Audit Committee, Underpricing of IPOs, and Accuracy of Management Earnings Forecasts

17 Pages Posted: 3 Nov 2008

See all articles by Jean Bédard

Jean Bédard

Université Laval - École de comptabilité

Daniel Coulombe

Université Laval - Département des Sciences Comptables

Lucie Courteau

Free University of Bozen-Bolzano - Faculty of Economics and Management

Abstract

Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance. Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory.Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Québec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Québec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory. Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance.

Suggested Citation

Bédard, Jean and Coulombe, Daniel and Courteau, Lucie, Audit Committee, Underpricing of IPOs, and Accuracy of Management Earnings Forecasts. Corporate Governance: An International Review, Vol. 16, Issue 6, pp. 519-535, November 2008, Available at SSRN: https://ssrn.com/abstract=1292003 or http://dx.doi.org/10.1111/j.1467-8683.2008.00708.x

Jean Bédard (Contact Author)

Université Laval - École de comptabilité ( email )

2325, rue de la Terrasse
Québec, Québec G1V 0A6
Canada
418-656-7055 (Phone)
418-656-2624 (Fax)

Daniel Coulombe

Université Laval - Département des Sciences Comptables ( email )

Ste-Foy, Quebec G1K 7P4
Canada
418-656-2827 (Phone)
418-656-2624 (Fax)

Lucie Courteau

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Faculty of Economics and Management
Piazza Università 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

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