Board Structure and Audit Committee Monitoring

Abstract

Our study addresses two research questions. First, are audit fees related to the presence of common members in audit and compensation committees (committee overlap)? Second, are audit fees related to whether board membership is protected by the use of a staggered voting system (board classification)? Using a treatment effects model to control for endogeneity, we find a negative relationship between audit fees and committee overlap, which is consistent with the argument that committee overlap is associated with weak corporate governance and that in an environment with weak governance, monitoring efforts by the audit committee are similarly weak. We find a positive relationship between audit fees and board classification, indicating that firms with classified boards seek greater monitoring, which is consistent with the prior literature which suggests that such firms seek the “quiet life” and wish to avoid reporting-related problems.

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