Does Term Limit Improve Directors’ Monitoring Effectiveness? Evidence from the Mandatory Departure of Audit Committee Chairs

• In Event: Break and Research & Education Poster Forum

Abstract

China restricts independent audit committee chairs to a maximum of two three-year terms. In the last year of their tenure, audit committee chairs can either improve monitoring because of their regained independence or reduce their oversight efforts due to the horizon effect. We find smaller discretionary accruals prior to the mandatory departure of audit committee chairs, which supports the notion that term limits improve director monitoring. This baseline result is robust when we consider the voluntary departure and personal characteristics of audit committee chairs; the turnover of audit committee members; the change of audit partners and audit firms; and the dynamics of audit committee chair tenure. Since audit committee chairs who supervise auditors are neither appointed nor compensated by auditors, we further use the audit-pricing setting to not only isolate the independence effect, but also to investigate the career concern effect for departing audit committee chairs. We find lower audit fees in the last year of audit committee chair tenure, which suggests that departing audit committee chairs are likely incentivized by career concerns to perform their duties with diligence. Consistent with the settling-up argument, audit committee chairs who successfully negotiate lower audit fees receive greater compensation in their new board appointments and are more likely to secure prestigious board seats in state-owned enterprises. Adding to the ongoing debate on director term limits, our evidence from audit committee chairs suggests that the intended independence effect, boosted by the unintended career concern effect, could make the director term limit regulation effective.

Authors

• Baiqiang Wang, Central University of Finance and Economics

• Kangtao Ye, Renmin University of China

• Ning Zhang, Queen's University

• Nan Zhou, University of Cincinnati