Audit Committee Reputation Incentives: How Do Key Audit Committee Directors Allocate Monitoring Effort Across Multiple Directorships?

• In Event: Audit Committee Relationships

Abstract

Using a sample of audit committee chairs and financial experts that serve on multiple audit committees from 2004-2014, we examine whether the reputation incentives for these directors are associated with audit committee effectiveness at the firms they serve. Reputation incentives theory suggests that these directors will allocate relatively more monitoring effort to the firms in their portfolio that offer them a greater opportunity to enhance their reputation as a monitor (higher reputation incentives) and allocate less monitoring effort to the other firms they serve. Consistent with reputation incentives theory, we find that audit committee effectiveness is lower at firms that offer these directors relatively lower reputation incentives as compared to firms that offer them relatively higher reputation incentives. Further, these results are driven by smaller firms that likely depend more on director effort and input. Our findings should be of interest to boards, investors, and regulators considering the implications of director service on multiple boards.

Authors

• Terry L Neal, University of Tennessee-Knoxville

• Justin Short, Emory University