Director Compensation and Related Party Transactions

Abstract

This paper examines whether independent directors’ compensation is associated with related party transactions (RPTs). We focus both on directors’ total compensation and on their equity-based compensation. Employing hand-collected data for S&P 1500 firms, we find that independent directors’ compensation is significantly associated with RPTs. Specifically, we predict and find that level of compensation is positively related to RPTs, but we do not find equity-based compensation to be associated with RPTs. 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 RPTs and director compensation is moderated by corporate governance mechanisms, suggesting that the association between director compensation and RPTs reflects a conflict of interest between insiders and shareholders. We also find some evidence that the effects of director compensation on RPTs are stronger for RPTs with directors compared with RPTs with non-directors, for non-business RPTs compared with business RPTs, and for ex post RPTs compared to ex ante RPTs.