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Abstract:
This study examines whether audit committee and board characteristics are related to earnings management by the firm. The motivation behind this study is the implicit assertion by the SEC, the NYSE and the NASDAQ that earnings management and poor corporate governance mechanisms are positively related.A non-linear negative relation is found between audit committee independence and earnings manipulation. Specifically, a significant relation is found only when the audit committee has less than a majority of independent directors. Surprisingly, and in contrast to the new regulations, no significant association is found between earnings management and the more stringent requirement of 100% audit committee independence.Empirical evidence also is provided that other corporate governance characteristics are related to earnings management. Earnings management is positively related to whether the CEO sits on the board's compensation committee. It is negatively related to the CEO's shareholdings and to whether a large outside shareholder sits on the board's audit committee. These results suggest that boards structured to be more independent of the CEO may be more effective in monitoring the corporate financial accounting process.

Abstract:
This study examines whether audit committee and board characteristics are related to earnings management by the firm. A negative relation is found between audit committee independence and abnormal accruals. A negative relation is also found between board independence and abnormal accruals. Reductions in board or audit committee independence are accompanied by large increases in abnormal accruals. The most pronounced effects occur when either the board or the audit committee is comprised of a minority of outside directors. These results suggest that boards structured to be more independent of the CEO are more effective in monitoring the corporate financial accounting process.

audit committee, board of directors, earnings management, abnormal accruals

Abstract:
This study examines whether audit committee and board characteristics are related to earnings management by the firm. The motivation behind this study is the implicit assertion by the SEC, the NYSE and the NASDAQ that earnings management and poor corporate governance mechanisms are positively related.

A non-linear negative relation is found between audit committee independence and earnings manipulation. Specifically, a significant relation is found only when the audit committee has less than a majority of independent directors. Surprisingly, and in contrast to the new regulations, no significant association is found between earnings management and the more stringent requirement of 100% audit committee independence.

Empirical evidence also is provided that other corporate governance characteristics are related to earnings management. Earnings management is positively related to whether the CEO sits on the board's compensation committee. It is negatively related to the CEO's shareholdings and to whether a large outside shareholder sits on the board's audit committee. These results suggest that boards structured to be more independent of the CEO may be more effective in monitoring the corporate financial accounting process.

Audit committees, Earnings management, Corporate governance, Board of Directors

Abstract:
We examine recent confrontational shareholder activism campaigns by hedge funds and by other private investors. The three main parallels between the groups are a significantly positive market reaction for the target firm around the initial Schedule 13D filing date, a further significant increase in share price for the subsequent year, and the activist's high success rate in gaining its original objective. The two main differences are the types of companies each group targets and the activists' post-investment strategies. Hedge funds target more profitable and healthy firms than other activists. Afterwards, hedge funds reduce the target's cash holdings by increasing its leverage and dividends paid. In contrast, other activists lower the target's capital expenditures and research and development costs. In total, we conclude that the activism benefits existing shareholders of the targeted firms, but that hedge funds and other entrepreneurial activists achieve these benefits through different outlets.

Abstract:
We examine recent confrontational shareholder activism campaigns by hedge funds and by other private investors. The three main parallels between the groups are a significantly positive market reaction for the target firm around the initial Schedule 13D filing date, a further significant increase in share price for the subsequent year, and the activist's high success rate in gaining its original objective. The two main differences are the types of companies each group targets and the activists' post-investment strategies. Hedge funds target more profitable and healthy firms than other activists. Afterwards, hedge funds reduce the target's cash holdings by increasing its leverage and dividends paid. In contrast, other activists lower the target's capital expenditures and research and development costs. In total, we conclude that the activism benefits existing shareholders of the targeted firms, but that hedge funds and other entrepreneurial activists achieve these benefits through different outlets.

Hedge Fund, Activism, 13D

Abstract:
A prime objective of the Sarbanes-Oxley Act and recent changes to stock exchange listing standards is to improve the quality of financial reporting. We examine the associations between audit committee financial expertise and alternate corporate governance mechanisms and earnings management. We find that both accounting and certain types of non-accounting financial expertise reduce earnings management for firms with weak alternate corporate governance mechanisms, but that independent audit committee members with financial expertise are most effective in mitigating earnings management. Importantly we find that alternate corporate governance mechanisms are an effective substitute for audit committee financial expertise in constraining earnings management. Finally, we find either no association or a positive association between financial expertise and real earnings management. Our results suggest that alternate governance approaches are equally effective in improving the quality of financial reporting, and that firms should have the flexibility to design the particular set of governance mechanisms that best fit their unique situations.

earnings management, real earnings management, corporate governance, Sarbanes-Oxley

Abstract:
In this study, I examine possible reasons behind observed differences in audit committee composition and activity. Although 97.9% of all audit committees for large U.S. firms have at least one outside, independent director, more than one-half of the sampled firms also have at least one affiliated, interested director and nearly 5% have a member of the firm's upper management. These percentages fly in the face of the Treadway Report which advocates that audit committees be comprised solely of independent directors. In addition, contrary to the Treadway Commission's explicit recommendation, only 38.9% of audit committees meet four or more times per year.Two possible explanations for these observed variations are put forth and examined. The first is that boards with dominant CEOs are reluctant to have active, independent audit committees whose sole purpose is to act as a monitor on upper management's actions. The second explanation is that audit committees are constructed and act according to the economic needs of the firm. The evidence presented throughout this paper supports both points of views. The governance structures of audit committees appear to be sensitive in meeting the monitoring and litigation risk needs of the parent firm. However, there is also some evidence that boards with strong CEOs have a higher probability of placing insiders and interested directors than boards with relatively weaker CEOs. Audit committees of strong-CEO firms also tend to meet less frequently than their counterparts. These results suggest that there may be room for firms to better structure their audit committees to fulfill their needs.In this paper, I examine possible reasons behind observed differences in audit committee composition and activity. The governance structures of audit committees appear to be sensitive in meeting the monitoring and litigation risk needs of the parent firm. However, boards with stronger CEOs also have a higher probability of placing insiders and interested directors on their audit committees than boards with relatively weaker CEOs. Audit committees of strong-CEO firms also tend to meet less frequently than their counterparts.

Abstract:
In this study, I examine possible reasons behind observed differences in audit committee composition and activity. Although 97.9% of all audit committees for large U.S. firms have at least one outside, independent director, more than one-half of the sampled firms also have at least one affiliated, interested director and nearly 5% have a member of the firm's upper management. These percentages fly in the face of the Treadway Report which advocates that audit committees be comprised solely of independent directors. In addition, contrary to the Treadway Commission's explicit recommendation, only 38.9% of audit committees meet four or more times per year.

Two possible explanations for these observed variations are put forth and examined. The first is that boards with dominant CEOs are reluctant to have active, independent audit committees whose sole purpose is to act as a monitor on upper management's actions. The second explanation is that audit committees are constructed and act according to the economic needs of the firm. The evidence presented throughout this paper supports both points of views. The governance structures of audit committees appear to be sensitive in meeting the monitoring and litigation risk needs of the parent firm. However, there is also some evidence that boards with strong CEOs have a higher probability of placing insiders and interested directors than boards with relatively weaker CEOs. Audit committees of strong-CEO firms also tend to meet less frequently than their counterparts. These results suggest that there may be room for firms to better structure their audit committees to fulfill their needs.

In this paper, I examine possible reasons behind observed differences in audit committee composition and activity. The governance structures of audit committees appear to be sensitive in meeting the monitoring and litigation risk needs of the parent firm. However, boards with stronger CEOs also have a higher probability of placing insiders and interested directors on their audit committees than boards with relatively weaker CEOs. Audit committees of strong-CEO firms also tend to meet less frequently than their counterparts.

Abstract:
Little is known about the economic environments and determinants of the compensation arrangements for outside board members. As delegated monitors of corporate management, board members act as shareholders' agents. Thus, a potential for misaligned interests exists, requiring in turn incentive arrangements that are incentive-compatible and individually rational. We study the economic determinants of both the levels and mix of compensation for outside board members. We also examine the effects of the existence of a director pension plan on the relation between director compensation and the hypothesized determinants. In sum, and contrary to criticism that the board of directors is often a passive, ineffective entity that dislikes conflict with incumbent management, we find that board compensation is structured to mitigate agency problems inherent in firms whose management control is separated from ownership.

Director compensation, outside directors, director pension plan, incentive contracts, agency theory

Abstract:
This paper examines and finds systematic economic factors behind variations in audit committee composition. Specifically, audit committee independence is positively related to the informativeness of accounting data in valuation and negatively related to the degree of bargaining power that the CEO commands over the board. In constrast, no systematic relation is found between audit committee composition and the degree of contracting between shareholders and senior claimants. This paper also examines and finds economic benefits of firms having independent audit committees. Specifically, CEO cash compensation and the number of audit committee meetings are negatively (positively) related to audit committee independence, respectively.

Abstract:
This paper examines and finds systematic economic factors behind variations in audit committee composition. Specifically, audit committee independence is positively related to the informativeness of accounting data in valuation and negatively related to the degree of bargaining power that the CEO commands over the board. In constrast, no systematic relation is found between audit committee composition and the degree of contracting between shareholders and senior claimants. This paper also examines and finds economic benefits of firms having independent audit committees. Specifically, CEO cash compensation and the number of audit committee meetings are negatively (positively) related to audit committee independence, respectively.

Abstract:
This paper examines accounting and non-accounting factors behind accounting losses over a fifty-year period. Using multivariate time-series analysis, we report evidence that the annual percentage of losses for U.S. firms is significantly related to accounting conservatism, Compustat coverage of small firms, real firm performance as measured by cash flows from operations, and business cycle factors. We further find that non-accounting factors tend to play the dominant role in explaining accounting losses over our sample period. Our results are robust to alternative definitions of macroeconomic productivity, as well as to varying model specifications. Our findings contribute to the literature on accounting losses and accounting conservatism and have implications for the use of accounting loss information in numerous settings.

Accounting losses, accounting conservatism, business cycle, macroeconomics, cash flows from operations

Abstract:
This paper examines accounting and non-accounting factors behind accounting losses over a fifty-year period. Using multivariate time-series analysis, we report evidence that the annual percentage of losses for U.S. firms is significantly related to accounting conservatism, Compustat coverage of small firms, real firm performance as measured by cash flows from operations, and business cycle factors. We further find that non-accounting factors tend to play the dominant role in explaining accounting losses over our sample period. Our results are robust to alternative definitions of macroeconomic productivity, as well as to varying model specifications. Our findings contribute to the literature on accounting losses and accounting conservatism and have implications for the use of accounting loss information in numerous settings.

Accounting losses, accounting conservatism, business cycle, small firms

Abstract:
This paper examines accounting and non-accounting factors behind accounting losses over a fifty-year period. Using multivariate time-series analysis, we report evidence that the annual percentage of losses for U.S. firms is significantly related to accounting conservatism, Compustat coverage of small firms, real firm performance as measured by cash flows from operations, and business cycle factors. We further find that non-accounting factors tend to play the dominant role in explaining accounting losses over our sample period. Our results are robust to alternative definitions of macroeconomic productivity, as well as to varying model specifications. Our findings contribute to the literature on accounting losses and accounting conservatism and have implications for the use of accounting loss information in numerous settings.

Accounting losses, accounting conservatism, business cycle, macreconomics, cash flows from operations

Abstract:
This paper examines four non-mutually-exclusive hypotheses behind the inclusion of different types of directors and the impact they have on firm performance. Strong associations are found between the specific economic needs of companies and the incidence of directors most likely to fulfill these needs. In particular, theoretical and empirical evidence is presented that most affiliated directors are not puppets of management, but are placed on boards to serve specific, strategic needs of firms. In addition, no systematic relation is found between various measures of performance and director type. In total, it appears that, on average, boards of directors are constructed in a rational manner.

Abstract:
This paper examines four non-mutually-exclusive hypotheses behind the inclusion of different types of directors and the impact they have on firm performance. Strong associations are found between the specific economic needs of companies and the incidence of directors most likely to fulfill these needs. In particular, theoretical and empirical evidence is presented that most affiliated directors are not puppets of management, but are placed on boards to serve specific, strategic needs of firms. In addition, no systematic relation is found between various measures of performance and director type. In total, it appears that, on average, boards of directors are constructed in a rational manner.

Abstract:
This paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5,200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

Abstract:
This paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5,200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

Abstract:
This paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

Director pay, director stock options, performance, investments

Abstract:
A prime objective of the Sarbanes-Oxley Act and recent changes to stock exchange listing standards is to improve the quality of financial reporting. We examine the associations between audit committee financial expertise and alternate corporate governance mechanisms and earnings management. We find that both accounting and certain types of non-accounting financial expertise reduce earnings management for firms with weak alternate corporate governance mechanisms, but that independent audit committee members with financial expertise are most effective in mitigating earnings management. Importantly we find that alternate corporate governance mechanisms are an effective substitute for audit committee financial expertise in constraining earnings management. Finally, we find either no association or a positive association between financial expertise and real earnings management. Our results suggest that alternate governance approaches are equally effective in improving the quality of financial reporting, and that firms should have the flexibility to design the particular set of governance mechanisms that best fit their unique situations.

earnings management, real earnings management, corporate governance, Sarbanes-Oxley

Abstract:
This paper examines the impact of Nasdaq Listing Standards on the composition of new listings in the late 1990s. The Nasdaq has two types of listing standards: one based on profitability and the second based explicitly or implicitly on market capitalization. Specifically, unprofitable firms are allowed to list if either their pro-forma net tangible assets, which include the anticipated proceeds from their IPO, exceeds $18 million or their market capitalization exceeds $75 million. We show that as the market bubble accelerated in the late 1990s, a vast majority of firms entered under a market capitalization based standard, and these firms became a substantial portion of the Nasdaq. Subsequently, these firms performed the poorest both in terms of financial performance, stock return performance as well as involuntary delistings, while firms that listed under the profitability standard performed much better. In addition, firms that entered under market capitalization standards also exhibited the greatest return volatility. These results illustrate the importance of a profitability standard and the danger of a market capitalization based standard (explicit or implicit) in a market that is in, what ex-post turns out to be, a bubble.

Abstract:
This paper examines the impact of Nasdaq Listing Standards on the composition of new listings in the late 1990s. The Nasdaq has two types of listing standards: one based on profitability and the second based explicitly or implicitly on market capitalization. Specifically, unprofitable firms are allowed to list if either their pro-forma net tangible assets, which include the anticipated proceeds from their IPO, exceeds $18 million or their market capitalization exceeds $75 million. We show that as the market bubble accelerated in the late 1990s, a vast majority of firms entered under a market capitalization based standard, and these firms became a substantial portion of the Nasdaq. Subsequently, these firms performed the poorest both in terms of financial performance, stock return performance as well as involuntary delistings, while firms that listed under the profitability standard performed much better. In addition, firms that entered under market capitalization standards also exhibited the greatest return volatility. These results illustrate the importance of a profitability standard and the danger of a market capitalization based standard (explicit or implicit) in a market that is in, what ex-post turns out to be, a bubble.

Abstract:
This paper examines the causes and consequences of hedge fund activism. Hedge funds target profitable and healthy firms, with above-average cash holdings. The target firms earn significantly higher abnormal stock returns around the initial 13D filing date than a sample of control firm. However, they do not show improvements in accounting performances in the year after the initial purchase. Instead, hedge funds extract cash from the firm through increases in the target s debt capacity and higher dividends. Examination of proxy fights and threats accompanying the activist campaign suggests that hedge fund managers achieve their goals by posing a credible threat of engaging the target in a costly proxy solicitation contest.

Abstract:
Little is known about the economic environments and determinants of the compensation arrangements for outside board members. As delegated monitors of corporate management, board members act as shareholders' agents. Thus, a potential for misaligned interests exists, requiring in turn incentive arrangements that are incentive-compatible and individually rational. We study the economic determinants of both the levels and mix of compensation for outside board members. We also examine the effects of the existence of a director pension plan on the relation between director compensation and the hypothesized determinants. In sum, and contrary to criticism that the board of directors is often a passive, ineffective entity that dislikes conflict with incumbent management, we find that board compensation is structured to mitigate agency problems inherent in firms whose management control is separated from ownership.

Director compensation, outside directors, director pension plan, incentive contracts, agency theory

Abstract:
Unlike a conventional spin-off, a sponsored spin-off takes place when the subsidiary to be divested sells an equity stake to an outside investor before going public, thereby receiving a substantial capital infusion. We find that the stock return performance of a sample of 57 sponsored spin-offs from 1994 through 2005 is significantly negative over a three-year period following the spin-off date. In contrast, 182 conventional spin-offs over same interval record an average return performance. The parent firms' stock performance for the year preceding (following) the spin-off date is below-average (average), suggesting that their earlier performance was adversely affected by the subsidiary and motivated the parent to spin it off. In support of this contention, we find that parent firms tended to under-invest in the subsidiary prior to the spin-off, due to the subsidiary's limited growth opportunities. This under-investment, in turn, could have motivated the subsidiary to seek outside funding sources before going public.

Spin-offs,Sponsored Spin-offs,Conventional Spin-offs,Long-Run Performance

Abstract:
In contrast to previous studies documenting positive abnormal returns to target shareholders, we find that hedge fund activism significantly reduces existing bondholders’ wealth. Bondholders earn an average excess bond return of -3.9% around the initial 13D filing date, and an additional average excess bond return of -6.4% over the remaining year after the filing date. When examining the reasons behind these results, we find that negative excess bond returns are related to a subsequent decline in cash on hand (loss of collateral effects) and an increase in total debt as a percentage of total assets. In addition, negative bond returns are more prominent when the hedge fund activist conducts a confrontational campaign against the target firm or if the activist gains at least one seat on the target’s board within a year of the initial 13D filing. We also find evidence of an expropriation of wealth from the bondholder to the shareholder. We conclude that the intervention of the activist results in the firm taking actions that are deleterious to bondholder wealth.

Hedge Fund, Bondholder, expropriation

Abstract:
Shareholder-sponsored proposals are studied focusing on those seeking changes in corporate governance and the incentive structure of managers. The sample contains 334 proposals made by shareholders of 485 of the S&P 500 firms between July 1, 1991 and June 30, 1992. We test hypotheses on the determinants of the likelihood of a corporate governance proposal being made as well as the votes obtained. We find that the likelihood of a firm being the target of one or more corporate governance proposals to be significantly affected by firm size, presence of negative net income, percentage of outside directors with outside directorships in other S&P 500 firms, the percentage of institutional ownership and whether or not shareholders vote on the choice of auditor and last year's vote. We also examine the determinants of the likelihood of specific types of proposals and of particular proponents.

Abstract:
Unlike a conventional spin-off, a sponsored spin-off takes place when the subsidiary to be divested sells an equity stake to an outside investor before going public, thereby receiving a substantial capital infusion. We find that the stock return performance of a sample of 57 sponsored spin-offs from 1994 through 2005 is significantly negative over a three-year period following the spin-off date. In contrast, 182 conventional spin-offs over same interval record an average return performance. The parent firms' stock performance for the year preceding (following) the spin-off date is below-average (average), suggesting that their earlier performance was adversely affected by the subsidiary and motivated the parent to spin it off. In support of this contention, we find that parent firms tended to under-invest in the subsidiary prior to the spin-off, due to the subsidiary's limited growth opportunities. This under-investment, in turn, could have motivated the subsidiary to seek outside funding sources before going public.

Spin-offs,Sponsored Spin-offs, Conventional Spin-offs, Long-Run Performance

Abstract:
In contrast to previous studies documenting positive abnormal returns to target shareholders, we find that hedge fund activism significantly reduces existing bondholders’ wealth. Bondholders earn an average excess bond return of -3.9% around the initial 13D filing date, and an additional average excess bond return of -6.4% over the remaining year after the filing date. When examining the reasons behind these results, we find that negative excess bond returns are related to a subsequent decline in cash on hand (loss of collateral effects) and an increase in total debt as a percentage of total assets. In addition, negative bond returns are more prominent when the hedge fund activist conducts a confrontational campaign against the target firm or if the activist gains at least one seat on the target’s board within a year of the initial 13D filing. We also find evidence of an expropriation of wealth from the bondholder to the shareholder. We conclude that the intervention of the activist results in the firm taking actions that are deleterious to bondholder wealth.

hedge fund, bond, expropriation of wealth

Abstract:
We study the relation between stability of the nonprofit organization’s environment and its board structure and the impact of this relation on organizational performance from the perspectives of both Agency Theory and Resource Dependence (Boundary Spanning) Theory. The impact of board characteristics on organizational performance is contextual. Specifically, we predict and show for a sample of U.S. nonprofits that board mechanisms related to monitoring are more likely to be effective for stable organizations, whereas board mechanisms related to boundary spanning are more effective for less stable organizations. We find that the two theories are complementary and address different aspects of nonprofit performance, but the results are statistically stronger and more often consistent with resource dependence than with agency theory. Overall, this study supports Miller-Millesen’s (2003) contention that, because the nonprofit environment is often more complex and heterogeneous than the for-profit world, no one theory describes all tasks of nonprofit boards.

nonprofit governance, boards, resource dependency, agency theory, organizational stability

Abstract:
This paper investigates the relationship between nonprofit board composition and organizational efficiency. Overall, we find a significant statistical association between the presence of major donors on the board and indicators of organizational efficiency. While proof of a causal link is beyond the scope of this study, our findings are consistent with the Fama and Jensen (1983) conjecture that major donors monitor non-profit organizations at least in part through their board membership. This study also implies that, with the exception of the finance committee, it is the presence of major donors on the board and not their presence on committees that is associated with organizational efficiency measures. The multivariate analysis shows that the ratio of total expenses to program expenses is significantly and negatively associated with higher donor representation. Decomposing the total expense ratio into its two components, we find that different factors affect the administrative and fund-raising expense ratios. The percentage of major donors on the finance committee, a key committee overseeing budgets and administrative expenses, is negatively related to the organization's administrative expenses ratio. The presence of major donors on other board committees is not significantly statistically associated with nonprofit efficiency.

nonprofit governance, boards, committees, efficiency

Abstract:
This paper provides empirical evidence that audit committee independence is associated with economic factors. I find that audit committee independence increases with board size and board independence and decreases with firm's growth opportunities and for firms that report consecutive losses. In contrast, no relation is found between audit committee independence and creditors' demand for accounting information. Although the analyses are based on data from 1991 to 1993, these results have implications for NYSE and NASDAQ listing requirements for audit committees adopted in December 1999. Specifically, the new requirements give firms the option of including non-outside directors on their audit committees if it is in the best interests of the firm to do so.

Audit committee; Corporate governance; Board of Directors; Outside directors

Abstract:
This paper demonstrates a linkage between the composition of the boards of directors and firm productivity by examining the committee structures of boards for firms listed on the S&P 500. First, a vast majority of boards have set up audit, compensation and nominating committees, committees that primarily monitor and reward the behavior of senior managers. Similarly, a large number of boards have finance, investment and strategic development committees, committees whose primary functions are to evaluate and recommend long-term investment and financing decisions. Second, monitoring committees are disproportionately comprised of directors independent of management whereas productivity committees are disproportionately comprised of directors employed by the firm. Third, a positive relation is found between the percentage of outsiders on monitoring committees and factors associated with the benefits of monitoring. These factors are the firm's outstanding debt and free cash flow. If monitoring is perceived to be an input into a firm's productivity, then this result suggests that outside directors increase productivity through better monitoring. Fourth, a positive relation is also found between the percentage of insiders on productivity committees and measures of firm productivity. These measures include return on assets, productivity off capital expenditures and stock market returns.