Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?

41 Pages Posted: 8 May 2006

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Rebecca N. Hann

University of Maryland - Robert H. Smith School of Business

Xuesong Hu

University of Oregon - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: 2004-11-09

Abstract

We examine three-day cumulative abnormal returns around the announcement of 702 newly appointed outside directors assigned to audit committees during a period before implementation of the Sarbanes-Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose whether they have a financial expert on their audit committee, we test whether the market reacts favorably to the appointment of directors with financial expertise to the audit committee. In addition, because it is controversial whether SOX should define financial experts narrowly to include primarily financial experts (as initially proposed) or more broadly to include financial experts (as ultimately passed), we separately examine appointments of each type of expert. We find a positive market reaction to the appointment of financial experts assigned to audit committees but no reaction to financial experts assigned to audit committees, consistent with accounting-based financial skills, but not broader financial skills, improving the audit committee`s ability to ensure high-quality financial reporting. In addition, we find that this positive reaction is concentrated among firms with relatively strong corporate governance, consistent with financial expertise complementing strong governance, possibly because strong governance helps channel the expertise toward enhancing shareholder value. Together, these findings are consistent with financial expertise on audit committees improving corporate governance but only when both the expert and the appointing firm possess characteristics that facilitate the effective use of the expertise.

Suggested Citation

DeFond, Mark and Hann, Rebecca N. and Hu, Xuesong, Does the Market Value Financial Expertise on Audit Committees of Boards of Directors? (2004-11-09). Journal of Accounting Research, Vol. 43, pp. 153-193, May 2005. Available at SSRN: https://ssrn.com/abstract=876667 or http://dx.doi.org/10.1111/j.1475-679x.2005.00166.x

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Rebecca N. Hann

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Xuesong Hu

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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