Risk Management and Corporate Governance: The Importance of Independence and Financial Knowledge for the Board and the Audit Committee

HEC Montreal Working Paper No. 05-03

53 Pages Posted: 7 Jun 2005

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Thouraya Triki

HEC Montreal

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005


The new NYSE rules for corporate governance require the audit committee to discuss and review the firm's risk assessment and hedging strategies. They also put additional requirements for the composition and the financial knowledge of the directors sitting on the board and on the audit committee. In this paper, we investigate whether these new rules as well as those set by the Sarbanes Oxley act lead to hedging decisions that are of more benefit to shareholders. We construct a novel hand collected dataset that allows us to explore multiple definitions for the financially knowledgeable term present in this new regulation.

We find that the requirements on the audit committee size and independence are beneficial to shareholders, although maintaining a majority of unrelated directors in the board and a director with an accounting background on the audit committee may not be necessary. Interestingly, financially educated directors seem to encourage corporate hedging while financially active directors and those with an accounting background play no active role in such policy. This evidence combined with the positive relation we report between hedging and the firm's performance suggests that shareholders are better off with financially educated directors on their boards and audit committees. Our empirical findings also show that having directors with a university education on the board is an important determinant of the hedging level. Indeed, our measure of risk management is found to be an increasing function of the percentage of directors holding a diploma superior to a bachelor degree. This result is the first direct evidence concerning the importance of university education for the board of directors.

Keywords: Corporate governance, risk management, corporate hedging, financial knowledge, board independence, audit committee independence, board of directors, university education, empirical test, unrelated directors, NYSE rules, Sarbanes Oxley act, audit committee size, financially educated directors

JEL Classification: G18, G34, G38

Suggested Citation

Dionne, Georges and Triki, Thouraya, Risk Management and Corporate Governance: The Importance of Independence and Financial Knowledge for the Board and the Audit Committee (May 2005). HEC Montreal Working Paper No. 05-03, Available at SSRN: https://ssrn.com/abstract=730743 or http://dx.doi.org/10.2139/ssrn.730743

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Thouraya Triki

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7

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