, Elsevier, vol. 79(C).
    5. Frye, Melissa B. & Gatchev, Vladimir A. & Pham, Duong T., 2024. "Director self-dealing: Evidence from compensation peer groups," Journal of Corporate Finance, Elsevier, vol. 85(C).
    6. Tong Li & Nengsheng Luo, 2024. "Dividend Payments and Persistence of Firms’ Green Innovation: Evidence from China," Sustainability, MDPI, vol. 16(18), pages 1-29, September.
    7. Bansal, Shashank & Singh, Harminder, 2023. "Does market competition foster related party transactions? Evidence from emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    8. Luo, Jin-hui & Dong, Huaili & Liu, Yue, 2023. "Does high cash compensation compromise the independence of outside directors? Evidence from directors' dissenting votes in China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    9. Farooq, Muhammad Umar & Su, Kun & Boubaker, Sabri & Ali Gull, Ammar, 2022. "Does gender promote ethical and risk-averse behavior among CEOs? An illustration through related-party transactions," Finance Research Letters, Elsevier, vol. 47(PB).
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    More about this item

    Keywords

    Related party transactions; Director compensation; Board monitoring; Corporate governance; Disclosure; Audit committees; SFAS 57; Regulation S-X;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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