Article2008

The Effect of Audit Committees on Earnings–Return Association: Evidence from Foreign Registrants in the United States

Jengfang Chen · Rong‐Ruey Duh · Fu-Jiing Shiue

39 citations0/0 files storedCorporate Governance An International Review

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: This study examines whether foreign registrants that choose not to establish audit committees in the US have generally lower earnings–return associations. Research Findings/Insights: Our empirical results indicate that earnings–return associations for foreign registrants without audit committees are significantly lower compared with those of their US‐matched firms which are required to establish audit committees. This result is even more pronounced after the introduction of new audit committee rules in 1999 aimed at increasing the responsibilities of audit committees. In addition, earnings–return associations of foreign registrants are found to increase following the establishment of audit committees. Overall, our results are consistent with the idea that the establishment of audit committees may be related to higher earnings–return associations. Theoretical/Academic Implications: Our empirical results suggest that foreign registrants that have chosen to establish audit committees have better earnings–return associations. This implies that the effectiveness of the audit committee in resolving agency problems is applicable to foreign companies, even though their home countries adopt non‐Anglo‐American corporate governance systems. Practitioner/Policy Implications: This study offers important insights to foreign firms listed in the US. As the choice not to form an audit committee may increase the cost of capital in the US, but save the cost of establishment in home market, the managers of foreign registrants should weigh the costs and benefit of the options and make a choice accordingly.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1980Agency Problems and the Theory of the Firm 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1994Debt covenant violation and manipulation of accruals 1995Managerial ownership, accounting choices, and informativeness of earnings 1999The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications 1991Earnings Asan Explanatory Variable for Returns 2006Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies

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