Audit Committee Financial Expertise, Tenure, and Capital Structure Decisions, Evidence from Turkey

Abstract

Capital structure theory proposes that a company's capital structure is affected by a variety of factors. The most important of these factors is corporate governance practices. The audit committee is recognized as an important corporate governance mechanism that stands out with its monitoring and oversight responsibility. The audit committee helps to make financial decisions more soundly by providing coordination between a company's independent audit, internal audit, and the board of directors. In addition, firms ensure, through the audit committee, that managers' decisions to improve firm performance are ethically monitored. Previous studies have so far given little weight to the relationship between the audit committee and capital structures. Therefore, this study examines the impact of audit committee characteristics on the capital structure, with a particular focus on the financial expertise and tenure of audit committee members. The sample of the study includes mostly hand-collected 1,638 firm-year observations obtained from Turkey’s listed non-financial companies between 2009 and 2019. Empirical results indicate that the financial expertise and long tenure of the audit committee members are associated with lower financial leverage. Moreover, the presence of less tenure and nonfinancial experts members in the audit committee is associated with higher financial leverage. This study fills a literature gap where empirical evidence on how the audit committee affects capital structure is insufficient.