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Does social exchange relationship impair audit committee effectiveness?

Author

Listed:
  • Lerong He

    (State University of New York at Brockport)

  • Rong Yang

    (Rochester Institute of Technology)

  • Yuanlong He

    (State University of New York at Brockport)

Abstract

This research applies the three-tier agency theory and social exchange theory to study the role of audit committees in improving financial reporting quality and reducing the likelihood of earnings restatements. Utilizing a matched sample of restated and non-restated U.S. listed firms between 2002 and 2005, this paper finds that firms with a larger proportion of audit committee members appointed after the CEO are associated with higher incidences of restatements, while the presence of an all-independent nomination committee is associated with a lower likelihood of restatements. The paper also shows that firms whose audit committee members have longer average tenure and receive higher director compensation are associated with a smaller likelihood of restatements. Finally, the paper documents changes in the impact of audit committee characteristics on financial restatements after the enactment of the Sarbanes–Oxley Act. Overall, our results suggest that audit committees’ effectiveness in supervising financial reporting quality is affected by social exchange processes and the broad social context.

Suggested Citation

  • Lerong He & Rong Yang & Yuanlong He, 2018. "Does social exchange relationship impair audit committee effectiveness?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 219-249, June.
    • Handle: RePEc:kap:jmgtgv:v:22:y:2018:i:2:d:10.1007_s10997-017-9385-5
    DOI: 10.1007/s10997-017-9385-5
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