Audit committee compensation and earnings management around M&A

Abstract

This study examines the impact of equity compensation of audit committee members on the increasing monitoring role in earnings management around mergers and acquisitions (M&A). The results find support for the incentive alignment hypothesis, which suggests that compensating directors on audit committees with equity increases their monitoring role in reducing earnings management. The findings imply that the audit committee incentivized with equity compensation does due diligence increases the oversight responsibility over financial reporting and reduces the tendency for the firm to engage in earnings management around M&A. In addition, the results of this study support the incentive alignment hypothesis that when the post-acquisition profitability of the M&A is high, audit committee members are likely to increase their oversight responsibility over financial reporting during M&A.