Academic journal article International Journal of Business

Audit Committee Characteristics and Repeatedly Meeting-Beating Analyst Forecasts

Academic journal article International Journal of Business

Audit Committee Characteristics and Repeatedly Meeting-Beating Analyst Forecasts

Article excerpt

ABSTRACT

This paper examines the association between audit committee directors' tenure and number of other board memberships at firms that repeatedly meet or just beat analyst forecasts as compared to firms that repeatedly just miss such forecasts. I use data from the period 2005 to 2007 and find that the proportions of audit committee directors with (a) long tenure and (b) more than three other board memberships are positively associated with the likelihood of a firm repeatedly meeting or just beating analyst forecasts. These results suggest that audit committee director tenure and the degree of director "busyness" can affect an audit committee member's effectiveness in providing financial reporting oversight and provide empirical support for calls by governance advocates and others about limiting audit committee member tenure and busy-boarding.

JEL Classifications: G30, M41, M42

Keywords: analyst forecasts; earnings forecasts; earnings management; audit committee; audit committee tenure; audit committee busyness; busy-boarding; corporate governance

I. INTRODCUTION

In recent years, the Securities and Exchange Commission (SEC 1999a, 2003), legislators (U.S. Senate 2002a, 2002b; SOX, 2002), and others have stressed the importance of the audit committee in providing effective oversight of the financial reporting process. Spurred by such interest from legislators and regulators, many prior studies have examined the association between audit committee characteristics and a variety of financial reporting outcomes. As noted by Beasley et al. (2009) and Carcello et al. (2011), prior research related to audit committee characteristics has focused on audit committee composition and diligence. Further, studies examining audit committee composition have concentrated on two characteristics of audit committee directors: independence and financial expertise. While earlier research tended to focus on independence, in the aftermath of actions by the SEC (1999a, 2000) and the enactment of SOX (requiring all audit committee directors to be independent), later research has focused on issues related to the presence of financial experts on the audit committee (e.g., Yang and Krishnan, 2005; Krishnan and Visvanathan, 2008; Krishnan and Lee, 2009; Dhaliwal et al., 2010).

In an effort to identify what constitutes a "good" audit committee, DeFond and Francis (2005) and Carcello et al. (2011) call for additional research addressing specific characteristics of the audit committee beyond independence and expertise. Audit committee member tenure and the number of other directorships are two issues that have received increasing attention from good governance advocates and others in recent years.

DeZoort et al. (2002) call for an enhancement of the richness of audit committee composition measures, specifically suggesting that the "research could address whether ...current audit committee tenure affects overall ACE [audit committee effectiveness]." A survey by Heidrick and Struggles (2007) finds that 21 percent of companies had a term-limit policy for directors and that this proportion had doubled since 2000. Shareholder activists have recently put forth proposals at many companies that there should be a limit on the number of years a director can serve.1 Reflecting this trend, publications issued by the Big 4 accounting firms now discuss audit committee director tenure issues (PricewaterhouseCoopers, 2000; Deloitte, 2010). For example, Deloitte (2010) notes in its Audit Committee Brief that "[t]o be most effective, audit committees should periodically reassess the optimal mix of committee members, taking into account...the skills, experiences, diversity, time commitments, tenure, and rotation of its members." Such views echo those espoused by some academics earlier (Lapides et al., 2007).

During the Senate hearings related to the Enron failure, senators and others raised the possibility of limiting the number of boards an individual could serve on at any time (U. …

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