Professional Documents
Culture Documents
Abernathy 2013
Abernathy 2013
Abernathy 2013
Spears School of Business, Oklahoma State University, Stillwater, OK 74078, United States
Kogod School of Business, American University, Washington, DC 20016, United States
a r t i c l e
i n f o
Keywords:
Audit committees
Financial expertise
Analyst earnings forecasts
a b s t r a c t
An important role of nancial accounting information is to aid nancial statement users in forming expectations about the rm's future earnings. Prior research nds that accounting nancial expertise of the audit
committee is associated with higher nancial reporting quality. We extend this literature by examining the
association between audit committee nancial expertise and analysts' ability to anticipate future earnings.
We nd a signicant association between accounting nancial expertise on the audit committee and analyst
earnings forecasts that are more accurate and less dispersed. In contrast, we do not nd a signicant association between non-accounting nancial expertise (i.e., supervisory expertise) and forecast accuracy or forecast dispersion. These ndings contribute to our understanding of the benets of accounting expertise in
audit committees by demonstrating an association between accounting nancial expertise and improvements in analyst earnings forecasts.
2012 Elsevier Ltd. All rights reserved.
1. Introduction
Prior research provides evidence that having accounting nancial
experts on the audit committee is associated with higher nancial
reporting quality (e.g., DeFond, Hann, & Hu, 2005; Dhaliwal, Naiker, &
Navissi, 2010; Krishnan & Visvanathan, 2008). We extend this research
to examine whether improved nancial reporting quality from such expertise is associated with the ability to anticipate future earnings. The
Financial Accounting Standard Board (FASB) (1978) notes in the Statement of Financial Accounting Concepts No. 1 that nancial reporting
should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit
and similar decisions. While prior studies suggest that audit committee
expertise is associated with improved nancial reporting quality, there
is little empirical evidence on the association between audit committee's
nancial expertise and decisions of nancial statement users. We
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
the audit committee should improve the quality of information available to investors. Prior research supports this notion by showing that
the nancial expertise of the audit committee is signicantly associated
with a lower incidence of nancial statement restatement (Abbott,
Parker, & Peters, 2004), a reduced likelihood of material weaknesses in
internal control reported during an auditor change (Krishnan, 2005), a
reduction in fraud (Farber, 2005), and lower expected rates of return
on pension plan assets (Comprix, Guo, Zhang, & Zhou, 2012).
The SEC initially proposed a stringent denition of nancial expert,
which dened individuals as nancial experts only if they had education
and experience in accounting or auditing (i.e. as a certied public accountant, auditor, chief nancial ofcer, nancial controller or accounting ofcer). In response to criticism that this denition was overly restrictive,
the SEC adopted a broader denition of audit committee nancial expert.
Specically, an audit committee member could be deemed a nancial expert if the member has had work experience in accounting or auditing, as
well as work experience in nance positions or as a chief executive ofcer (CEO) or company president. Therefore, nancial expertise may include expertise in accounting, nance, or in supervising the preparation
of nancial statements (supervisory expertise). However, many argue
that the current denition of nancial expertise may be too broad and
lack the ability to ensure high nancial reporting quality.
Consistent with this, prior research nds that the presence of accounting nancial expertise (but not non-accounting nancial expertise)
on the audit committee is associated with certain nancial reporting
characteristics such as greater accounting conservatism (Krishnan &
Visvanathan, 2008), higher quality accruals (Dhaliwal et al., 2010), and
lower earnings management (Bdard, Chtourou, & Courteau, 2004;
Carcello, Hollingsworth, & Neal, 2006). The accounting nancial expertise of the audit committee is also associated with a reduction in suspicious auditor switches (Archambeault & DeZoort, 2001) and higher
rm credit ratings (Ashbaugh-Skaife, Collins, & LaFond, 2006). Prior research also suggests that investors care about the accounting nancial
expertise of audit committee members. For example, DeFond et al.
(2005) nd that companies appointing audit committee members with
accounting nancial expertise experience signicant positive abnormal
market returns, while no market reaction is observed upon the appointment of those with non-accounting nancial expertise.
Financial analysts use accounting information to form expectations of
future earnings (e.g., Abarbanell & Bushee, 1997). Furthermore, survey
evidence suggests that audit committee nancial expertise matters to nancial analysts. Dickins, Hillison, and Platau (2009) survey nancial analysts and nd that analysts are more condent in the nancial statements
when the Audit Committee Financial Expert (ACFE) has accounting-based
nancial expertise. However, there is little evidence on how nancial analyst earnings forecasts vary with audit committee nancial expertise.
Thus, if audit committee accounting expertise increases both the quality
of nancial information which nancial analysts use to formulate their
forecasts and analyst condence in the nancial information provided,
we expect the properties of analysts' earnings forecasts to improve with
audit committee accounting expertise.
To address our research question, we examine the associations between audit committee nancial expertise and analyst earnings forecast
properties (i.e., accuracy and dispersion). Financial analysts are viewed
as sophisticated nancial statement users and their earnings forecasts
are commonly used as a proxy for the market's expectation of earnings,
which is a critical element in rm valuation. We nd that the accounting
nancial expertise of the audit committee is signicantly associated with
greater analyst forecast accuracy and lower forecast dispersion. In contrast, examining the broad denition of nancial expertise adopted by
the SEC, we nd that non-accounting nancial expertise is not signicantly associated with either improved analyst forecast accuracy or
lower analyst forecast dispersion.
This study contributes to the literature in the following ways. First,
building on prior studies that examine the relation between audit committee expertise and nancial reporting quality, we examine whether
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
If accounting nancial expertise improves nancial reporting quality, we expect the dispersion of analysts' earnings forecasts to decrease.
Unlike forecast accuracy, which is a function of both realized current period earnings and forecasted earnings, the dispersion measure does not
depend on realized earnings, the quality of which is also likely to be a
function of audit committee expertise. In this sense, forecast dispersion
complements forecast accuracy as a measure of improvement in the nancial analysts' information environment. Our second hypothesis in alternative form is as follows:
H2. The accounting nancial expertise of the audit committee is negatively associated with analysts' earnings forecast dispersion.
3. Methodology
3.1. Sample selection
Sample selection begins with rms that are included in the S&P 500
with data available for 20002008. The sample is conned to rms in
the S&P 500 to increase data availability for members of the board of directors. We exclude rms in the nancial services industries (Standard
Industrial Classication [SIC] codes 60006999) as earnings characteristics for these rms are likely to differ. The nal sample consists of 2484
rmyear observations. For each rm, we hand collected data on the
qualications and experience of the members of the audit committee
from proxy statements, 10-K reports, company websites, and other publicly available sources.
3.2. Financial expertise
To measure nancial expertise, we assign audit committee members
into one of three categories of nancial expertise. First, audit committee
members are categorized as accounting nancial experts if they have experience as a certied public accountant, auditor, chief nancial ofcer,
controller, or chief accounting ofcer, consistent with the original denition of nancial expertise proposed by the SEC. Second, audit committee members are classied as non-accounting nancial experts if they
have experience as chief executive ofcer or president of a for-prot
company. Third, those audit committee members who are neither accounting nancial experts nor non-accounting nancial experts are categorized as nonnancial experts.
Consistent with prior research (e.g. Hoitash et al., 2009; Krishnan
& Visvanathan, 2008), we measure nancial expertise of the audit
committee as the number of audit committee directors with
accounting (non-accounting) nancial expertise divided by the total
number of directors on the audit committee. AFIN (NAFIN) is the proportion of accounting (non-accounting) nancial experts on the audit
committee.
3.3. Forecast accuracy
To test hypothesis one, we use the following equation, which
controls for previously identied determinants of analysts' forecast
properties. Table 1 provides formal denitions for each of the variables
used in our analysis. Because multiple observations from the same rm
(but from different years) are in the sample, we use t-statistics based on
HuberWhite standard errors to correct for clustering by rm. These
standard errors are robust to heteroscedasticity and serial correlation
(Huber, 1967; Rogers, 1993; White, 1980) for all the analyses. We use
the following model to test H1:
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
Table 1
Variable denitions.
ACCY
DISP
AFINEXD
ADD
AEXP
AFIN
NAFIN
NFE
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
SOX
AQ
ACSIZE
ACMEET
ACIND
BSIZE
NODUAL
BIND
INVMILLS
=
=
=
=
=
=
=
=
=
Accuracy in analysts' earnings forecasts, dened as the negative of the absolute difference between the forecast and actual earnings, scaled by lagged stock price
Standard deviation in analysts' earnings forecasts, scaled by lagged stock price
Indicator variable equal to 1 if there is an accounting nancial expert on the audit committee, 0 otherwise
Indicator variable equal to 1 in the current year and all subsequent years in the sample in which the rm added an accounting nancial expert, 0 otherwise.
Indicator variable equal to 1 if the rm had an accounting nancial expert on the audit committee for the entire sample period, 0 otherwise
Proportion of audit committee directors who qualify as accounting nancial experts to the total number of directors on the audit committee
Proportion of audit committee directors who qualify as non-accounting nancial experts to the total number of directors on the audit committee
Proportion of audit committee directors who qualify as nonnancial experts to the total number of directors on the audit committee
Logarithm of the market value of equity at the beginning of year t.
Current year earnings minus last year earnings scaled by stock price.
Indicator variable equal to 1 if the rm had negative earnings, 0 otherwise
Zmijewski's nancial distress score
Log of the average of the number of calendar days between mean forecast announcement date and subsequent actual earnings announcement date
Standard deviation of the return on equity over the previous ve years
Log of number of analysts following the client
Earnings level measured as earnings per share
Indicator variable equal to 1 if the rm is audited by a national industry audit specialist based on the denition of Reichelt and Wang (2010) specically, the
auditor has an annual market share greater than 30% in two-digit SIC industry in the national audit market, 0 otherwise
Indicator variable equal to1 if the scal year is after 2003, 0 otherwise
Accruals quality, based on the model of Dechow and Dichev (2002)
Log of total number of directors in the audit committee
Number of meetings by the audit committee during the year
Proportion of directors that are independent in the audit committee
Log of total number of directors on the board of directors
Indicator variable equal to 1if the CEO is not also the chairman of the board, 0 otherwise
Proportion of directors that are independent in the board of directors
Inverse Mills ratio for the endogenous choice of appointment of an accounting nancial expert to the audit committee
jFORECAST t EPSt j
PRICEt1
Specically, we control for audit committee size by using the natural log of the number of members on the audit committee (ACSIZE),
the number of meetings held by the audit committee during the year
(ACMEET), and the proportion of independent directors on the audit
committee (ACIND). We make no expectation for ACSIZE because
prior research is mixed on audit committee size and audit committee
effectiveness. Prior research on the frequency of audit committee
meetings is also mixed (Farber, 2005; Hoitash et al., 2009); therefore,
we make no prediction about the coefcient of ACMEET. We expect a
positive association between ACIND and ACCY because Klein (2002)
and Abbott et al. (2004) nd that audit committee independence is
indicative of good governance.
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
We control for board size by using the natural log of the number of
directors on the board (BSIZE) and expect a negative association with
ACCY because prior research suggests larger boards are less effective.
We control for separation of the roles of CEO and chairman of the
board (NODUAL) using an indicator variable coded as one if the CEO is
not the chairman of the board, and zero otherwise. We expect a positive
association between NODUAL and ACCY because prior research indicates
that separation of the role of CEO and chairman of the board enhances
corporate governance potentially increasing forecast accuracy (Agrawal
& Chadha, 2005; Jensen, 1993). Finally, we control for the proportion of
directors who are independent (BIND), and expect a positive association
with ACCY because prior research suggests that more independent
boards are associated with lower incidence of fraud and earnings management (Beasley, 1996; Klein, 2002).
expert to the audit committee, we identify those rms that added an accounting nancial expert to the audit committee during the sample period and classify those rms as ADD rms in the year the accounting
nancial expert was added and all years following the addition of the
accounting nancial expert. To control for the effects of already having
an accounting nancial expert on the audit committee, we classify
rms that had an accounting nancial expert on the audit committee
for the entire sample period as AEXP rms. Both ADD and AEXP are indicator variables that take the value of one if the rm added an expert
during the sample period (ADD) or if the rm had an accounting expert
on the audit committee from before (AEXP), zero otherwise. We estimate similar models for forecast accuracy and forecast dispersion
replacing our proportion measures (AFIN and NAFIN) with measures
of the addition of board members with accounting nancial expertise
(ADD and AEXP).
STDFORECAST t
:
PRICEt1
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
Table 2
Descriptive statistics.
Variable
Mean
Median
Standard
deviation
Q1
Q3
ACCY
DISP
AFINEXD
AFIN
NAFIN
NFE
ADD
AEXP
ACSIZE
ACIND
ACMEET
NODUAL
BSIZE
BIND
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
SOX
AQ
INVMILLS
0.00283
0.00163
0.47101
0.14075
0.61391
0.24494
0.07882
0.42141
1.45527
0.92544
7.46940
0.23309
2.38500
0.74102
9.26997
0.05950
0.10306
3.12313
3.81715
0.19386
2.58647
2.01060
0.31200
0.53905
0.15942
0.52733
0.00090
0.00075
0.00000
0.00000
0.66667
0.25000
0.00000
0.00000
1.38629
1.00000
7.00000
0.00000
2.39790
0.76923
9.24578
0.01326
0.00000
3.12433
3.73767
0.04442
2.63906
1.78000
0.00000
1.00000
0.05600
0.53073
0.00577
0.00253
0.49926
0.17584
0.23483
0.21796
0.26951
0.49390
0.25667
0.14389
3.15544
0.42289
0.19176
0.14104
1.23725
0.23986
0.30410
0.96331
0.33564
0.58595
0.54942
1.85831
0.46340
0.49857
0.40482
0.07478
0.00257
0.00037
0.00000
0.00000
0.50000
0.00000
0.00000
0.00000
1.38629
0.85714
5.00000
0.00000
2.30259
0.66667
8.41170
0.00597
0.00000
3.73897
3.66356
0.02033
2.30259
1.10000
0.00000
0.00000
0.12310
0.47671
0.00032
0.00172
1.00000
0.25000
0.75000
0.40000
0.00000
1.00000
1.60944
1.00000
9.00000
0.00000
2.48491
0.84615
9.97883
0.03353
0.00000
2.52987
3.91202
0.10230
2.94444
2.79500
1.00000
1.00000
0.02710
0.58471
consistent with the addition of these six control variables for corporate
governance characteristics of the rm. The coefcient on AFIN remains
positive and signicant. This result supports the prediction of the rst
hypothesis (H1) that accounting nancial expertise on the audit committee is associated with higher forecast accuracy. The coefcient on
NAFIN remains insignicant, indicating that nancial expertise gained
in supervising the preparation of nancial statements (i.e., supervisory
expertise) is not associated with improvements in forecast accuracy.
Examining the signicant control variables in columns (1) and (2),
we nd that the coefcients on SIZE and COVERAGE are positively associated with forecast accuracy. Larger rms and those followed by
more analysts have more accurate earnings forecasts. On the other
hand, rms with greater earnings surprise (SURPRISE), reporting a
loss (LOSS), longer forecast horizon (HORIZON), and reporting in the
post SarbanesOxley period (SOX) tend to have less accurate earnings
forecasts. The coefcients on the control variables reported in column
(1) are generally consistent with the coefcients reported in column
(2) that includes the additional six control variables for corporate governance characteristics. The explanatory power of the model (adj. R 2)
is about 33%. Columns (3) and (4) repeat the analysis, including additional controls for endogeneity, described below.
4.4. Controlling for endogeneity
It is possible that individuals with accounting nancial expertise do
not randomly join rms but, rather, self-select rms based on certain
rm characteristics. Specically accounting experts may choose not to
serve on the audit committee of rms with low earnings quality to
avoid damaging their reputations, being sued, or undertaking an additional workload (Engel, 2005; Beasley et al. 2009). This suggests that
rm characteristics that affect analyst forecast properties and the presence of accounting experts may be endogenously determined, which
could bias our regression analysis (Maddala, 1983). To address this
issue, we build upon models used by Agrawal and Chadha (2005),
Krishnan and Visvanathan (2008), and Dhaliwal et al. (2010) to examine whether our results persist after controlling for endogeneity. To
achieve this objective, we rst estimate a probit regression model to determine the predicted probability of having an accounting nancial expert on the audit committee. The dependent variable is AFINEXD, which
is an indicator variable that equals one if the rm has at least one accounting expert on the audit committee and zero otherwise.
From prior literature, we identify rm size, nancial reporting quality, leverage, operating performance, corporate governance, sales growth,
board size, inside ownership, capital intensity, earnings volatility, and
rm age, as rm characteristics that can drive the presence of accounting
experts on the audit committee. We include SIZE, which is the logarithm
of the market value of equity, because larger rms may have more
knowledgeable boards; therefore, small rms may benet more from
having an accounting expert on the audit committee (Agrawal &
Chadha, 2005). We measure nancial reporting quality as accruals quality (AQ) based on the model in Dechow and Dichev (2002). We include
AQ because accounting nancial experts may be more likely to serve
on the audit committee of rms with higher nancial reporting quality.
DEBT, which is long-term debt divided by total assets, is included because
rms with higher leverage are likely to have a greater need for accounting nancial expertise (Agrawal & Chadha, 2005). We measure operating
performance by the prior three-year average return on assets (PROA).
PROA is included because directors with accounting expertise may be
picked by better-managed rms, which are less likely to have accounting
problems. GINDEX measures the strength of a rm's governance system
based on 24 corporate governance provisions (Gompers, Ishii, &
Metrick, 2003). A low GINDEX means that a rm has a strong governance
system. We expect that better governed rms will be more likely to have
an accounting nancial expert on the audit committee. SGROW is the annual percentage change in sales, and is included because high-growth
rms are likely to have greater nancial needs, which requires nancial
DISP
AFIN
NAFIN
ADD
AEXP
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
COVERAGE
STDROE
EL
AUISPEC
AQ
ACSIZE
ACIND
ACMEET
NODUAL
BIND
BSIZE
SOX
INVMILLS
ACCY
DISP
AFIN
NAFIN
ADD
AEXP
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
COVERAGE
STDROE
EL
AUISPEC
AQ
ACSIZE
ACIND
ACMEET
NODUAL
BIND
BSIZE
SOX
(0.68)
(0.02)
0.01
0.03
(0.06)
0.32
(0.48)
(036)
(0.19)
(0.11)
0.20
(0.19)
0.30
0.04
(0.00)
0.02
(0.04)
(0.10)
0.03
(0.06)
0.09
(0.04)
0.22
0.04
(0.00)
(0.03)
0.07
(0.31)
0.53
0.43
0.27
0.08
(0.15)
0.24
(0.28)
(0.03)
0.02
(0.01)
0.06
0.14
(0.01)
0.07
(0.07)
0.06
(0.24)
(0.46)
0.13
0.78
(0.06)
0.02
0.07
(0.07)
(0.01)
(0.10)
0.11
0.02
(0.07)
(0.09)
(0.15)
0.04
0.29
0.04
0.09
(0.08)
0.30
(0.31)
(0.04)
(0.35)
0.07
(0.00)
(0.02)
0.02
(0.05)
0.04
(0.00)
0.06
0.03
0.02
0.09
0.07
(0.04)
(0.02)
0.11
0.06
0.03
0.07
(0.25)
0.03
0.00
(0.03)
0.01
(0.00)
(0.00)
(0.02)
0.02
0.03
0.01
0.06
0.01
0.01
(0.02)
0.02
0.03
0.07
0.00
(0.10)
0.02
0.09
(0.04)
0.03
(0.13)
0.10
0.04
(0.05)
(0.09)
(0.04)
0.03
0.22
0.02
0.10
(0.06)
0.24
(0.27)
(0.23)
(0.23)
(0.30)
(0.16)
0.58
(0.15)
0.27
0.10
(0.15)
0.11
(0.04)
0.06
0.03
(0.04)
0.31
0.10
0.26
0.41
0.27
0.06
(0.12)
0.31
(0.30)
(0.03)
0.00
(0.02)
0.02
0.12
0.01
0.05
(0.06)
0.02
(0.20)
0.28
0.11
(0.07)
0.21
(0.39)
(0.06)
(0.01)
(0.09)
(0.02)
0.08
0.05
0.01
(0.12)
(0.08)
(0.19)
0.14
(0.23)
0.32
(0.12)
0.06
0.10
0.13
0.07
0.03
(0.12)
0.09
0.12
(0.13)
(0.09)
(0.12)
0.02
(0.06)
0.01
0.05
0.02
(0.01)
0.01
(0.00)
(0.04)
0.02
(0.08)
(0.03)
(0.12)
0.07
(0.01)
(0.07)
(0.02)
(0.07)
0.00
0.12
(0.15)
0.12
(0.08)
0.16
(0.15)
(0.07)
(0.04)
(0.03)
0.03
0.09
0.04
0.06
(0.04)
0.01
(0.30)
0.05
(0.06)
0.11
0.03
0.01
(0.11)
0.11
0.14
0.21
0.11
0.06
0.11
(0.02)
(0.02)
(0.05)
0.02
0.03
(0.01)
0.11
0.03
0.02
(0.15)
0.01
(0.03)
0.03
(0.22)
0.15
0.06
(0.07)
(0.12)
0.20
0.36
0.04
0.07
(0.01)
(0.12)
0.47
0.01
0.07
(0.01)
0.08
0.11
(0.02)
0.41
(0.87)
(0.21)
(0.01)
0.06
(0.08)
(0.06)
0.15
(0.16)
0.01
0.20
0.37
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
Table 3
Pearson correlations.
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
From this equation, we calculate the Inverse Mills ratio (the ratio of
the probability density function to the cumulative distribution function), and include it as an additional explanatory variable in Eqs. (1)
and (3) examining the association between forecast accuracy and accounting nancial expertise.9 Columns (3) and (4) of Table 4 present
the ndings. The results are consistent with those reported earlier in
columns (1) and (2). The proportion of accounting nancial experts
on the audit committee is signicantly associated with forecast accuracy, whereas the proportion of non-accounting nancial experts on the
audit committee has an insignicant association with forecast accuracy.
The signicance and direction of the additional control variables also remain basically unchanged after including the Inverse Mills ratio in the
equation. The coefcient on the Inverse Mills ratio is positive and significant in column (3) but not in (4). The explanatory power of the model
(adj. R2) increases slightly from 33% to 34% with the addition of the Inverse Mills ratio as an explanatory variable in the equation. Overall, the
ndings reported in columns (3) and (4) are consistent with our rst
hypothesis (H1) and help alleviate concerns that the primary results
are driven by endogeneity.
Table 4
Forecast accuracy and nancial expertise of the audit committee.
Variable
Predicted
sign
(1)
(2)
(3)
(4)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
INTERCEPT
AFIN
NAFIN
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
SOX
0.0069***
(0.000)
0.0017***
(0.007)
0.0004
(0.419)
0.0008***
(0.000)
0.0076***
(0.000)
0.0028***
(0.000)
0.0001
(0.367)
0.0007**
(0.028)
0.0002
(0.232)
0.0004*
(0.086)
0.0004***
(0.003)
0.0000
(0.844)
0.0038***
(0.000)
0.0086***
(0.000)
0.0019***
(0.003)
0.0004
(0.410)
0.0007***
(0.000)
0.0076***
(0.000)
0.0028***
(0.000)
0.0001
(0.389)
0.0007**
(0.032)
0.0001
(0.365)
0.0004*
(0.062)
0.0004***
(0.004)
0.0001
(0.756)
0.0034***
(0.000)
ACSIZE
ACMEET
ACIND
BSIZE
NODUAL
BIND
0.0043*
(0.061)
0.0020***
(0.002)
0.0005
(0.233)
0.0008***
(0.000)
0.0075***
(0.000)
0.0029***
(0.000)
0.0002*
(0.097)
0.0007**
(0.036)
0.0002
(0.185)
0.0002
(0.187)
0.0004***
(0.003)
0.0000
(0.857)
0.0035***
(0.000)
0.0002
(0.644)
0.0001*
(0.082)
0.0008
(0.218)
0.0004
(0.436)
0.0007***
(0.002)
0.0008
(0.345)
INVMILLS
0.0062**
(0.035)
0.0020***
(0.003)
0.0005
(0.268)
0.0008***
(0.000)
0.0076***
(0.000)
0.0029***
(0.000)
0.0002*
(0.095)
0.0007**
(0.022)
0.0001
(0.556)
0.0003
(0.122)
0.0004***
(0.000)
0.0001
(0.776)
0.0035***
(0.000)
0.0001
(0.796)
0.0000
(0.952)
0.0008
(0.289)
0.0006
(0.322)
0.0007***
(0.002)
0.0007
(0.382)
0.0039
(0.382)
0.337
2484
Adj. R2
Sample size
0.331
2484
0.336
2484
0.0033**
(0.043)
0.332
2484
Notes: Variables are dened in Table 1. Each model includes, but does not tabulate, year
dummies. p-Values (indicated within parentheses) are computed based on HuberWhite
robust standard errors that correct for serial correlation among multiple-year observations.
*, **, *** indicate signicance at the 10%, 5%, and 1% levels, respectively. Signicances are
one-tailed tests where predicted signs are specied and two tailed tests otherwise.
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
Table 5
Forecast dispersion and nancial expertise of the audit committee.
Variable
Table 6
Forecast accuracy and the addition of accounting expertise to the audit committee.
Predicted
sign
(1)
(2)
(3)
(4)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
INTERCEPT
AFIN
NAFIN
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
SOX
0.0039***
(0.000)
0.0004*
(0.072)
0.0000
(0.942)
0.0003***
(0.000)
0.0035***
(0.000)
0.0017***
(0.000)
0.0002***
(0.000)
0.0001
(0.365)
0.0002**
(0.046)
0.0002**
(0.028)
0.0001**
(0.011)
0.0001
(0.247)
0.0018***
(0.000)
0.0046***
(0.000)
0.0005**
(0.046)
0.0000
(0.954)
0.0003***
(0.000)
0.0035***
(0.000)
0.0017***
(0.000)
0.0002***
(0.000)
0.0000
(0.375)
0.0001*
(0.095)
0.0002**
(0.032)
0.0001**
(0.014)
0.0001
(0.209)
0.0017***
(0.000)
ACSIZE
ACMEET
ACIND
BSIZE
NODUAL
BIND
0.0022**
(0.011)
0.0006**
(0.028)
0.0001
(0.719)
0.0004***
(0.000)
0.0035***
(0.000)
0.0018***
(0.000)
0.0001**
(0.032)
0.0000
(0.465)
0.0002**
(0.039)
0.0003**
(0.021)
0.0001**
(0.010)
0.0001
(0.243)
0.0016***
(0.000)
0.0002
(0.185)
0.0001
(0.011)
0.0007
(0.012)
0.0003
(0.183)
0.0002**
(0.018)
0.0001
(0.831)
INVMILL
0.0000
(0.983)
0.0006**
(0.028)
0.0001
(0.631)
0.0005***
(0.000)
0.0034***
(0.000)
0.0018***
(0.000)
0.0001*
(0.063)
0.0000
(0.499)
0.0003**
(0.033)
0.0003**
(0.014)
0.0001***
(0.007)
0.0001
(0.462)
0.0017***
(0.000)
0.0003*
(0.080)
0.0001**
(0.047)
0.0007**
(0.015)
0.0001
(0.596)
0.0002**
(0.017)
0.0001
(0.680)
0.0048
(0.123)
0.411
2484
Adj. R2
Sample size
0.402
2484
0.409
2484
0.0013*
(0.091)
0.403
2484
Variable
Predicted
sign
(1)
(2)
(3)
(4)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
INTERCEPT
ADD
AEXP
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
SOX
0.0059***
(0.006)
0.0005**
(0.028)
0.0002
(0.320)
0.0008***
(0.000)
0.0076***
(0.000)
0.0025***
(0.000)
0.0002
(0.201)
0.0008**
(0.048)
0.0002
(0.398)
0.0002
(0.372)
0.0004***
(0.003)
0.0001
(0.600)
0.0036***
(0.000)
0.0070***
(0.005)
0.0006**
(0.022)
0.0003
(0.256)
0.0008***
(0.000)
0.0076***
(0.000)
0.0025***
(0.000)
0.0002
(0.204)
0.0008**
(0.027)
0.0002
(0.544)
0.0003
(0.318)
0.0004***
(0.003)
0.0001
(0.552)
0.0034***
(0.000)
ACSIZE
ACMEET
ACIND
BSIZE
NODUAL
BIND
0.0037
(0.166)
0.0006**
(0.016)
0.0003*
(0.097)
0.0009***
(0.000)
0.0075***
(0.000)
0.0026***
(0.000)
0.0003*
(0.062)
0.0008**
(0.033)
0.0003
(0.329)
0.0001
(0.658)
0.0004***
(0.003)
0.0001
(0.639)
0.0035***
(0.000)
0.0004
(0.432)
0.0001
(0.239)
0.0009
(0.202)
0.0003
(0.663)
0.0008***
(0.003)
0.0005
(0.611)
INVMILLS
0.0042
(0.334)
0.0006***
(0.017)
0.0003*
(0.096)
0.0008***
(0.000)
0.0075***
(0.000)
0.0026***
(0.000)
0.0003*
(0.078)
0.0008*
(0.063)
0.0002
(0.458)
0.0001
(0.648)
0.0004***
(0.003)
0.0001
(0.608)
0.0035***
(0.000)
0.0004
(0.488)
0.0000
(0.847)
0.0009
(0.199)
0.0003
(0.620)
0.0008***
(0.003)
0.0004
(0.625)
0.0011
(0.858)
0.344
2195
Adj. R2
Sample size
0.339
2195
0.344
2195
0.0020
(0.230)
0.340
2195
Notes: Variables are dened in Table 1. Each model includes, but does not tabulate, year
dummies. p-Values (indicated within parentheses) are computed based on HuberWhite
robust standard errors that correct for serial correlation among multiple-year observations.
*, **, *** indicate signicance at the 10%, 5%, and 1% levels, respectively. Signicances are
one-tailed tests where predicted signs are specied and two tailed tests otherwise.
Notes: Variables are dened in Table 1. Each model includes, but does not tabulate, year
dummies. p-Values (indicated within parentheses) are computed based on HuberWhite
robust standard errors that correct for serial correlation among multiple-year observations.
*, **, *** indicate signicance at the 10%, 5%, and 1% levels, respectively. Signicances are
one-tailed tests where predicted signs are specied and two tailed tests otherwise.
columns (1) and (2) indicate the ndings continue to hold with inclusion of controls for endogeneity.
10
This may be attributable to the small number of rms disclosing an accounting nancial expert over our entire sample period beginning in 2001.
10
J.L. Abernathy et al. / Advances in Accounting, incorporating Advances in International Accounting 29 (2013) 111
Table 7
Forecast dispersion and the addition of accounting expertise to the audit committee.
Variable
Predicted
sign
(1)
(2)
(3)
(4)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
Coefcient
(p-value)
INTERCEPT
ADD
AEXP
SIZE
SURPRISE
LOSS
ZMIJ
HORIZON
STDROE
COVERAGE
EL
AUISPEC
SOX
0.0035***
(0.000)
0.0002*
(0.099)
0.0001
(0.358)
0.0003***
(0.000)
0.0034***
(0.000)
0.0017***
(0.000)
0.0002***
(0.002)
0.0001
(0.173)
0.0002*
(0.093)
0.0003***
(0.019)
0.0001***
(0.006)
0.0001***
(0.085)
0.0018***
(0.000)
0.0039***
(0.000)
0.0002*
(0.082)
0.0001
(0.290)
0.0003***
(0.000)
0.0034***
(0.000)
0.0017***
(0.000)
0.0002***
(0.002)
0.0001
(0.205)
0.0002*
(0.078)
0.0003**
(0.023)
0.0001***
(0.007)
0.0002*
(0.075)
0.0018***
(0.000)
ACSIZE
ACMEET
ACIND
BSIZE
NODUAL
BIND
0.0019*
(0.053)
0.0002**
(0.050)
0.0001
(0.170)
0.0004***
(0.000)
0.0034***
(0.000)
0.0018***
(0.000)
0.0001**
(0.029)
0.0001
(0.277)
0.0002**
(0.038)
0.0003***
(0.008)
0.0001***
(0.006)
0.0001*
(0.089)
0.0017***
(0.000)
0.0003
(0.149)
0.0000**
(0.035)
0.0009***
(0.006)
0.0002
(0.429)
0.0003***
(0.008)
0.0001***
(0.799)
INVMILLS
0.0009
(0.670)
0.0002*
(0.055)
0.0001***
(0.210)
0.0005***
(0.000)
0.0033***
(0.000)
0.0018***
(0.000)
0.0001*
(0.094)
0.0001
(0.621)
0.0004**
(0.025)
0.0003***
(0.005)
0.0001***
(0.004)
0.0001
(0.246)
0.0018***
(0.000)
0.0004*
(0.052)
0.0002**
(0.042)
0.0008***
(0.007)
0.0000
(0.980)
0.0003***
(0.008)
0.0000
(0.961)
0.0058*
(0.079)
0.421
2195
Adj. R2
Sample size
0.412
2195
0.419
2195
0.0008
(0.282)
0.413
2195
Notes: Variables are dened in Table 1. Each model includes, but does not tabulate, year
dummies. p-Values (indicated within parentheses) are computed based on HuberWhite
robust standard errors that correct for serial correlation among multiple-year observations.
*, **, *** indicate signicance at the 10%, 5%, and 1% levels, respectively. Signicances are
one-tailed tests where predicted signs are specied and two tailed tests otherwise.
level are reduced. If we include AQ in the forecast accuracy model originally reported in Table 4, column 1, the coefcient on AFIN drops from
0.0017 to 0.0016, but is still signicant (t=2.45). The coefcient on AQ
is signicant and positive (t= 2.04). If we include AQ in the forecast dispersion model originally reported in Table 5, column 1, AFIN goes from
0.0004 to 0.00039, and it is still signicant (t=1.39). The coefcient on AQ is positive, but not signicant in the dispersion model.
Taken together, these results are consistent with the idea of nancial
reporting quality being related to analyst forecast properties, and suggest that audit committee nancial expertise represents a dimension
of reporting quality not fully captured in the conventional reporting
quality measure.
5. Conclusion
While prior research provides evidence that having an accounting
expert on an audit committee improves nancial reporting quality,
little is known as to whether the higher reporting quality due to accounting expertise translates into tangible economic benets to nancial statement users. Our results show that nancial analyst
earnings forecast properties (i.e., more accurate and less dispersed
forecasts) are associated with the accounting expertise of a rm's
audit committee. Furthermore, we do not nd a signicant association between non-accounting nancial expertise and properties of
analyst forecasts.
These ndings are of direct importance to investors in the capital
markets since analyst earnings forecasts are primary inputs in equity
valuation. Our ndings further contribute to the growing literature on
audit committee's expertise by documenting that accounting expertise (and not non-accounting expertise) is associated with greater analysts' forecast accuracy and lower forecast dispersion. The results
also have important implications for regulators, corporate boards,
and others in dening requirements for nancial expertise. Our ndings suggest that adopting a narrower denition of a nancial expert
as originally proposed by the SEC is likely to enhance the audit committees' effectiveness. Our ndings are also relevant to regulators in
other countries who are considering steps to enhance the effectiveness of audit committees.
Finally, we note that our ndings are subject to limitations. First, we
document an association rather than causation between accounting expertise on the audit committee and attributes of analysts' earnings forecasts. While we provide evidence of a link between accounting expertise
and analyst earnings forecasts, we cannot state conclusively that accounting expertise on the audit committee is directly attributable to improvements in forecast accuracy and forecast dispersion of analysts.
Second, while we take steps to alleviate concerns regarding endogeneity,
we cannot rule out the possibility that our results might be inuenced by
omitted correlated variables. We further attempt to mitigate this concern by controlling for several observable governance and other characteristics in our model.
Despite these limitations, this paper extends the literature regarding nancial expertise on the audit committee. While prior literature
provides evidence of link between accounting nancial expertise and
nancial reporting quality, we extend the literature in providing evidence of an association between accounting nancial expertise and
the use of nancial reporting information in the form of improved analyst earnings forecasts.
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11