Audit Committee Accounting Expertise, Analyst Following, and Market Liquidity

44 Pages Posted: 19 Jun 2017

See all articles by David B. Farber

David B. Farber

Indiana University Kelley School of Business Indianapolis

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Elaine Mauldin

University of Missouri Trulaske College of Business

Date Written: July 11, 2016

Abstract

We study the relation between audit committee accounting expertise, analyst following, and market liquidity. Our main results indicate that analyst following increases subsequent to the appointment of an accounting expert to the audit committee. We also provide evidence that accrual quality, as opposed to audit quality or management earnings forecasts, is the channel through which accounting expertise increases analyst following and improves analyst forecast properties. We also show that audit committee accounting expertise is related to higher trading volume and lower liquidity risk, supporting incentives for greater analyst following. Our study extends prior literature by providing evidence that audit committee accounting expertise enhances firms’ information environment beyond the effects it has on financial reporting quality or analysts’ forecast properties. Our study also complements the literature on determinants of analyst following and market liquidity, both of which are related to cost of capital. Results from our study should be useful to firms seeking to enhance analyst following and market liquidity.

Keywords: Analyst Following, Audit Committee Accounting Expertise, Market Liquidity

JEL Classification: G24, G29, M41, M42

Suggested Citation

Farber, David B. and Huang, Shawn X. and Mauldin, Elaine, Audit Committee Accounting Expertise, Analyst Following, and Market Liquidity (July 11, 2016). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2988070

David B. Farber

Indiana University Kelley School of Business Indianapolis ( email )

801 W Michigan Ave
Indianapolis, IN 46202
United States

Shawn X. Huang (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Elaine Mauldin

University of Missouri Trulaske College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-884-0933 (Phone)

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