Essays on audit committee and board composition

Abstract

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.