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Corporate Governance: The Relation between the Timing of the Replacement of Arthur Andersen and Board Equity Compensaton and Ownership
James C Flagg,
Texas A & M University
Sarah A Holmes, East Central University
ABSTRACT. This study examines whether a relation exists between the timing of the replacement of Arthur Andersen and the magnitude of both board equity compensation and insider ownership. We argue that boards that received more of their compensation in options and/or stock and who, along with the chief officers, owned higher levels of stock, took longer to change auditors (measured from the last day of field work for the 2001 audit) than boards that held a smaller equity position. We find that the granting of one-time stock option awards and the magnitude of outstanding stock held by board members were positively associated with the length of the dismissal deliberation period. Thus, boards that were more independent (as evidenced by less current and potential stock ownership) displayed quicker responses to the perceived threat of a poor quality audit by changing their auditor on a timelier basis than less independent boards.
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