The Effects of Audit Committee Members’ Age and Additional Directorships on the Cost of Equity Capital in the U.S.

Abstract

We examine the associations between the cost of equity capital and two audit committee characteristics: 1) average audit committee members’ age; and 2) average number of audit committee members’ other directorships. The study is motivated by the recent emphasis on the important role of audit committees in overseeing financial reporting and audit processes, as well as the recognition of the critical role of capital costs in firms’ operational efficiency and profitability. The empirical results show that the cost of equity capital is lower in U.S. firms with higher average audit committee members’ age. We do not find any evidence that average number of audit committee members’ other directorships is associated with cost of equity capital. We also find that age could be another proxy for audit committee members’ experience. Our findings provide evidence that supports the call of the U.S. Securities and Exchange Commission (SEC) for greater board diversity (including age). Our study not only demonstrates the important role of audit committees in corporate governance, but also enriches the literature by examining the two audit committee characteristics that are rarely mentioned in prior studies.

Keywords: Cost of equity capital, audit committee age, other directorships, financial reporting quality

JEL Classification: M41, M42, M48, G38