Determinants of financial restatement: Does the CEO-board relationship and CEO compensation influence the risk of financial restatement?

摘要

The cataclysmic business failures of the past decade clearly outline the necessity for effective governance research and policy. These failures have prompted prominent investors, politicians, and researchers to show an ever-increasing interest in corporate fraudulent activity and its relationship to executive compensation packages and the CEO-board relationship. Further research is needed to better understand these relationships, especially the relationship between governance mechanisms and their influence on financial restatement, an outcome of fraud. This study looks to answer that need by examining the CEO-board relationship, as well as CEO compensation components, the combined effects of CEO compensation and CEO-board relationship variables, and their correlation to financial restatement when comparing firms in the same relative industry. 109 matched pairs of restated and non-restated Fortune 500 organizations across twelve industries were used to collect and analyze information from corporate proxy statements and annual reports. The results suggest that CEO bonus as a percentage of total compensation was found to decrease the probability of financial restatement as the percentage of bonus increases. Further, this research has found that when an organization has a high proportion of board members brought on by the current CEO and offers very little salary, but higher levels of CEO stock-options and restricted stock as a percentage of total compensation, that organization is more likely to restate its financials. This study provides new insight into the relationship between governance mechanisms and the propensity to restate, something costly to a majority of stakeholders affiliated with a firm.