Abstract
We document that reputation incentives of independent directors vary across firms and significantly influence CEO compensation structure and accounting statement quality. When more independent directors rank directorships higher (lower), boards employ more (less) equity-based CEO compensation, which raises (lowers) CEO pay-performance sensitivity. These firms also exhibit lower accrual-based and real earnings management and fewer earnings restatements. Compensation and audit committee member reputation incentives are particularly important. These results are invariant to endogeneity adjustments using multiple approaches. We conclude that directors with strong reputation incentives exhibit greater concern about more CEO equity-based pay heightening incentives to inflate earnings.
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