The paper uses a sample of seasoned equity offerings (SEO) to investigate the effects of earnings management and compensation committee structures on executives' compensation incentives. We control for the potential endogeneity of the choice of executives' compensation incentives using Heckman's two-stage approach. We show that firms with strong compensation committee structures upwardly manage earnings more in the year before SEOs and do not engage in earnings manipulation in the years of SEOs. Executives do not exercise stock options to gain more compensation during the SEOs. However, strong compensation committee structures reverse the usually negative relationship between SEOs and percentage changes in executive holdings of stock options. We also show that firms with seasoned equity offerings engage in earnings management prior to SEOs in order to change executives' compensation incentives, but strong compensation committee structures reduce the positive relationship between earnings management and seasoned equity offerings and mitigate executive opportunistic trading activities during the SEOs. Our evidence indicates that a strong compensation committee is an effective internal control mechanism that supports strong corporate governance in a firm.
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