Article

Audit Committee and Firm Value: Evidence on Outside Top Executives as Expert-Independent Directors

Department of Accounting and Finance, Gordon Ford College of Business, Western Kentucky University, Bowling Green
Corporate Governance An International Review (Impact Factor: 1.9). 02/2008; 16(1):16-31. DOI: 10.1111/j.1467-8683.2008.00662.x
Source: RePEc

ABSTRACT Manuscript Type: Empirical
Research Question/Issue: We examine the relation between independence of audit committee and firm value with a sample of Fortune 200 companies.
Research Findings/Insights: Using a sample of Fortune 200 companies and defining top executives of other publicly traded firms as expert-independent directors and controlling for firm specifics, board features, and individual director characteristics, we find the presence of expert-independent directors on board and in the audit committee enhances firm value.
Theoretical/Academic Implications: We provide empirical evidence to show that by focusing on this restricted definition of independent directors (expert-independent directors), we are able to examine independence in both the board and audit committee in a different light.
Practitioner/Policy Implications: We offer new insights to relate firm value of the composition of audit committee. When expert-independent directors are of majority control of audit committee, finance-trained directors improve firm value almost five times to that of firms with independent audit committee alone.

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    • "Audit committee can act as a bridge in such gaps especially in terms of the integrity of the financial statements of an organisation. An effective audit committee will therefore help in aligning the interests of management with that of shareholders(Chan & Li, 2008). Thus academic literature suggests that a qualitative audit committee has significant positive impact in minimizing agency conflicts and protecting shareholders' interest(Al-matari & Al-matari, 2012). "
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    • "The independence of the committee is taken to be assured by the presence of independent auditors. Furthermore the audit committee will also submit their work to external auditors, and the latter's remit will include providing assessments of the effectiveness of management's financial management and the committee's work (Chan & Li, 2008, Chen, Firth, Gao, & Rui, 2006). Good independent external auditors charge high fees, especially if they are required to undertake a considerable amount of work. "
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    • "But found no relationship between independent audit committee and performance. Chan and Li (2008) found that firm value in enhanced by presence of expert-independent directors in audit committee. Lybaert (1998) stated that better performance of firms is due to higher and better level of education among entrepreneurs. "
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