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Audit committees: voluntary formation by ASX non-top 500

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  • Li (Glenda) Chen
  • Alan Kilgore
  • Renee Radich
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    Abstract

    Purpose – This paper aims to examine the relationship between firm characteristics and incentives for the voluntary formation of audit committees by non-top 500 firms listed on the Australian Stock Exchange (ASX). Design/methodology/approach – Data are obtained from a random sample of 224 non-top 500 firms listed on the ASX for the year 2005. Logistic regression analysis is used to examine the characteristics of non-top 500 firms who have voluntarily established audit committees. Findings – The results are consistent with the hypothesis that incentives to voluntarily form audit committees increase with agency costs of debt. The results show a significant and positive association between cost of debt, firm size, number of directors on the board, the proportion of independent directors, independent board chair and the voluntary formation of audit committees. Research limitations/implications – Results indicate that firm size is not necessarily the primary influence in voluntary formation of audit committees. Board size and the proportion of independent directors and having an independent board chair also have a significant influence on the decision. These results suggest that audit committees will be established in high agency cost of debt situations, where there are economies of scale and are reflective of a desire to reduce information asymmetries and the liability exposure of outside directors. Originality/value – This study provides useful insights and direction in examining voluntary formation in an Australian context using non-top 500 firms. The results have implications for regulators in considering making audit committees mandatory for all listed companies.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 24 (2009)
    Issue (Month): 5 (May)
    Pages: 475-493

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    Handle: RePEc:eme:majpps:v:24:y:2009:i:5:p:475-493

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Audit committees; Australia; Corporate governance; Costs; Stock exchanges;

    References

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    1. Holthausen, Robert W. & Leftwich, Richard W., 1983. "The economic consequences of accounting choice implications of costly contracting and monitoring," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 77-117, April.
    2. Garvey, Gerald T. & Swan, Peter L., 1994. "The economics of corporate governance: Beyond the Marshallian firm," Journal of Corporate Finance, Elsevier, vol. 1(2), pages 139-174, August.
    3. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    4. Eichenseher, John W. & Shields, David, 1985. "Corporate director liability and monitoring preferences," Journal of Accounting and Public Policy, Elsevier, vol. 4(1), pages 13-31.
    5. Anderson, Don & Francis, Jere R. & Stokes, Donald J., 1993. "Auditing, directorships and the demand for monitoring," Journal of Accounting and Public Policy, Elsevier, vol. 12(4), pages 353-375.
    6. Menon, Krishnagopal & Deahl Williams, Joanne, 1994. "The use of audit committees for monitoring," Journal of Accounting and Public Policy, Elsevier, vol. 13(2), pages 121-139.
    7. Bradbury, Michael E., 1990. "The incentives for voluntary audit committee formation," Journal of Accounting and Public Policy, Elsevier, vol. 9(1), pages 19-36.
    8. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    9. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    10. Pincus, Karen & Rusbarsky, Mark & Wong, Jilnaught, 1989. "Voluntary formation of corporate audit committees among NASDAQ firms," Journal of Accounting and Public Policy, Elsevier, vol. 8(4), pages 239-265.
    11. Julie Cotter & Mark Silvester, 2003. "Board and Monitoring Committee Independence," Abacus, Accounting Foundation, University of Sydney, vol. 39(2), pages 211-232.
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