Daniel Bryan
SUNY at Buffalo
Carol Liu
SUNY at Buffalo
Samuel L. Tiras
SUNY at Buffalo
Abstract: The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC) suggested that audit committees would enhance the financial reporting process, when comprised of members that are independent, financially literate, commit sufficient time to the committee and meet regularly. We investigate whether the BRCs recommendations would likely increase the quality of reported earnings by testing whether earnings informativeness is greater for those firms that currently employ independent and effective audit committees (as defined by the BRC) over those that do not. We measure informativeness through the earnings-returns relation and find a significantly stronger relation when the audit committee members are independent, financially literate and commit sufficient time to the committee. These characteristics are still significant when we control for other factors that could influence the audit committees oversight, such as CEO influence, CEO shareholdings and large outside blockholders serving on the committee. Overall, these results suggest that independent and effective audit committees enhance the quality of reported earnings, lending evidence supporting the BRCs (1999) recommendations.
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