Expertise Rents from Insider Trading for Financial Experts on Audit Committees

46 Pages Posted: 6 Mar 2011 Last revised: 27 Jan 2018

See all articles by Scott Duellman

Scott Duellman

Saint Louis University - Department of Accounting

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden

Yan Zhang

State University of New York at Binghamton - School of Management

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: March 16, 2017

Abstract

Sarbanes Oxley Act (SOX) Section 407 requires firms to disclose if there is a financial expert serving on their audit committees. The extant literature has largely documented SOX 407 benefits, ranging from controlling earning management to reducing internal control weaknesses. Our paper investigates whether there is a cost associated with SOX 407. Using a sample of executive and director transactions from 2003 to 2007, we test whether financial experts obtain information rents or expertise rents on stock purchases. Information rent is earned due to access to superior information, whereas expertise rent is earned due to superior processing skill of the same information. We first find that audit committee members obtain significantly higher abnormal returns than other independent board members. This suggests that audit committee members, including both financial and non-financial experts, earn information rent due to their access to privileged information in audit committees. We then find that financial experts on audit committees obtain higher abnormal returns than non-financial experts on audit committees. Because financial experts and non-financial experts have access to the same information in audit committees, our finding suggests that audit committee financial experts earn additional rents due to their financial expertise. The existence of such expertise rents indicates that there is a cost associated with SOX 407.

Keywords: Audit Committee Financial Experts, Insider Trading, SOX 407

JEL Classification: M41

Suggested Citation

Duellman, Scott and Guo, Jun and Zhang, Yan and Zhou, Nan, Expertise Rents from Insider Trading for Financial Experts on Audit Committees (March 16, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1777722 or http://dx.doi.org/10.2139/ssrn.1777722

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Jun Guo (Contact Author)

Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )

Camden, NJ 08102
United States

Yan Zhang

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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