Voluntary Audit Committee Formation and Agency Costs

30 Pages Posted: 3 Jan 2007

See all articles by Michael Firth

Michael Firth

Lingnan University - Department of Finance and Insurance

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: December 2006

Abstract

This paper finds that only a small proportion of listed companies in Hong Kong voluntarily establish audit committees prior to the implementation of the revised Code of Best Practice, which effectively mandated them. We show that firms with dispersed share ownership, a greater proportion of outside directors, and that have a non-Big 5 auditor are associated with the voluntary adoption of audit committees. The latter result differs from other studies and it suggests audit committees are a substitute mechanism for the employment of high quality auditors (using the Big 5 as a proxy for high quality).

Keywords: Audit committee, Agency costs, Audit quality substitution effect

JEL Classification: G34, M49, G32

Suggested Citation

Firth, Michael and Rui, Oliver M., Voluntary Audit Committee Formation and Agency Costs (December 2006). Available at SSRN: https://ssrn.com/abstract=954675 or http://dx.doi.org/10.2139/ssrn.954675

Michael Firth (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

HOME PAGE: http://https://www.ceibs.edu/rui-oliver

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