Is there an association between director option compensation and the likelihood of misstatement?

Oversight bodies in the United States (US) have addressed the issue of director independence in recent years. Bebchuk et al. [Bebchuk, L., Grinstein, Y., Peyers, U. (2006). Lucky directors. (Working paper Harvard University Law School) SSRN # 952239.] found that director oversight may be impaired if directors receive option grants under favorable terms because these grants may create a mutuality of interest between directors and managers. We assess whether option grants to independent directors reduce oversight of financial reporting. Using a sample of 105 US firms that misstated their revenue matched with a sample of non-misstatement firms, we find that companies whose independent directors do not receive stock options are less likely to misstate revenues than companies who meet the Sarbanes-Oxley definition of independence. Our results show that compensating outside directors with stock options may weaken their independent oversight. (C) 2008 Elsevier Ltd. All rights reserved.