Do overlapping audit and compensation committee memberships contribute to better financial reporting quality? Empirical evidence for the German two-tier system

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Strengthening audit committee effectiveness is a key challenge from
a research, regulation and corporate practice perspective. Audit committees’
monitoring role in financial reporting is of great importance for shareholders
and other stakeholder groups. This empirical-quantitative study examines
overlapping membership in the audit and compensation committees and its
impact on financial reporting quality. The analysis covers a sample of German
firms listed on the ‘DAX’, ‘TecDAX’ and ‘MDAX’ for the business years
2010–2016 (426 firm-year observations). Correlation and regression analyses
were conducted to evaluate the link between two overlapping variables and
financial reporting quality. While the first overlapping variable (proportion of
audit committee members who also sit on the compensation committee)
contributes positively to accrual quality (as financial reporting quality), no
significant results were found for the second overlapping variable (the
existence of an independent financial expert as an overlapping member). The
main result holds for robustness checks and has major implications in the
German two-tier system.
Original languageEnglish
JournalInternational Journal of Economics and Accounting
Issue number3/4
Pages (from-to)196-214
Number of pages19
Publication statusPublished - 2017