Essays on audit committee and board composition
Poonawala, Sakina H.
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The ﬁrst essay examines audit committee composition change with respect to new members joining. Firms are argued to maintain audit committee composition as per their monitoring needs (Krishnan and Lee, 2009) and independent directors, too, are motivated to monitor effectively (Sarbanes-Oxley-Act, 2002). Newcomers are shown to inﬂuence group performance (ChoiandLevine,2004). Accordingly,weexpectthatauditcommitteeswithnewcomerswould reduce earnings management. Further, we develop a director competency score and hypothesize that competencies of new members would reduce earnings management. We also hypothesize that litigation risk (Brochet and Srinivasan, 2014) would motivate newcomers to reduce earnings management. We ﬁnd that the competencies and industry litigation risk together result in the newcomer having a signiﬁcant negative impact on earnings management. Further, weﬁnd,throughthedifference-in-differenceapproach,thatthelitigationriskincrease,because of the passage of SOX, 2002, inﬂuences the association of ﬁrms with new audit committee members and earnings management. The second essay examines board composition change with respect to directors leaving. The revised Indian Listing Agreement (2014) reduced the number of independent directorships held by an individual from 10 to 7 ﬁrms. In the same year, there was a signiﬁcant increaseintheliabilitiesofindependentdirectors. Weusethisnaturalexperimenttoexaminethe choiceofresignationofbusydirectorsandtheimpactofsuchresignation. Wehypothesizethat the likelihood of their resignation is negatively associated with the ﬁrm’s governance quality and accordingly, ﬁnd that their likelihood of resignation increases with promoter ownership. Busy directors are known to be ineffective monitors (Sarkar et al., 2008) and are argued to be management-friendly in the context of weak corporate governance (Levit and Malenko, 2016). Accordingly,weﬁndthatthestockmarketreactspositivelytotheresignationofthebusydirectors. We also use the difference-in-difference approach and ﬁnd that the earnings management reduces with an increase in the likelihood of resignation.
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