Audit Committee Financial Literacy: What Might It Mean and Why Bother?

We review the history of financial literacy, as it applies to public company audit committees; we report on a financial literacy quiz that we have given to over 1,400 members of corporate boards, not all audit committee members. We develop a classification to score the potential of corporate audit committees to be financially literate, as defined in this paper, based on listing requirements of the NYSE, as promulgated late in 1999. We score audit committees of approximately 300 large companies in 2000 and 2004, and of a subsample in 1996 as well. We find that scores did not change between 1996 and 2000, but have improved significantly since. Still, the audit committees have room for improved financial literacy in the sense that we define. We also find evidence of superior stock market returns to companies who have improved the potential for financial literacy, as we measure it, of their audit committees over the last four years. The improvers in our sample enjoyed annualized abnormal, excess returns of 4.6 percent per year more than those which did not improve.