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  • Jennifer M Mueller-Phillips
    Voluntary Adoption of More Stringent Governance Policy on...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.01 Board/Audit Committee Composition, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    Voluntary Adoption of More Stringent Governance Policy on Audit Committees: Theory and Empirical Evidence
    Practical Implications:

    The findings in this study have important policy and practical implications. First, the study provides empirical evidence that firms have incentives to adopt more stringent governance mechanisms voluntarily if doing so is beneficial. The OSC Policy to exempt smaller issues is both effective and efficient in that it encourages the voluntary adoption and it avoids imposing unnecessary compliance costs associated with a one-size-fits-all mandatory compliance policy. Second, the findings in this study provide strong evidence that adopting more stringent audit committees can generate tangible economic benefits in the form of increased firm valuation, lower cost of capital, and improved investment efficiency. It appears that managers in some TSX listed firms may have overlooked these benefits and did not adopt the more stringent audit committee voluntarily before the mandatory adoption date. Finally, the findings in this study provide corroborating evidence that fully independent and financially literature audit committees are more effective than the less stringent ones in monitoring firm investments and in enhancing the quality of accounting information, as implied in our findings. Investors and policy makers should advocate the adoption of more stringent audit committees.

    For more information on this study, please contact either Feng Chen or Yue Li.

    Citation:

    Chen, F., and Y. Li. 2013. Voluntary Adoption of More Stringent Governance Policy on Audit Committees: Theory and Empirical Evidence. The Accounting Review 88 (6): 1939-1969.

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