On the role of internationalization of firm‐level corporate governance: The case of audit committees

Abstract

AbstractResearch Question/IssueMotivated by the agency theory and the findings of linguistic studies, we analyze the association between the internationalization of a firm's audit committee and its corporate governance.Research Findings/InsightsBased on data from 2159 publicly traded European firms from 15 countries for the period 2000–2018, we find that firms with foreign directors on their audit committees are associated with lower financial reporting quality. The association is mitigated by stronger country‐level investor protection and a higher similarity among intra‐committee languages. We further find that foreign directors on the audit committee are related to stock prices being less informative about future earnings.Theoretical/Academic ImplicationIn this study, we argue that language differences create communication difficulties that weaken social integration between foreign directors and the other parties involved in overseeing financial reporting, thus hampering their ability to monitor effectively.Practitioner/Policy ImplicationsThe results indicate that foreign directors on a corporate board increase its independence. However, appointing foreign directors to the firm's audit committee may compromise the board's monitoring function.