Events calendar

11.15 - 12.45 Wednesday 1 May 2013

On campus - London - United Kingdom

Accounting Seminar Series

Speaker(s): April Klein (New York University)

Costs and Benefits of Audit Committee Regulation: Evidence from the 1999 NYSE and NASDAQ Exchange Rule Changes

We examine market reactions to the 1999 rule changes approved by the SEC for the NYSE and NASDAQ to require all listed firms to have a fully-independent audit committee with at least three directors within 18 months of passage. On the benefit side, we find no evidence that the market perceived the new regulation to dampen earnings management or fraudulent accounting restatements, two of the benefits put forth by the SEC throughout the regulatory process. To evaluate the costs of compliance, we take advantage of the fact that at the time of the passage and through the subsequent 18 months, listed firms were required to have a minimum of two independent directors on their boards. Thus, to comply with the new audit committee standard, many firms needed to add one independent director. We find that cross-sectional abnormal returns are significantly lower for firms with just two independent board directors prior to the regulation. As evidence of a direct cost, firms with only two independent board directors increased their board size more significantly than firms with three or more independent board directors. As evidence of an indirect cost, we classify firms as being optimal or sub-optimal with respect to having a board with two independent directors. We then show that optimal firms suffered the greatest shareholder wealth losses, consistent with a cost of them being “pushed” of out optimality by the new regulation. Given the D.C. Circuit’s recent invalidations of SEC rulemaking efforts on the ground that the SEC failed to meet a review standard that weighs both the costs to firms as well as the benefits to investors (Cox and Baucom, 2012), our paper takes a step in addressing these concerns.

Event location

S215

Download: AKlein Workshop Paper 01May13.pdf (299.26 KB)
Contact: Debbie Hughes - Email: dhughes@london.edu Tel: +44 (0)20 7000 8120