CEO Equity Incentives And Earning Quality: The Role Of Auditor Expertise

The fundamental purpose of CEO equity incentives is to mitigate the agency conflict between the company owner and the CEO, most researches find that the implementation of CEO equity incentives causes the CEO to generate more opportunism motivation and to do more earnings manipulation behaviors. Finally, the degree of earnings management is increasing, which leads to the decrease of earnings quality.Based on prior studies, firstly from the perspective of the CEO, I study the influence of auditor industry expertise on the relationship between CEO equity incentive and earnings quality. Secondly, from the perspective of the company owner, he is aware of the role of the auditor industry expertise in the supervision of the CEO and decides how to trade off the CEO equity incentive and auditor industry expertise.I do research in China's a-share main board listed companies from 2011 to 2014.I find that auditor industry expertise can restrain the relationship between CEO equity incentive and earnings quality. The implication of this result is auditor industry expertise can restrain negative effects of CEO equity incentive. Through the research, I discover that the company owner offers more equity incentives to the CEO when he is audited by an industry expert.This paper has two new ideas. First, I put auditor industry expertise into the relationship CEO equity incentive and earnings management,and expand the role of external audit. Second, I further study the company owner decide how to trade off the CEO equity incentive and auditor industry expertise.