Compliance and value relevance of audit committees: evidence from Hong Kong

Abstract

Purpose Audit committees (ACs) have been perceived as an important means of corporate governance, safeguarding the interests of shareholders by monitoring internal control and risk management. This study aims to examine specific structural and operational characteristics of ACs for firms in Hong Kong, where regulators have strived to adhere to international compliance standards. Design/methodology/approach This study is based on a cross‐sectional examination of disclosures on ACs by 223 listed companies in Hong Kong. Findings The independence and financial expertise of AC members do not enhance the value of the respective firms, despite maintaining satisfactory compliance. The discrepancy in the value relevance of ACs in prior studies is explained by the possible inadequacy of the resources available to ACs. Research limitations/implications The data in this study are entirely from secondary sources of disclosures by listed companies for the year immediately following the implementation of the code of best practices of corporate governance. No in‐depth case studies are supplemented. Practical implications A key implication of this study to the regulators is that the proper allocation of resources to an AC should be considered beyond the independence and financial expertise of AC members to ensure the effectiveness of an AC. Originality/value This paper is an empirical study about the practices and compliance of ACs among listed companies in a global financial centre.

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