Shareholder Activism and Changes in Audit Committee Composition

Abstract

We examine whether governance related shareholder activism is associated with changes in audit committee composition. Audit committees are the “ultimate monitors” of firms’ financial reporting processes. The SEC is interested in whether audit committees have financial experts and prior research has documented benefits associated with accounting-specific financial expertise. Governance activism expresses investors’ dissatisfaction with corporate governance; audit committees are an important governance mechanism. Therefore, we predict that governance activism will affect audit committee composition. We document consistent associations between both general and accounting related governance activism and increases in audit committee accounting expertise. These associations are strongest when a firm concurrently announces a restatement, experiences an internal control failure, or has low pre-activism expertise. Further, in the post period, there is a considerable drop in activism for firms that have added accounting experts. Our study documents an important determinant of audit committee composition.