Social Diversity of Audit Committees and Firms’ Financial Reporting Quality
50 Pages Posted: 25 Mar 2020
Date Written: December 29, 2019
We examine the effect of audit committee social diversity on financial reporting quality, as measured through gender, age, and/or ethnic diversity. Considering these dimensions simultaneously, we find that only ethnic diversity is associated with a lower likelihood of financial statement misstatements. Our results are driven by firms operating in more complex environments, which suggests that audit committee ethnic diversity may be particularly important when the firm is inherently complex. We also find that ethnic diversity is associated with a lower likelihood of misstatements for companies with more powerful CEOs and when the audit committee’s financial expertise is stronger, which suggests ethnic diversity enhances audit committee effectiveness in these situations. Our study highlights the importance of ethnic diversity in audit committee performance, a crucial component of the current debate on corporate board diversity.
Keywords: Audit Committee, Culture, Diversity, Accounting Quality
JEL Classification: M40, M41
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