Director Excess Compensation and Investment Efficiency: The Economic Role of Accounting

We examine the relation between director excess compensation and corporate investment efficiency, and the role of accounting quality in this association. We utilize a cost-minimization stochastic frontier approach to estimate director excess compensation. On average, over the 2007–2018 period, directors are paid approximately $59,455 more than their efficient compensation level. We find that overpaying directors aggravates agency problems and exacerbates overinvestment. Next, using an accounting quality index based on five accounting quality proxies pertaining to earnings management, value relevance, and asymmetric timely loss recognition, we document that accounting quality moderates the detrimental impact of director excess compensation on corporate investment. Our study adds to the literature on the negative effects of director excess compensation and the positive economic role of accounting.