An analysis of the factors driving the voluntary creation of audit committees: Evidence in the case of Spain

Abstract

Following the publication of the Spanish Code of Corporate Good Governance in 1998 (known as the Olivencia Code), some companies voluntarily created audit committees in line with the recommendation that all firms, and especially listed companies, should do so. The aim of this work is to analyse the factors associated with voluntary audit committee formation in companies listed on the Spanish Capital Market through 1999. In particular we analyse factors such as board independence and size, the board chairman/CEO duality, auditor size, agency costs, ownership, economies of scale, institutional investors, the audit report and auditor tenure. We find that voluntary audit committee formation is positively correlated with the proportion of independent directors on the board of directors and economies of scale, while the evidence reveals a non-linear (quadratic) relationship between board size and voluntary audit committee formation. We also formed another sample excluding financial institutions, for which we found that audit committee formation is positively associated with board independence and economies of scale, and negatively associated with the audit report and audit tenure