Determinants and Accounting Consequences of Forming a Governance Committee: Evidence from the United States

Abstract

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This study examines the determinants of forming a governance committee and whether such a committee constrains managerial opportunism.Research Findings/Insights: This study examines a sample of S&P 1,500 firms over the period of 1996 to 2002. It finds that firms with a larger, more independent, and more active board, higher agency costs (as indicated by lower managerial ownership and lower takeover vulnerability), and past occurrence of class‐action lawsuits are more likely to voluntarily form a governance committee. This study also provides evidence that having a governance committee brings real consequences in that it constrains managerial opportunism by reducing aggressive financial reporting.Theoretical/Academic Implications: Consistent with substitution theory, this study documents that a firm is more likely to form a governance committee to compensate for its severe agency problems. It also demonstrates that delegating some corporate governance duties to a specific board committee could improve the effectiveness of board monitoring.Practitioner/Policy Implications: This study provides insights to regulators who are interested in regulating board structure. It suggests that whether a firm needs to form a governance committee is endogenously determined by the firm's characteristics when the firm has an independent board. In addition, this study documents that a voluntarily formed governance committee is able to mitigate agency costs in the form of constraining managerial accounting discretion.