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Unformatted text preview: hich we have complete
governance data, we select the 100 firms with the largest positive accruals to form the
HIGH_POS subsample and the 100 firms with the largest negative for the HIGH_NEG
subsample. For the LOW subsample, we select the 50 firms with the smallest positive and the
50 with the smallest negative DAC.
To collect 100 observations with full governance data in each category, we had to
consider 203, 286 and 160 observations for the HIGH_POS, HIGH_NEG and LOW
categories, respectively. Observations are excluded because of missing proxy statements (45,
16 (2) 113, 37), absence of an audit committee (7, 7, 1), missing information on directors’ stocks
options and stock holdings (4, 5, 4) and changes in the board of directors during 1996 in
firms for which the 1995 proxy statement is not available (45, 59, 18).
All the characteristics of the audit committee and the board of directors were hand-collected
from the firm’s proxy statement for the year 1996. Table 1 summarizes the definitions of all
governance and control variables. Consistent with prior research, we classify directors as
executives, affiliated (gray), or independent non-executives. Affiliated directors are those
who have business relationships with the firm or its managers, although they are not
employees of the firm. Consultants, suppliers, bankers, former employees and managers’
family members as well as employees of other firms that have a business relationship with
the firm are part of this group. The independent non-executive group includes all directors
who seem to have no relation with the firm other than being part of its board of directors. To
clarify the affiliations disclosed in the proxy statements, we obtain the list of each firm’s
affiliated companies in Who Owns Whom (1996). We use a dichotomous variable ACIND
that is coded 1 if the audit committee is composed solely of independent non-executive
directors and 0 otherwise. ACNMAN is the percentage of members who are independent
non-executive directors and are not managers of other firms. The relative level of
compensation based on stock options (ACOPTION) is measured as the ratio of stock options
that can be exercised in the next 60 days to the total of options and stocks held by independent non-executive members of the audit committee.
For each committee member we determine whether that member holds a professional
certification in accounting (CPA) or financial analysis (CFA) or has experience in finance or
accounting. Our definition of financial expertise is more restrictive than that of the Blue 17 Ribbon Commission in that it excludes prior experience as a CEO. We believe that the CEO
position provides financial literacy but not expertise. Our FNEXPERT variable is coded 1 if
at least one audit committee member has financial expertise and 0 otherwise.
We examine two dimensions of audit committee activity. The presence of a clear
mandate defining the responsibilities of the audit committee is measured with the indicator
variable MANDATE that takes the value of 1 if the proxy statement indicates that the
committee is responsible for the oversight of both the financial statements and the external
audit and 0 otherwise. The frequency of committee meetings is measured with a dichotomous
variable (MEETINGS) which takes value 1 if the audit committee held more than 2 meetings
in 1996 and zero otherwise.3
The size of the board of directors is measured as the number of its members
(BOARDSIZE). The characteristics related to the board’s independence are measured with
the following variables: BOARDIND is defined as the percentage of board members who are
independent non-executive directors, CEOCHAIR is an indicator variable with a value of 1 if
the CEO is also chairman of the board, and NOMCOM is an indicator variable with a value
of 1 if the nominating committee is composed in majority of non-executive directors. The
non-executive directors’ incentives are measured by the cumulative percentage of the firm’s
stock they hold as a group (NXOWN). Finally, the board’s competence is measured by
NXTENURE which is the average number of years of board service for non-executive
directors and NXDIRSHIP which is the average number of directorships held by nonexecutive directors in unaffiliated firms.
Our sample is selected without consideration of specific incentives to manage earnings, but
some of the firms may be in a situation that gives them such incentives and that have nothing
18 to do with the quality of their corporate governance practices. We control for three of these
situations: the presence of a bonus plan in management’s compensation package (Gaver et al.
1995), the possibility of violation of the firm’s debt covenant constraints (Dechow et al.
1996) and the imminence of an initial public offering (IPO) (Teoh, Welch, and Wong 1998).
The bonus plan and debt covenant motivations are combined into one indicator variable
(AGENCY) that takes the value of 1 if the...
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This document was uploaded on 11/27/2013.
- Fall '13