Determinants and Accounting Consequences of Forming a Governance Committee: Evidence from the United States
Version of Record online: 13 NOV 2009
© 2009 Blackwell Publishing Ltd
Corporate Governance: An International Review
Volume 17, Issue 6, pages 710–727, November 2009
How to Cite
Huang, H., Lobo, G. J. and Zhou, J. (2009), Determinants and Accounting Consequences of Forming a Governance Committee: Evidence from the United States. Corporate Governance: An International Review, 17: 710–727. doi: 10.1111/j.1467-8683.2009.00769.x
- Issue online: 13 NOV 2009
- Version of Record online: 13 NOV 2009
- Corporate Governance;
- Governance Committee;
- Accounting Accruals;
- Sarbanes-Oxley Act
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.