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

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  • Mai Dao
  • Hua-Wei Huang
  • Jishan Zhu

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.

Suggested Citation

  • Mai Dao & Hua-Wei Huang & Jishan Zhu, 2012. "The Effects of Audit Committee Members' Age and Additional Directorships on the Cost of Equity Capital in the USA," European Accounting Review, Taylor & Francis Journals, vol. 22(3), pages 607-643, September.
    • Handle: RePEc:taf:euract:v:22:y:2012:i:3:p:607-643
    DOI: 10.1080/09638180.2012.739823
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