Audit Committees’ Independence and the Information Content of Earnings Announcements in Western Europe

• In Event: Auditor and Audit Committee Independence

Abstract

We analyse whether the independence of the audit committee impacts the credibility of
earnings announcements. More precisely, we examine whether the independence of audit
committees in different institutional settings impacts the market reaction, which is measured
by the abnormal stock returns variance and the abnormal trading volume, to earnings
announcements in Europe. For our sample composed of more than 7’500 earnings
announcements made by European firms from 15 countries between 2006 and 2014, we find
that the market reactions to earnings announcements are significantly higher when the audit
committee is more independent, but only in countries with weak institutions. Our result holds
after controlling for numerous factors which may explain the market reaction, and also for
various methodological issues. We conclude that more independent audit committees are
substitutes to weak institutions to increase the credibility of earnings. Our results should be of
great interest for European regulators that recently introduced new requirements for public
firms regarding audit committees’ independence.

Author

• Alain Schatt, HEC Lausanne