Lihong Zhao

This study examines whether paying audit committee members a higher proportion of cash, rather than equity, improves the quality of financial oversight. Using 7,159 firm-year observations from publicly listed non-financial U.S. companies between 2005 and 2023, this paper focuses on firms with standardized financial disclosures and comparable audit committee structures. The sample begins in 2005 to reflect the regulatory environment following the implementation of Section 404 of the Sarbanes-Oxley Act, which requires companies to assess and disclose the effectiveness of internal controls. The results show that a higher proportion of cash compensation is significantly associated with lower discretionary accruals, indicating stronger earnings quality. This relationship holds across alternative model specifications and accrual quality measures. The findings suggest that cash-based pay may enhance audit committee independence by reducing incentives tied to stock performance. For companies and regulators, the study underscores the importance of compensation design – favoring cash over equity may help strengthen financial reporting oversight and reduce earnings management, particularly in complex or high-risk firms.