Academic journal article Iranian Journal of Management Studies

The Impact of Audit Committee and Its Characteristics on the Firms' Information Environment

Academic journal article Iranian Journal of Management Studies

The Impact of Audit Committee and Its Characteristics on the Firms' Information Environment

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Information environment (IE) includes public and confidential information that is available to the capital market through mandatory and voluntary disclosure (Siregar & Utama, 2008; Beyer et al., 2010; Armstrong et al., 2012; Robin & Wu, 2015). If IE of a firm does not have enough transparency, some individuals like managers are likely to enjoy more information advantages than others (Bhattacharya et al., 2013). On the other hand, the importance of information environment for investors persuade firms to seek to improve it.

To provide a strong information environment and improve information transparency, various mechanisms like promoting corporate governance were offered in the financial and accounting literature. Therefore, the ongoing research aims at presenting an appropriate index for information environment and then investigating the role of audit committee, as a corporate governance mechanism, in improving it. Thus, the current research seeks to know whether audit committee has triggered any reduction in information asymmetry among firms, and thereby improving their information environment. In that case, what was the impact? And, do the characteristics of audit committee have any significant effects on the information environment of the firms? The results reveal that audit committee plays a key role in improving the transparency of information environment and promoting the financial information transparency, which in turn enhance market liquidity. Moreover, the researchers found evidence of the influence of audit committee on the improvement of IE.

This study plans to employ the multi-criteria decision-making model to offer a new index for evaluating the information environment of firms. This index is expected to capture all factors affecting the IE of firms. Also, it helps the stakeholders and investors to understand IE of firms as well as the quality of IE to manage to establish an optimal portfolio.

In response to the research questions, given the intangibility of information environment, financial literature introduces various criteria to proxy for information environment of firms (Clarke & Shastri, 2000). In an attempt to develop a comprehensive criterion that encompasses all the indices, this research is the first of its kind to employ mathematical methods to present a unique and comprehensive index for IE. Given the novelty of the debate over presenting a comprehensive index for information environment of firms and the recent establishment of audit committees, very little research has been reported on this issue. This research is the first of its kind in Iran to offer an index for firms' information environment. Having applied the obtained index, the researchers try to identify the information environment of the selected firms and, given that audit committee is a novel issue, especially in Iran (less than 4 years old), finally investigate the role of audit committee in improving this environment. It also provides a reexamining tool for previous studies on information environment and paves the way for scholars to find evidence about corporate governance and audit committee's effects on the emerging markets such as Iran. Taking into account this purpose, the rest of this paper is arranged as follow: Section 2 discusses how to describe the previous literature related to a problem and also presents the theoretical foundations. The research methodology is presented in Section 3, which is followed by a discussion of how to state the main technical results in Section 4. Section 5 gives insights on how to discuss the results provided in the previous section and then provides some final conclusions. The final parts are devoted to recommendations for future studies and research limitations.

Theoretical Framework and Literature Review

Information Environment

Transition from industry age to information age has emphasized the importance of information in the decision-making process. …

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