No abstract

Audit committee (AC) responsibilities have been increasing over time, prompting concerns that overloading ACs may impair their effectiveness. Using new measures to capture AC responsibilities based on AC charters, we find that greater AC responsibilities are associated with improved financial statement reliability. Contrary to overload concerns, this association is strongest when ACs have very high levels of responsibilities. Cross-sectional analyses indicate greater AC responsibilities improve financial statement reliability at complex firms, following significant governance lapses, when AC members are capable and experienced, and when ACs also meet often to carry out their oversight duties. Further analysis suggests that our AC responsibility results are driven by duties related to financial reporting while, in stark contrast, allocating responsibilities unrelated to financial reporting to the AC (e.g., risk management) detracts from monitoring effectiveness by decreasing financial statement reliability. The latter is consistent with an overload effect driven by responsibilities that distract the AC from its core financial reporting oversight mandate. Our results inform recent regulatory changes at some exchanges to expand AC oversight.

We examine whether restricting managers' discretion through GAAP impacts the usefulness of accounting information in debt contracting. Our study informs standard setters and regulators regarding the debt contracting implications of limiting managers' discretion via accounting standards. We predict and find that under more restrictive standards, lenders make more non‐GAAP modifications to GAAP‐based performance measures, suggesting that restrictions of managers' discretion reduce the usefulness of accounting information. We perform two additional analyses to enhance identification. First, in line‐item‐level analysis, we document a positive relation between the exclusion of specific nonrecurring items from contractual definitions of earnings and the number of restrictions in the GAAP standards that apply to each specific item each year. Second, using difference‐in‐differences tests around standard changes, we find that the propensity to exclude items varies positively with changes in the restrictiveness of related standards. Moreover, we predict and find that restrictive standards are also positively associated with loan spreads but significantly less so when lenders adjust GAAP numbers in loan contracts. Overall, this study improves our understanding of how attributes of accounting standards impact the usefulness of accounting information.

I examine whether audit committees (ACs) improve financial reporting reliability by utilizing an internal audit function (IAF) as a resource. I use semi-structured interviews with chief audit executives and AC chairs to develop an understanding of the nature of AC-IAF relations. Then using AC charters, I measure AC interaction with IAFs, finding an improvement in financial reporting reliability for firms that introduce a new IAF under a NYSE mandate. Importantly, this improvement is limited to firms with significant interaction between ACs and the new IAFs. Using detailed hand-coded data, I investigate the different kinds of interactions between ACs and IAFs, finding evidence of the importance of private meetings to review the IAF’s scope, findings, and recommendations. The value of the IAF as a resource to the AC is greater when the AC ensures free and open communication, promotes IAF independence, and stands in greater ex ante need of monitoring assistance.

We study how customer base concentration at a target firm impacts the occurrence and structure of M&A deals. We hypothesize that customer concentration increases information asymmetry and adverse selection between bidders and targets, such that (1) firms with greater customer concentration are less likely to receive a bid and (2) bidders for targets with greater customer concentration share the risk by using more stock payment in their offer. Using data on customer concentration and M&A deals from 1985 to 2016, we find consistent evidence supporting our predictions. Our findings extend the literature by systematically documenting an important factor in M&A decisions and by quantifying the economic consequences of customer concentration.