The Effects of Audit Committee Members’ Age and Additional Directorships on the Cost of Equity Capital in the USA

Abstract

In this paper, we examine the associations between the cost of equity capital and two audit committee (AC) characteristics: (1) average AC members' age and (2) average number of AC members' other directorships. This study is motivated by the recent emphasis on the important role of ACs in overseeing financial reporting and audit processes, as well as the recognition of the critical role of capital costs in firms' operational efficiency and profitability. The empirical results show that the cost of equity capital is lower in US firms with higher average AC members' age. We do not find any evidence that the average number of AC members' other directorships is associated with the cost of equity capital. We also find that age could be another proxy for AC members' experience. Our findings provide evidence that supports the call of the US Securities and Exchange Commission for greater board diversity (including age). Our study not only demonstrates the important role of ACs in corporate governance, but also enriches the literature by examining the two AC characteristics that are rarely mentioned in prior studies.

Audit Characteristics, Gender Diversity and Firm Performance: Evidence from a Developing Economy

“…Consequently, financial reports of those firms seem to be more trustworthy to investors, which in turn are supposed to enhance market and operating performance of the firms. Dao et al (2013) argue that US firms with higher AC members’ experience (as measured by average AC members’ age) have negative impact on cost of equity capital, which is widely recognised to increase operational efficiency and profitability. Similar effect on cost of equity capital has also been reported by Chen and Li (2013), who argue that voluntary adoption of stringent AC requirements where all members are independent and have financial expertise are supposedly linked to better operational efficiency and performance.…”

The signalling role of audit committee characteristics and the cost of equity capital

“…Second, this study extends the literature on the cost of capital by examining the effect of AC characteristics as a proxy for the credibility of disclosures (Raghunandan and Rama, 2007) on the cost of equity capital. This study is related to, but differs from, the study by Dao et al (2013). Dao et al (2013) examine the influence of the average age of AC members and the directorships of AC members on the firm’s cost of equity capital.…”

“…This study is related to, but differs from, the study by Dao et al (2013). Dao et al (2013) examine the influence of the average age of AC members and the directorships of AC members on the firm’s cost of equity capital. This study, however, focusses on other major characteristics of ACs such as size, meeting frequency, independence, the independence of the AC chair and financial expertise and their influence on the cost of equity capital.…”

How U.S. audit committees oversee internal control over financial reporting

“…Older audit committee members may have a mix of personal and professional experiences that translates favourably to their audit committee oversight roles (Dao et al, 2013). For example, in this study, age is correlated with board experience, audit committee experience and whether the audit committee member is retired.…”