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    Market Reactions to Departures of Audit Committee Directors
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.01 Board/Audit Committee Composition, 13.03 Board/Audit Committee Tenure 
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    Title:
    Market Reactions to Departures of Audit Committee Directors
    Practical Implications:

    The evidence indicates that the market values the presence of audit committee financial experts who have previous accounting experience on the board and reacts negatively if such directors leave the company. Furthermore, the results indicate a negative stock market reaction when a short-tenured audit committee director leaves the board. Departures of audit committee members could be early warning signals for larger problems in the long run.

    For more information on this study, please contact Meghna Singhvi (Meghna.Singhvi@LMU.EDU)

    Citation:

    Singhvi, M., D.V. Rama and A. Barua. 2013. Market reactions to departures of audit committee directors. Accounting Horizons 27(1): 113-128

    Keywords:
    Audit committee turnover, audit committee resignations, expert directors, director-tenure.
    Purpose of the Study:

    Audit committee composition has received significant attention from legislators and regulators in recent years. In this study, the authors study investor’s reaction to audit committee director departures, conditional on directors’ attributes, namely, types of expertise, tenure and busy-ness (i.e., number of other board appointments). SOX’s requirements about audit committee expertise were initially controversial and the SEC had to change the proposed definitions related to “audit committee financial expert.” Some suggest that long-tenured board members provide better oversight because of firm-specific knowledge that is acquired with experience, while others argue that long tenured directors are less likely to provide adequate oversight over management.  Similarly, there are divergent arguments about audit committee directors serving on multiple boards. The authors argue that market reactions provide empirical evidence about market perceptions related to different types of audit committee director departures. 

    Design/Method/ Approach:

    The data are from the years 2005-2008. This paper studies the cumulative abnormal return around the seven days surrounding the Form 8-K filing related to the departure of audit committee directors. The authors focus on single audit committee director departures and delete firms with (a) more than one audit committee director resignation and (b) other contemporaneous news. The final sample comprises of 107 audit committee director departures with available data for the analysis. 

    Findings:
    • The authors find that there is a negative market reaction when an audit committee financial expert who has an accounting background departs from the audit committee.
    • The authors find that there is a negative market reaction when a short-tenured (0-3years) audit committee director departs from the audit committee.
    • The market reaction does not differ between directors with and without multiple board memberships.
    Category:
    Governance
    Sub-category:
    Board/Audit Committee Composition, Board/Audit Committee Tenure