%0 Journal Article %1 claassen2014analysis %A Claassen, Debbie %D 2014 %I SSRN %J SSRN eLibrary %K Supervisory_Board corporate_governance discretionary_accruals earnings_management employee_representation performance-based_compensation two-tier_system %R 10.2139/ssrn.2482487 %T Analysis of Supervisory Board Compensation Structure, Employee Representation and the Relation to Earnings Quality: Evidence from German Boards %U http://ssrn.com/paper=2482487 %X In this paper, I examine how the compensation structure of German Supervisory Boards affects earnings management and which role employee representatives play. Supervisory Boards of German firms consist of directors appointed by shareholders and, for firms with a sufficient number of employees, directors appointed by employee representatives. The Supervisory Board participates in the firm’s decision making, but also has the key fiduciary responsibility to audit and approve the Annual Financial Statements. In numerous cases shareholder representatives’ bonus plans are tied to financial performance, raising concerns about the integrity of financial reporting. In contrast, employee representatives are required to forward their remuneration to the Hans Böckler Foundation and can only keep a small fixed amount. In my sample of 357 firm-year observations the results indicate that Supervisory Boards that receive a long-term cash incentive are more likely to have higher levels of absolute discretionary accruals. This implies that these Supervisory Boards may reduce their attention to accruals choices made by the Management Board and manipulate financial performance to increase payoffs. However, I find that employee representation can weaken the positive effect a long-term bonus has on the magnitude of discretionary accruals. More specifically, firms with co-determined Supervisory Boards that provide their Supervisory Board members with a long-term bonus contract show a lower propensity to engage in earnings management. This result suggests that the forwarding of the employee representatives’ compensation increases independence on the Supervisory Board, which can diminish conflicts of interest in the Supervisory Board’s decision-making. Finally, I also find a direct relation between co-determined Supervisory Boards and earnings management, indicating that co-determined Supervisory Boards are more likely to monitor the financial reporting process and have incentives to constrain earnings management. Thus, employee representatives seem to view earnings management as a threat to their wages and the insolvency of the firm.

@article{claassen2014analysis, abstract = {In this paper, I examine how the compensation structure of German Supervisory Boards affects earnings management and which role employee representatives play. Supervisory Boards of German firms consist of directors appointed by shareholders and, for firms with a sufficient number of employees, directors appointed by employee representatives. The Supervisory Board participates in the firm’s decision making, but also has the key fiduciary responsibility to audit and approve the Annual Financial Statements. In numerous cases shareholder representatives’ bonus plans are tied to financial performance, raising concerns about the integrity of financial reporting. In contrast, employee representatives are required to forward their remuneration to the Hans Böckler Foundation and can only keep a small fixed amount. In my sample of 357 firm-year observations the results indicate that Supervisory Boards that receive a long-term cash incentive are more likely to have higher levels of absolute discretionary accruals. This implies that these Supervisory Boards may reduce their attention to accruals choices made by the Management Board and manipulate financial performance to increase payoffs. However, I find that employee representation can weaken the positive effect a long-term bonus has on the magnitude of discretionary accruals. More specifically, firms with co-determined Supervisory Boards that provide their Supervisory Board members with a long-term bonus contract show a lower propensity to engage in earnings management. This result suggests that the forwarding of the employee representatives’ compensation increases independence on the Supervisory Board, which can diminish conflicts of interest in the Supervisory Board’s decision-making. Finally, I also find a direct relation between co-determined Supervisory Boards and earnings management, indicating that co-determined Supervisory Boards are more likely to monitor the financial reporting process and have incentives to constrain earnings management. Thus, employee representatives seem to view earnings management as a threat to their wages and the insolvency of the firm.}, added-at = {2015-04-10T14:04:25.000+0200}, author = {Claassen, Debbie}, biburl = {https://www.bibsonomy.org/bibtex/2456a06a4742de0dc137eb1891b686272/meneteqel}, doi = {10.2139/ssrn.2482487}, interhash = {8892ae1188f2523dd395c6b94039e11d}, intrahash = {456a06a4742de0dc137eb1891b686272}, journal = {SSRN eLibrary}, keywords = {Supervisory_Board corporate_governance discretionary_accruals earnings_management employee_representation performance-based_compensation two-tier_system}, language = {English}, location = {http://ssrn.com/paper=2482487}, publisher = {SSRN}, timestamp = {2015-04-10T14:06:10.000+0200}, title = {Analysis of Supervisory Board Compensation Structure, Employee Representation and the Relation to Earnings Quality: Evidence from German Boards}, type = {Working Paper Series}, url = {http://ssrn.com/paper=2482487}, year = 2014 }