Audit Committee Formation at the IPO: Existence and Financial Expertise

• In Event: Audit Committees and Audit Quality

Abstract

Audit committee formation is of great importance in corporation governance. Overtime, regulators, shareholder, and investors have called for improvement in the monitoring service provided by audit committees. In this paper, we propose and test two models explaining what factors affect the existence of designated audit committees and the extent of audit committee financial expertise at IPOs. Our results show that foreign operations, industry concentration, CEO shareholdings, venture capital presence, underwriter ranking, the board size, and the percentage of outside directors are positively associated with the likelihood that companies have audit committees established before IPOs. Firm size is negatively associated with designation of audit committees pre-IPO. Results also show that IPO firms that have larger size, foreign operations, greater growth opportunity, less CEO power, the presence of venture capital, higher underwriter ranking, and more independent board members have greater proportions of audit committee members with financial expertise. These results provide new evidence on an important choice in the literature that seeks to understand factors related to audit committee formation.

Authors

• Yang Xu, The University of Kansas

• Chan Li, University of Pittsburgh

• Qian Wang, Iowa State University