Audit Committee Expertise and Financial Analysts’ and Investors’ Ability to Anticipate Future Earnings

Abstract:     
One of the important attributes of high quality accounting information is its ability to aid financial statement users in forming expectations about the firm’s future earnings. Prior research finds that accounting financial expertise of the audit committee is associated with higher financial reporting quality. We extend the literature by examining the association between audit committee expertise and security analysts’ and investors’ ability to anticipate future earnings. We find that analyst earnings forecasts of firms with an audit committee member with accounting financial expertise are more accurate and less dispersed. These associations tend to be stronger in weaker governance firms. We also find that audit committee expertise is associated with a more informative stock price for firms weaker governance. We do not find a significant association between non-accounting financial expertise and attributes of analysts’ forecasts or earnings informativeness. These findings contribute to our understanding of the role of accounting expertise in audit committees.

Number of Pages in PDF File: 59

Keywords: Audit committees, Financial expertise, Analyst Forecasts, Corporate governance, Financial reporting quality

working papers series