The incentives for voluntary audit committee formation

Abstract

This study uses an agency theory framework to analyze the incentives for voluntary formation of audit committees. Empirical variables are chosen to proxy for costs of conflicts of interest between stockholders, bondholders, and managers. Also tested is the influence of size and the incentives of (Big Eight) auditors and directors to establish audit committees. Univariate and multivariate tests are undertaken on 135 firms listed on the New Zealand Stock Exchange. The results indicate that voluntary audit committees are not related to auditor incentive variables or to agency cost variables arising from the separation of (residual) ownership and (decision) control. A relation is found between voluntary audit committee formation and directors' incentives. Both the number of directors on the board and intercorporate ownership were found to be the more important determinants of voluntary audit committees.