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Are Optimal Contracting and Managerial Power Competing or Complementary Views? Evidence from the Compensation of Statutory Auditors in Italy

Sat, April 29, 7:00 to 8:20am, Hilton Miami Downtown, TBA

Abstract

This study examines whether and to what extent the compensation of independent monitors at the board-level is the outcome of an optimal contract between independent parties or the result of involvement with corporate insiders.
By using a hierarchical linear regression model with a sample of 559 statutory auditors, whose main task is to monitor the acts and the decision-making process of the board of directors, this study provides evidence that the statutory auditors’ compensation is mainly based upon the effort and responsibilities that are observable by shareholders. However, our findings highlight that the additional, poorly disclosed, compensation that a statutory auditor may receive for other services to the firm (or other firms in the group), non-related to his/her role, is associated with his/her involvement with the firm and its controlling shareholder.
By analysing a de facto three-tier hierarchical agency model, this study gives insights of how and to what extent the optimal contracting and managerial power perspectives provide complementary, rather than competing, explanations to compensation at the board-level, as they encompass different contracting arrangements within agency theory. Not only do these two perspectives co-exist at an aggregate-level, but they also seem to be complementary at firm-level as well as at the individual-level. This study also offers insights to policymakers by questioning the current regulation that allows threats to the de facto independence of a formally independent governance mechanism and suggests further disclosure about the criteria and the rationales of the additional compensation perceived by statutory auditors.

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