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Keywords:

  • Corporate Governance;
  • Governance Committee;
  • Accounting Accruals;
  • Sarbanes-Oxley Act

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study examines the determinants of forming a governance committee and whether such a committee constrains managerial opportunism.

Research Findings/Insights: This study examines a sample of S&P 1,500 firms over the period of 1996 to 2002. It finds that firms with a larger, more independent, and more active board, higher agency costs (as indicated by lower managerial ownership and lower takeover vulnerability), and past occurrence of class-action lawsuits are more likely to voluntarily form a governance committee. This study also provides evidence that having a governance committee brings real consequences in that it constrains managerial opportunism by reducing aggressive financial reporting.

Theoretical/Academic Implications: Consistent with substitution theory, this study documents that a firm is more likely to form a governance committee to compensate for its severe agency problems. It also demonstrates that delegating some corporate governance duties to a specific board committee could improve the effectiveness of board monitoring.

Practitioner/Policy Implications: This study provides insights to regulators who are interested in regulating board structure. It suggests that whether a firm needs to form a governance committee is endogenously determined by the firm's characteristics when the firm has an independent board. In addition, this study documents that a voluntarily formed governance committee is able to mitigate agency costs in the form of constraining managerial accounting discretion.