The Governance Role of Independent Directors' Cash Compensation in Suspect Firms? Evidence From Real Earnings Management

This study investigates the relationship between cash compensation for independent directors and real earnings management in Chinese suspect firms over the period 2009–2023. The findings reveal that higher cash compensation to independent directors is associated with a reduction in real earnings management, suggesting that such compensation enhances board independence and strengthens its monitoring effectiveness. Further analysis indicates that this relationship is significantly shaped by the ownership structure. Specifically, the negative association between cash compensation and real earnings management is more pronounced in firms with non-state and foreign ownership, implying that these ownership types reinforce the governance role of independent directors in curbing managerial opportunism. The results remain robust across alternative measures of earnings management, different sample specifications, and after addressing endogeneity concerns through various econometric approaches. This study contributes to the literature by offering novel empirical evidence on the role of non-equity compensation in enhancing board monitoring in suspect firms. It also provides important insights for international investors, firms, and policymakers, particularly in the context of Chinese firms' growing integration into global markets following their inclusion in MSCI indices.