The Wealth Effect of Announcement of Audit Committee Formation: Evidence From Malaysian Listed Firms

Abstract

This study investigates the wealth effects of announcements of audit committee formation by Malaysian listed companies. Using a sample of companies that announced the formation of audit committees before, during and after the mandatory year (1994), the abnormal returns and cumulative abnormal returns were estimated to measure the wealth effect for eleven days surrounding the announcement date. Negative and significant abnormal returns and cumulative abnormal returns were observed during the five days before the announcement (including the announcement day) for all the sampled firms. The post-announcement period did not show any significant drift of abnormal returns. The negative wealth effect could be due to investors' perceived scepticism concerning the ability of firms to actually form an effectively functioning audit committee.