Effect of overlapping audit and compensation committee memberships on the readability of management compensation reports in the German HDAX

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.