This study focuses on the relationship between board effectiveness and
management compensation reporting. Specifically, the effect of overlapping
memberships in audit and compensation committees (OMAC) on the readability
of management compensation reports (MCR) is analyzed. Using archival data
from firms listed on the German HDAX between 2014 and 2018 (329 firm-year
observations) and the Flesch Reading Ease index, regression analysis shows a
positive significant effect of OMAC on MCR. Similar statistical results are found
in a robustness check, which refers to an alternative readability score (the
Gunning Fog index). Several corporate governance and firm characteristics are
included as control variables, and fixed-effects panel regressions are used. This
study provides empirical support for the agency-theoretical assumption that
board effectiveness and knowledge spillovers decrease conflicts of interest and
information asymmetry between boards of directors and shareholders.