Multiple Directorships and Audit Committee Effectiveness: Evidence from Effort Allocation

European Accounting Review, Forthcoming.

47 Pages Posted: 4 Apr 2022 Last revised: 14 Apr 2022

See all articles by Xinming Liu

Xinming Liu

Xiamen University

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Hung-Chao Yu

National Chengchi University

Zhen Zheng

Xiamen University

Date Written: March 9, 2022

Abstract

Recent post-SOX studies have consistently found that the presence of audit committee (AC) directors with multiple directorships is associated with lower financial reporting quality. An implicit assumption of these studies is that AC directors distribute their effort equally across all their directorships. Using a firm size-based proxy and firm risk-based (i.e., probabilities of litigation and of misstatements) proxies to measure relative directorship importance, we investigate (1) whether and how AC directors who serve on multiple AC directorships allocate their effort to different directorships unequally, and (2) whether the unequal prioritization of effort across multiple AC directorships relates to AC monitoring effectiveness. We find a positive (no) relation between the risk-based (firm size-based) directorship importance measures and AC effectiveness, suggesting that AC directors serving on multiple boards unequally allocate their effort to different directorships based on incentives related to firm risk and not to firm size. Our results have relevance for regulators, boards of directors, investors, and other stakeholders.

Keywords: Audit committee, Audit fees, Auditor choice, Multiple directorship

JEL Classification: M41, G14

Suggested Citation

Liu, Xinming and Lobo, Gerald J. and Yu, Hung-Chao and Zheng, Zhen, Multiple Directorships and Audit Committee Effectiveness: Evidence from Effort Allocation (March 9, 2022). European Accounting Review, Forthcoming., Available at SSRN: https://ssrn.com/abstract=4053590

Xinming Liu (Contact Author)

Xiamen University ( email )

Siming South Road
Duxing Building No.2
Xiamen, Fujian 361005
China

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Hung-Chao Yu

National Chengchi University ( email )

No. 64, Sec. 2
Zhi-Nan Rd., Wenshan District
Taipei, Taipei 11605
Taiwan
+886-2-2938-7693 (Phone)
+886-2-2938-7113 (Fax)

Zhen Zheng

Xiamen University ( email )

Xiamen, Fujian 361005
China

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