Shareholder Activism and Changes in Audit Committee Composition

• In Event: Audit Committee Relationships

Abstract

We examine whether governance related shareholder activism is associated with changes in audit committee composition. Audit committees are the “ultimate monitors” of firms’ financial reporting processes. The SEC is interested in whether audit committees have financial experts and prior research has documented benefits associated with accounting-specific financial expertise. Governance activism expresses investors’ dissatisfaction with corporate governance; audit committees are an important corporate governance mechanism. Therefore, we predict that one, and as of yet unexplored, way for a firm to react to activism is to improve its audit committee. We document a positive association between governance activism – and specifically, accounting, audit, and financial reporting related governance activism – and increases in audit committee accounting-specific financial expertise. This association is strongest when a firm concurrently announces a restatement or experiences an internal control failure. We contribute to the literature by documenting an important determinant of audit committee composition.

Authors

• Tom Adams, University of Connecticut

• Thaddeus Andrew Neururer, University of Akron