The Composition and Effectiveness of Audit Committees in the Presence of Large Controlling Shareholders

11 Pages Posted: 22 Oct 2014

See all articles by Re-Jin Guo

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Yin‐Hua Yeh

National Chiao-Tung University

Date Written: Summer 2014

Abstract

The authors' study of audit committees in 450 large East Asian companies (150 each in Hong Kong, Singapore, and Malaysia) finds a strong positive correlation between the “cash flow” ownership (as opposed to just the voting rights) of large shareholders and the percentage of independent audit committee members. The study also reports a strong positive correlation between the “cash flow” ownership of large shareholders and the percentage of audit committee members with financial expertise and experience. This finding is consistent with the hypothesis that larger cash flow ownership provides large shareholders with strong incentives for more effective governance. Conversely, the lower percentages of independent or professional audit directors at companies with large disparities between cash ownership and voting rights is consistent with the authors' hypothesis that entrenched large shareholders prefer inferior governance structures that pose fewer obstacles to their tendency to exploit the wealth of minority shareholders. Furthermore, the authors find higher valuations (market‐to‐book ratios) for companies with audit committees that consist entirely of independent directors and have larger percentage of members with financial expertise. And when viewed as a whole, the authors' findings provide support for the argument that ownership structure affects the composition of audit committees, and that independent and professional audit committees can help increase firm value.

Suggested Citation

Guo, Re-Jin J. and Yeh, Yin‐Hua, The Composition and Effectiveness of Audit Committees in the Presence of Large Controlling Shareholders (Summer 2014). Journal of Applied Corporate Finance, Vol. 26, Issue 3, pp. 96-104, 2014, Available at SSRN: https://ssrn.com/abstract=2513047 or http://dx.doi.org/10.1111/jacf.12085

Re-Jin J. Guo (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
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312-413-3718 (Phone)

Yin‐Hua Yeh

National Chiao-Tung University ( email )

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