AUDIT COMMITTEE FINANCIAL EXPERTS AND TRADE-OFFS BETWEEN FINANCIAL REPORTING QUALITY AND FIRM VALUE

Abstract

This thesis studies the impact of financial expertise, using the SOX-defined Audit Committee Financial Expert ("ACFE") as a proxy, on financial reporting quality and firm value. In particular, this thesis seeks to ascertain whether there is a trade-off between financial reporting quality and firm value when there is a greater presence of financial expertise. The results find that this trade-off exists. Using a sample of 7,168 firm-year observations from the year 2003 to 2011, I find statistically significant results that reveal a non-linear relationship between the percentage of ACFEs on the audit committee and financial reporting quality, as well as the percentage of ACFEs on the board and firm value. Initially, a higher reported ACFE percentage is positively related to both financial reporting quality and firm value. However, beyond 70% of ACFEs on the audit committee and 21% of ACFEs on the board, lower financial reporting quality and firm value respectively are observed. Corollary to the first objective of this thesis, I also investigate the relationship between ACFE characteristics and the dependent variables of financial reporting quality and firm value. The results show that only ACFE equity compensation has a negative association with financial reporting quality, and a positive association with firm value. However, by further carrying out cross-sectional studies on other ACFE characteristics of tenure and busyness, I find significant relationships between these other ACFE characteristics and the two dependent variables. Hence, in addition to the percentage of ACFEs on the audit committee and board, ACFE characteristics are also important in understanding the impact of financial expertise on the trade-offs between financial reporting quality and firm value.