Voluntary Audit Committee Disclosures and Credibility of Financial Reporting

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Voluntary Audit Committee Disclosures and Credibility of Financial Reporting

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2019-10

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This paper examines whether the voluntary disclosure of audit committee activities in proxy statements increases market participants’ perception about the firm’s reporting credibility. In recent years, various stakeholders have expressed concern about the lack of transparency in how audit committees execute their responsibilities. To enhance investor confidence in financial reporting, companies have started to voluntarily provide additional task-oriented information about the audit committee oversight process beyond the limited regulatory requirement. Using textual content analysis techniques, I test whether these narrative disclosures improve market participants’ perception of the quality of reported earnings, captured by the earnings response coefficient (ERC) and analysts’ forecast dispersion (DISP). I find that, relative to a matched control sample of non-disclosing firms, the ERC of disclosing firms is significantly higher and their analysts’ forecast dispersion is significantly lower after the voluntary disclosure of audit committee activities and these effects increase with the number of dimensions of audit committee tasks disclosed. Further, cross-sectional analysis shows that the effects on ERC and DISP after the disclosure are incrementally greater for firms with a weak information environment. In light of the SEC’s renewed interest in improving transparency of the audit committee process, I provide timely evidence of the usefulness of narrative audit committee disclosures in enhancing the credibility of financial reporting.

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University of Minnesota Ph.D. dissertation. October 2019. Major: Business Administration. Advisors: Pervin Shroff, Ivy Zhang. 1 computer file (PDF); (vi, 76 pages).

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Guo, Xiaoli. (2019). Voluntary Audit Committee Disclosures and Credibility of Financial Reporting. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/209213.

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