Voluntary Adoption of More Stringent Governance Policy on Audit Committees: Theory and Empirical Evidence

• 成果类型: Article
• 署名作者: Chen, Feng; Li, Yue
• 署名单位: University of Toronto
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-50541
• 发表日期: 2013
• 页码: 1939-1969
• 关键词: investment opportunity set; Sarbanes-Oxley Act; corporate governance; INTERNAL CONTROL; Firm value; BOARD; COMPENSATION; determinants; QUALITY; disclosure

摘要

This study exploits an exogenous change to audit committee policy in Canada and presents new evidence on how high-quality corporate governance mitigates managerial resource diversion and improves firm values. We first examine why some firms listed on the Toronto Venture Exchange (TSX Venture) voluntarily adopted the more stringent governance policy in 2004 that requires all audit committee members to be independent and financially literate. We develop a parsimonious analytical model that shows that both compliance costs and financing needs have an impact on firms' adoption decisions. Confirming the model's predictions, we find that TSX Venture firms with low compliance costs and greater future financing needs are more likely to adopt the new policy voluntarily. The analytical model also shows that high-quality audit committees enhance firm values by reducing the likelihood of managerial resource diversion. Consistent with the predictions of our analytical model, we find that the adoption decision has a positive impact on firm value and a negative impact on firms' cost of equity capital for both Toronto Stock Exchange (TSX) and TSX Venture firms. As corroborating evidence of the economic impact of the more stringent governance policy, we also show that both TSX and TSX Venture firms have improved investment efficiency following the adoption decisions.