An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Henry Huang
Butler University

Gerald Lobo
University of Houston

Jian Zhou
SUNY at Binghamton

Abstract: On November 4, 2003, the SEC approved the NYSE proposal on implementing a series of governance changes. One of the provisions of the proposal is the requirement that all NYSE firms have a corporate governance committee. We examine the characteristics of companies that voluntarily formed corporate governance committees and their effects on accounting discretion. We find that firms with larger, more independent, and more active boards, higher agency costs (as indicated by lower insider ownership and lower takeover vulnerability), and past occurrence of class-action lawsuits, are more likely to form corporate governance committees. We also provide evidence that firms with a governance committee employ lower discretionary accounting accruals than firms without such a committee. Our study shows that firms voluntarily form governance committees based on their board characteristics, perceived agency costs, and the need for improving corporate governance.

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