Audit committee ownership and the cost of equity capital

Abstract

Purpose This paper aims to investigate whether audit committee ownership (consisting of both equity holdings and option holdings) is associated with the cost of equity capital. Design/methodology/approach This paper uses regression analysis to examine the association between audit committee ownership and the cost of equity capital. The data set consists of 2,825 firm-year observations for companies listed on the ASX between 2001 and 2015. This paper also conducts tests to explore the mediating effects of financial reporting quality, firm performance and the risk of reporting problems, on the relation between audit committee ownership and cost of equity capital. Findings The analyses reveal that audit committee ownership reduces the firm’s cost of equity and, thereby, support the incentive alignment view. However, the association is driven primarily by audit committee equity ownership, with option holdings having an insignificant effect. This paper also finds that firm performance mediates the association between audit committee ownership and the cost of equity capital. Practical implications Findings of the existing corporate governance research relating to the cost of equity capital and audit committee ownership remain sparse in the context of “comply-or-explain” types of regulatory environment, like that of Australia. The findings indicate that principle-based discretionary governance arrangements, e.g. compensating audit committee members with company equity, may bring benefits to firms in terms of cheaper financing. Regulators, scholars and practitioners are invited to consider further the comprehensive implications of the structure and transparency of audit committee incentives on the effective functioning of security markets. Originality/value The effects of audit committee ownership on the cost of equity capital are an issue of direct economic consequence for equity investors. The main finding of this study, namely, that a firm with higher audit committee share ownership is likely to benefit from a lower cost of equity capital, therefore adds value to the limited extant literature.

Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

“…To test our hypotheses, we rely on the empirical mediating‐variable approach developed by Baron and Kenny (1986). Baron and Kenny (1986) mediating‐variable approach is used widely in accounting research focusing on audit committees (Sultana et al, 2020), cost of equity (Habib et al, 2021) and financial analysts forecast (Yu & Fang, 2021). It allows to ascertain if the effect of an independent variable X on a dependent variable Y is either moderated (direct effect) or mediated (indirect effect) by a third variable (deemed Z ).…”

Does Audit Committee Busyness Affect Financial Restatement? Evidence from Audit Committee Share Ownership

“…1 The incentive alignment effect indicates aligning the interest of AC members with share ownership to ensure that AC members have a personal stake in the firm's success, leading to greater diligence by them in their oversight duties while maintaining their independence. 2 The entrenchment effect suggests that managers with high levels of ownership in a firm are more likely to make decisions that benefit themselves at the expense of other shareholders (see Habib et al 2021b ship as a remedy for agency problems from ownership-control separation. Oswald and Jahera (1991) link director/officer ownership to firm performance, while Mehran (1995) correlates manager equity with performance.…”

“…22The entrenchment effect suggests that managers with high levels of ownership in a firm are more likely to make decisions that benefit themselves at the expense of other shareholders (see Habib et al. 2021b). …”

The impact of audit committee characteristics on Saudi bank performance

“…Empirically, the examination of the association between corporate governance mechanisms and firm performance has attracted considerable attention by researchers worldwide (e.g., Ajeigbe & Ganda, 2022;Al-ahdal & Hashim, 2022;Al-Jalahma, 2022;Al-Matari et al, 2012;Almoneef & Samontaray, 2019;Alzeban, 2021;Ben Barka & Legendre, 2017;Bolton, 2014;Dakhlallh et al, 2020;Elhawary, 2021;Gani et al, 2017;Habib et al, 2021;Nawafly & Alarussi, 2018;Rahman & Ali, 2022) Moreover, the board of directors and its committees, especially audit committee, become a major subject of interest and discussion among researchers and policy makers because of the critical role they play to enhance governance system (Foo & Witkowska, 2011). Furthermore, the corporate scandals of the early 2000s and the unexpected collapse of some reputed firms, followed by the 2008-2009 global financial crisis, and ending with the latest accounting scandal related to Wirecard company highlight the weak role plied by audit committees, where a significant number of firm failures have been blamed on the lack of timely and accurate disclosure and effective corporate governance (Okeahalam, 2004).…”

“…The current study is motivated by several reasons. First, Despite the importance role of audit committee on firm performance, most empirical studies have been conducted in developed countries and the results are mixed (e.g., Alzeban, 2021;Ben Barka & Legendre, 2017;Bolton, 2014;Gani et al, 2017;Habib et al, 2021), however, less attention has been given in developing countries (e.g., Alahdal & Hashim, 2022;Boshnak, 2021;Elhawary, 2021), which necessitate further research.…”