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Audit committee
Audit committee members with members with
CEO experience and the value of CEO experience

cash holdings
Sunhwa Choi, Jinwoong Han and Taejin Jung 897
Business School Seoul National University, Seoul, Republic of Korea, and
Received 29 April 2019
Bomi Song Revised 11 March 2020
Accepted 24 May 2020
College of Business, Gachon University, Seongnam, Republic of Korea

Abstract
Purpose – The purpose of this study is to examine whether the presence of an audit committee (AC) members
with Chief Executive Officer (CEO) experience (supervisory experts) affects the market value of cash holdings.
Design/methodology/approach – To estimate the marginal value of cash holdings, this study uses the
model proposed by Faulkender and Wang (2006). The sample is 2,031 firm-year observations in Korea from
2000 through 2015.
Findings – The authors find that the presence of supervisory experts on ACs has a negative impact on the
value of cash holdings. This result suggests that supervisory experts on ACs weaken monitoring of
managerial actions. The authors also find that the negative effect of supervisory experts on the value of cash
holdings is mitigated when there are other AC members with accounting expertise.
Practical implications – The findings that AC supervisory expertise impairs the effectiveness of ACs,
and thus destroys shareholder value have policy implications because the current regulations in many
countries use a broad definition of financial expertise that includes supervisory expertise.
Originality/value – This is the first study that directly examines the effect of AC supervisory expertise on
the value of cash holdings. The study also contributes to the literature on the role of ACs in emerging markets by
documenting the limitations of corporate governance systems adopted from the Anglo–Saxon model.
Keywords Audit committee, Corporate governance, Financial expertise, Value of cash holding
Paper type Research paper

Data Availability: All data are publicly available from sources identified in the text.

1. Introduction
Audit committees (ACs) oversee firms’ financial reporting process and ACs, thus, work as an
important corporate governance mechanism. To ensure the effectiveness of ACs, Section 407 of
the Sarbanes–Oxley Act of 2002 (SOX) requires public firms in the USA to have at least one AC
member who is a financial expert. Although the SOX initially proposed a narrow definition of
financial expertise to include only individuals with experience in accounting or auditing [(e.g.
certified public accountant (CPAs), cash flows from operations (CFOs)], the final rule of Securities
Exchange Commission (SEC) defines financial expertise to also include individuals with
experience in finance (finance experts) and those with experience in supervising the preparation
of financial statements (supervisory experts) (SEC, 2003). This rule has been controversial Managerial Auditing Journal
Vol. 35 No. 7, 2020
pp. 897-926
The authors appreciate helpful comments and suggestions from Jong-Hag Choi, Woo-Jong Lee, and © Emerald Publishing Limited
0268-6902
the seminar participants at Seoul National University. DOI 10.1108/MAJ-04-2019-2269
MAJ because many are skeptical about whether supervisory experts such as CEOs and company
35,7 presidents are really qualified as financial experts. For example, a member of the Public
Company Accounting Oversight Board’s Standing Advisory Group expressed a concern by
arguing that some of them:
[. . .] simply don’t speak GAAP and GAAS sufficiently to understand the nuances of complex and
sophisticated accounting, auditing, internal controls, SEC regulations, etc., to be fully effective
898 audit committee members, let alone experts (Trautman, 2013).
The role of supervisory experts on ACs is an important issue because this category of
financial experts accounts for a significant portion of AC financial experts. For example,
Dhaliwal et al. (2010) report that 85% of their sample firms in the USA have AC members
with supervisory expertise.
In this study, we examine whether AC members with supervisory expertise affect the
value of corporate cash holdings. Our focus on cash holdings is motivated by a dramatic
increase in the amount of corporate cash holdings over the recent years. For example, Bates
et al. (2009) report that cash ratio (i.e. cash/total assets) of US firms increased from 10.5% in
1980 to 23.2% in 2006. Corporate cash holdings affect firm value because cash is subject to
the agency problem. As Jensen (1986) suggests, managers can easily spend cash for value-
destroying projects for their private benefit (e.g. empire building). Shareholders are aware of
this free cash flow problem, and therefore discount the value of cash holdings. As a result,
the market value of an additional dollar of cash is generally less than $1 (Faulkender and
Wang, 2006; Dittmar and Mahrt-Smith, 2007). As such, cash holdings provide a venue to
examine the implications of agency problems because the value of cash holdings reflects
shareholders’ evaluation of the extent of free cash flow problems.
Although studies find that the value of cash holdings is affected by several factors,
including corporate governance, financial reporting quality and internal control weakness
(Dittmar et al., 2003; Faulkender and Wang, 2006; Pinkowitz et al., 2006; Dittmar and Mahrt-
Smith, 2007; Louis et al., 2012; Sun et al., 2012; Gao and Jia, 2016), no study examines
whether AC members with experience as a CEO affect the value of cash holdings.
There are two conflicting views about the impact of AC members with supervisory
expertise on the value of cash holdings. On the one hand, the presence of supervisory
experts on ACs can be associated with a higher value of cash holdings because they may
mitigate the free cash flow problem by improving the monitoring role of ACs. Specifically,
they can better monitor managerial actions in operating or investment activities using their
current or past experience as a CEO in such decisions. In addition, supervisory experts can
complement the role of other AC members with financial expertise (Kusnadi et al., 2016).
Consistent with this argument, several studies provide evidence that AC members with
supervisory experience bring benefits to ACs, including reducing the likelihood of asset
misappropriation and improving financial reporting and audit quality (Xie et al., 2003;
Zhang et al., 2007; Hoitash and Hoitash, 2009; Mustafa and Ben Youssef, 2010; Cohen et al.,
2014).
On the other hand, AC members with supervisory expertise can be associated with a
lower value of cash holdings because they can aggravate the free cash flow problem.
Specifically, they lack specialised accounting knowledge, and thus may impair the function
of ACs in overseeing the financial reporting process (Davidson et al., 2004; DeFond et al.,
2005; Krishnan and Visvanathan, 2008; Naiker and Sharma, 2009; Dhaliwal et al., 2010). For
example, Dhaliwal et al. (2010) examine the association between various types of AC
financial expertise and accrual quality and find that the additional presence of supervisory
experts does not provide incremental benefits in improving accrual quality. Moreover, to the
extent that they are more likely to be connected to the management through business and Audit committee
industry relationships, they may lack substantive incentives to monitor the firm’s members with
management. In extreme cases, they can even collude with the management. CEO experience
To examine the research question, we focus on firms listed on the Korea Stock Exchange
(KSE) in South Korea (hereafter Korea). The Korean setting offers several advantages for
examining this issue. First, similar to the practise in the USA Korea regulators require firms
with the AC to have at least one member with financial expertise based on a definition of
financial expertise that includes supervisory experts. Second, Korea has weak legal
899
institutions and investor protection as in other emerging markets (La Porta et al., 2002), and
thus agency problems arising from managers’ misuse of cash in the country are more severe
than those in developed markets. In particular, many Korean firms belong to large business
groups called chaebols, in which the controlling families have de facto control through
complex pyramidal ownership structures and cross-ownership amongst the affiliated firms
(Almeida et al., 2011). Such ownership structures increase the incentive for controlling
owners to expropriate minority shareholders. Third, the ACs in Korea have more
comprehensive roles and responsibilities compared to their US counterparts. Specifically,
the role of Korean AC extends to monitoring of managers’ decisions in various areas
including operation and investment, which are directly related to the accumulation and use
of cash holdings (Kim, 2007; Choi et al., 2014). Overall, while Korea has the AC system that is
similar to those in the Anglo-Saxon countries (e.g. US, UK), unique characteristics of Korean
setting allow us to examine whether the adopted corporate governance model effectively
plays a monitoring role in the market with weak institutions.
To estimate the marginal value of cash holdings, we use the model proposed by
Faulkender and Wang (2006). We use a sample of 2,031 firm-year observations listed on the
KSE from 2000 through 2015. We first examine the overall effect of financial experts on ACs,
which include accounting, finance and supervisory experts. We find that the presence of
financial experts on ACs has a negative impact on the value of cash holdings, whereas other
AC characteristics such as size, independence and activity are not significantly related.
When we separately examine the effect of specific types of financial expertise (accounting,
finance and supervisory expertise), we find that the negative association between the AC
financial expertise and the value of cash holdings is primarily driven by the presence of
supervisory experts. Specifically, the presence of AC supervisory experts is associated with
a Korean Won (KRW) 0.298 discount for every KRW 1 of cash that firms hold. This result
suggests that investors evaluate the monitoring and safeguarding role of supervisory
experts on ACs as ineffective, thereby discounting the value of cash holdings of firms with
supervisory experts on ACs.
Next, we examine the impact of the mix of AC financial expertise on the effectiveness (or
ineffectiveness) of ACs because the negative effect of supervisory experts may be mitigated
or aggravated with the presence of other types of financial experts (Dhaliwal et al., 2010;
Cohen et al., 2014; Song et al., 2017). We find that the AC that includes only supervisory
experts and the AC that includes both supervisory and finance experts are associated with a
lower value of cash holdings, whereas we find no such evidence when the AC includes both
supervisory and accounting experts. These results indicate that the weak monitoring role of
ACs with supervisory experts is mitigated when there are other AC members with
accounting expertise.
This study contributes to the literature, regulators and practitioners in several ways.
First, it contributes to the debate on the definition of AC financial expertise. Although many
countries including Korea and the USA adopt a broad definition of financial expertise to
include supervisory expertise, our results indicate that supervisory expertise impairs the
MAJ effectiveness of ACs, and thus destroys shareholder value. Therefore, our findings have
35,7 policy implications for regulators by providing compelling evidence for the need to revisit
the definition of AC financial expertise.
Second, our study contributes to the literature on the role of ACs in emerging markets
(Nowland, 2008; Bédard and Gendron, 2010; Claessens and Yurtoglu, 2013; Choi et al., 2014;
Chen et al., 2015; Kusnadi et al., 2016). Although many emerging markets have adopted the
900 AC system following the Anglo-Saxon corporate governance model, we still have little
evidence on whether the adopted corporate governance model effectively plays a monitoring
role in these markets. Our results, thus, provide valuable insights into the limitations of
corporate governance systems in emerging markets.
Third, our results add to the literature on the determinants of the value of cash holdings.
The quality of corporate governance is a key factor affecting the value of cash holdings
(Weidemann, 2018 for a comprehensive review) and prior studies examine its role using
several proxies such as antitakeover provisions, ownership structure, leadership structure,
the board size, cross-listings and country-level investor protection (Pinkowitz et al., 2006;
Harford et al., 2008; Lee and Lee, 2009; Frésard and Salva, 2010; Kusnadi, 2011). However, no
study examines how the value of cash holdings is affected by the characteristics of the AC,
which is the ultimate monitoring mechanism of firms’ financial reporting process (The Blue
Ribbon Committee, 1999). We fill this gap by providing evidence that AC financial expertise
affects the value of cash holdings.
Finally, the findings of this study should be important to academics, regulators and
investors. We provide empirical evidence suggesting that the expertise of AC members and
its mix significantly affect firm value through their impact on the value of cash holdings.
Therefore, regulators can consider ways to mitigate the negative value implications of
supervisory AC experts and investors can incorporate the characteristics of ACs into their
valuations.
The remainder of this paper is structured as follows. Section 2 provides a review of the
literature and the institutional background and develops the hypotheses. Section 3 describes
the research design and Section 4 reports the sample selection and descriptive statistics.
Sections 5 and 6 present the results from the main and additional analyses, respectively.
Section 7 concludes.

2. Literature review, institutional background and hypothesis development

2.1 Literature review
Earlier studies on AC financial expertise, which do not distinguish between accounting and
non-accounting financial expertise, find that the presence of financial experts on ACs
improves the quality of financial reporting (Abbott et al., 2004; Bédard et al., 2004). More
recent studies distinguish different types of AC financial expertise and provide mixed
evidence about the impact of different types of financial expertise on financial reporting and
external auditing.
Some studies find that AC members with accounting expertise, but not those with
finance or supervisory expertise, have a positive impact on financial reporting quality.
Krishnan and Visvanathan (2008) find that accounting experts, but not non-accounting
experts, enhance accounting conservatism through their specific knowledge of accounting
matters. Dhaliwal et al. (2010) find that accounting expertise of AC members is positively
associated with accrual quality. They also examine the effect of the mix of accounting and
non-accounting expertise and find that the combination of accounting and finance expertise
has the most positive impact on accrual quality, whereas the additional presence of
supervisory experts does not provide incremental benefits. DeFond et al. (2005) examine the
reaction of stock markets to the appointment of AC members and find a positive market Audit committee
reaction to the appointment of members with accounting expertise but not to the members with
appointment of members with supervisory expertise. In addition, Naiker and Sharma (2009) CEO experience
report that firms with at least one supervisory expert on the AC are more likely to report
internal control deficiencies. These studies generally indicate that supervisory experts on
ACs do not contribute to higher financial reporting quality.
However, other studies provide evidence that supervisory expertise provides incremental 901
benefits to ACs. For example, Cohen et al. (2014) find that AC members with both industry
and supervisory expertise are associated with higher financial reporting quality (i.e. lower
income-increasing discretionary accruals) and more effective monitoring of external
auditors (i.e. lower likelihood of purchasing non-audit services from external auditors).
Likewise, Hoitash and Hoitash (2009) find that the presence of supervisory and accounting
experts is positively associated with audit fees, indicating that both types of financial
experts demand for high-quality audit services. Xie et al. (2003) find that firms with
supervisory experts (i.e. corporate directors) on ACs are less likely to engage in earnings
management and Mustafa and Ben Youssef (2010) provide evidence that managers are less
likely to misappropriate assets when the AC has non-accounting financial experts. These
findings suggest that the previous experience of AC members in a supervisory role helps
them to detect financial irregularities and prevent the misuse of assets. Overall, the literature
provides mixed evidence with respect to the impact of supervisory expertise on the
effectiveness of ACs.
Because the effectiveness of ACs affects the extent of agency problems, supervisory
experts on ACs can affect the value of cash holdings. Cash holdings aggravate the agency
problem (free cash flow problem) because cash provides funds for managers to invest in
value-destroying projects for their private benefit (Jensen, 1986). Therefore, shareholders,
anticipating that managers waste cash for inefficient projects, discount the value of cash
holdings. Consistent with the view that agency problems reduce the value of cash holdings,
Tong (2011) finds that the value of cash is lower in diversified firms, where agency problems
are aggravated because of empire building and cross-subsidisation associated with firm
diversification [1]. Several studies examine the effect of corporate governance on the value of
cash holdings (Weidemann, 2018 for a review of determinants of the value of cash holdings)
[2]. For example, Dittmar and Mahrt-Smith (2007) find that the marginal cash value of well-
governed firms is almost twice as large as that of poorly-governed firms. Similarly, Kim
et al. (2015) find that high-quality auditors are positively associated with the marginal value
of cash, suggesting that high-quality auditors mitigate the agency problem associated with
cash. Pinkowitz et al. (2006) find that investors place a higher value on firms’ cash holdings
in countries with strong investor protection than in countries with weak investor protection.
Sun et al. (2012) and Louis et al. (2012) find that higher accrual quality and more
conservative accounting increase the value of cash holdings. These results indicate that
better financial reporting can mitigate agency costs by improving firms’ information
environments, and thus facilitating the monitoring of managerial actions [3].

2.2 Institutional background

In Korea, the commercial act mandates public companies with total assets over KRW 2
trillion (approximately US$1.7bn) to establish an AC from 2000 onward, while smaller firms
are allowed to establish an AC voluntarily. Similar to the SOX requirement in the USA the
Korean Government requires public firms with the AC to have at least one financial expert
on ACs [4].
MAJ Previous studies on Korean ACs suggest that they play a monitoring role in ensuring
35,7 high- quality financial reporting. For instance, Hong (2009) finds that independent and
active ACs are associated with lower discretionary accruals. Cheon et al. (2013) report that
ACs with financial experts are likely to report lower levels of discretionary accruals, but this
result remains only when the firm has a strong corporate governance system. Song et al.
(2017) find that ACs with financial experts are more likely to hire industry specialists as
902 auditors and pay higher audit fees.
Although the objective of the AC system in Korea is to ensure effective monitoring of
managerial actions, the AC system based on the Anglo-Saxon model may not work
effectively in Korea. Specifically, the Anglo-Saxon model is characterised by strong capital
markets and dispersed ownership structures (Bédard and Gendron, 2010). By contrast, the
Korean economy is dominated by business groups with highly concentrated ownership.
Therefore, it is possible that practises considered best for ACs in Anglo-Saxon countries (e.g.
AC financial expertise) may not be effective in Korea. For example, controlling shareholders
may influence the selection of AC members to appoint individuals who are friendly with the
management or those who have current or prior business relationships. Furthermore,
controlling shareholders may override corporate governance mechanisms for their private
benefit. Consistent with this argument, Chen et al. (2015) find that adopting the Anglo-Saxon
model of ACs is not associated with earnings quality in Japan, suggesting that the Anglo-
Saxon-type AC does not fit all countries as a means of improving monitoring of managers.

2.3 Hypothesis development

There are two conflicting views on the relation between the presence of AC members with
supervisory experience and the value of cash holdings. AC members with supervisory
expertise may effectively monitor managers’ operational or investment decisions using their
own experience as a CEO (Goh, 2009; Hoitash et al., 2009; Mustafa and Ben Youssef, 2010). If
so, AC members with supervisory expertise are expected to be associated with a higher
value of cash holdings because investors would evaluate that the monitoring by these ACs is
of high quality.
However, we believe that it is more likely that AC members with supervisory expertise,
who often do not possess specific accounting knowledge and experience, undermine the
monitoring role of ACs. For instance, they may allow poor mapping of the underlying
transactions into financial reporting, which leads to poor financial reporting quality (and
hence weakening the AC’s monitoring role). In fact, many raise the concern that AC
members with supervisory experience simply do not understand the complex process
involving accounting, auditing, internal controls and related regulations (Trautman, 2013).
Consistent with this argument, Naiker and Sharma (2009) report that firms with supervisory
experts on the AC are more likely to report internal control deficiencies. Furthermore, AC
members with supervisory expertise are likely to have a business and industry relationships
with the management, lacking the incentives to monitor the management properly. For
example, it is possible that managers or controlling families appoint an individual with CEO
experience as an AC member because they have economic or personal ties with the member
and this supervisory expert many even colludes with them. Under this view, the presence of
supervisory experts can impair the monitoring role of ACs, such that shareholders are more
likely to discount the value of cash holdings, anticipating that cash will be wasted or
misused by managers. Thus, we provide our first hypothesis in the alternative form as
follows:
 H1. The presence of AC members with supervisory expertise has a negative impact on Audit committee
the marginal value of cash holdings. members with
Next, we examine whether the impact of AC members with supervisory expertise on the CEO experience
value of cash holdings is conditional on the presence of AC members with accounting or
finance expertise. A resource dependence theory suggests that a director extracts other
directors’ human capital resources to enhance firm performance (Pfeffer, 1972) and prior
studies show that the mix of financial expertise affects the effectiveness of ACs (Dhaliwal 903
et al., 2010; Cohen et al., 2014; Kusnadi et al., 2016; Song et al., 2017). For example, Dhaliwal
et al. (2010) find that the positive impact of AC financial expertise is greater when it includes
both accounting and finance experts because they provide incremental benefits to ACs with
their knowledge and skills. Therefore, we expect that the weak monitoring role of ACs with
supervisory experts will be alleviated by the presence of accounting experts. We provide the
second hypothesis as follows:

H2. The presence of AC members with accounting expertise mitigates the negative
impact of AC supervisory experts on the marginal value of cash holdings.

3. Research design
3.1 Benchmark model
We follow Faulkender and Wang (2006) and estimate the marginal value of cash holdings as
follows:

ri;t
RVWB i;t ¼ b 0 þ b 1 4Ci;t =Mi;t
1 þ b 2 4Ei;t =Mi;t
1 þ b 3 4NAi;t =Mi;t
1

þ b 4 4RDi;t =Mi;t
1 þ b 5 4Ii;t =Mi;t
1 þ b 6 4Di;t =Mi;t
1 þ b 7 Ci;t
1 =Mi;t
1



þ b 8 Li;t þ b 9 NFi;t =Mi;t
1 þ b 10 Ci;t
1 =Mi;t
1  4Ci;t =Mi;t
1



þ b 11 Li;t  4Ci;t =Mi;t
1 þ Year and industry fixed effects þ « i;t (1)

where for firm i in year t, ri,t – RVWBi,t is size and book-to-market portfolio-adjusted returns
in year t (Faulkender and Wang, 2006) [5]; and DCi,t/Mi,t
1 is the change in cash and cash
equivalents divided by lagged market value of equity. Equation (1) regresses a firm’s stock
return over the fiscal year on the change in the level of cash (DCi,t/Mi,t
1) to estimate the
stock market’s reaction to unexpected changes in cash holdings during a year, where the
expected level of cash in year t is assumed to be the amount of cash in the previous year.
The estimated coefficient on DCi,t/Mi,t
1 ( b 1) is interpreted as the dollar change in
shareholder value resulting from a one-dollar change in the firm’s cash holdings (marginal
market value of cash). Following Faulkender and Wang (2006), we control for cash holdings
of firm i at time t
1 (Ci,t
1/Mi,t
1), changes in interest expense (DIi,t/Mi,t
1), changes in
dividends for common stocks (DDi,t/Mi,t
1), market leverage (total debt divided by market
value of equity and total debt) at the end of fiscal year t (Li,t), net financing during the fiscal
year t (NFi,t/Mi,t
1), changes in the firm’s profitability (DEi,t/Mi,t
1) and changes in total
assets net of cash (DNAi,t/Mi,t
1) and research and development (R&D) expenditures
(DRDi,t/Mi,t
1). As Faulkender and Wang (2006) find that the marginal value of cash varies
with the level of cash and leverage, we also include their interactions with the change in
cash. We provide detailed definitions of the variables in the Appendix.
MAJ 3.2 Regression model
35,7 To examine the association between the presence of financial experts on ACs and the
marginal value of cash holdings, we estimate equation (2) as follows:

ri;t
RVWB i;t ¼ b 0 þ b 1 4Ci;t =Mi;t
1 þ b 2 AC_EXPi;t  ð4Ci;t =Mi;t
1 Þ þ b 3 AC_EXPi;t

þ b 4 4Ei;t =Mi;t
1 þ b 5 4NAi;t =Mi;t
1 þ b 6 4RDi;t =Mi;t
1
904
þ b 7 4Di;t =Mi;t
1 þ b 8 Ci;
1t =Mi;t
1 þ b 9 Li;t þ b 10 NFi;t =Mi;t
1


þ b 11 4Ii;t =Mi;t
1 þ b 12 Ci;t
1 =Mi;t
1  ð4Ci;t =Mi;t
1 Þ þ b 13 ðLi;t Þ

 ð4Ci;t =Mi;t
1 Þ þ b 14 AC_IND_RATIOi;t  ð4Ci;t =Mi;t
1 Þ

þ b 15 lnAC_ACTIVITYi;t  ð4Ci;t =Mi;t
1 Þ þ b 16 ðlnAC_SIZEi;t Þ

 ð4Ci;t =Mi;t
1 Þ þ b 17 FRNOWNi;t  ð4Ci;t =Mi;t
1 Þ

þ b 18 LARGESHAREi;t  ð4Ci;t =Mi;t
1 Þ þ b 19 AQi;t  ð4Ci;t =Mi;t
1 Þ

þ b 20 AC_IND_RATIOi;t þ b 21 lnAC_ACTIVITYi;t þ b 22 lnAC_SIZEi;t

þ b 23 FRNOWNi;t þ b 24 LARGESHAREi;t þ b 25 AQi;t

þ Year and industry fixed effects þ « i;t (2)

where for firm i in year t, AC_EXPi,t is an indicator variable that is equal to one if a firm has
at least one financial expert on the AC and zero otherwise [6]. If the presence of financial
experts on ACs improves monitoring of managerial actions, and thus increases the marginal
value of cash, we expect the coefficient on AC_EXPi,t  (DCi,t/Mi,t
1) to be positive. On the
other hand, if the financial expertise on ACs does not affect (or impairs) the effectiveness of
ACs, the coefficient on AC_EXPi,t  (DCi,t/Mi,t
1) is expected to be insignificant (negative).
More importantly, to examine the impact of AC supervisory expertise on the value of
cash holdings (H1), we separate AC_EXPi,t into ACCEXPi,t, FINEXPi,t and SUPEXPi,t,
which are indicator variables for the presence of AC members with accounting, finance and
supervisory expertise, respectively. The coefficients on the interactions between these
variables and the change in cash (DCi,t/Mi,t
1) reflect the impact of different types of AC
financial expertise on the marginal value of cash. For example, if the presence of supervisory
experts on ACs improves (impairs) monitoring of managers’ actions, and hence the value of
cash holdings, the coefficient on SUPEXPi,t(DCi,t/Mi,t
1) is expected to be positive
(negative).
To examine the combined effect of accounting, finance and supervisory expertise on ACs
on the value of cash holdings (H2), we follow Dhaliwal et al. (2010) and define seven
indicator variables, namely, ACC_ONLYi,t, FIN_ONLYi,t, SUP_ONLYi,t, ACC_FINi,t,
ACC_SUPi,t, FIN_SUPi,t and ALLi,t. The first three variables (ACC_ONLYi,t, FIN_ONLYi,t,
SUP_ONLYi,t) capture cases in which the AC includes at least one accounting (finance or
supervisory) expert but no other type of financial experts. The next three variables
(ACC_FINi,t, ACC_SUPi,t, FIN_SUPi,t) capture the three cases in which the AC includes two
of the three types of financial experts. The last variable (ALLi,t) captures the case in which
the AC includes all three types of financial experts.
 To control for the effects of other firm and AC characteristics on the value of cash Audit committee
holdings, we include the ratio of independent directors on the AC (AC_IND_RATIOi,t), the members with
natural log of the number of AC meetings (lnAC_ACTIVITYi,t), the natural log of the CEO experience
number of directors on the AC (lnAC_SIZEi,t), the percentage of foreign ownership
(FRNOWNi,t), the percentage of stocks held by largest shareholders (LARGESHAREi,t),
accrual quality (AQi,t) and their interactions with changes in cash [7].
905
4. Sample and descriptive statistics
4.1 Sample
Our initial sample comprises firms with ACs listed on the KSE from 2000 through 2015. We
hand collect information about AC members from firms’ annual reports from the data
analysis, retrieval and transfer system provided by the financial supervisory service (FSS).
We obtain financial data from the DataGuide database. We exclude firms with non-
December fiscal year-end and those in the financial industry. After we require non-missing
variables for our main regressions, the final sample consists of 2,031 firm-year observations
from 2000 through 2015. To alleviate the potential impact of outliers, we winsorize all
continuous variables at the 1st and 99th percentiles.

4.2 Classification of financial experts on audit committee s

The Korean commercial act requires that individuals with the following backgrounds can be
classified as financial experts on ACs.
 A person qualified as a CPA with at least five years of related work experience;
 A person with a master’s or higher degree in accounting or finance who has worked
at a research institute or university as a researcher or a professor in accounting or
finance for five years or more;
 A person with five or more years of experience as an accounting or financial
executive (or with 10 or more years of the experience as an employee) in public
companies; or
 A person with five or more years of combined experience in accounting or financial
affairs or supervisory work in government or financial institutions that are
designated by the financial investment services and capital markets act of Korea.

We classify an AC member as a financial expert if the member meets any of the above
conditions. In addition, we classify a financial expert as an accounting (finance) expert if the
member is a CPA, a CFO or an accounting professor (banker, analyst, fund manager or
finance professor). We classify a financial expert as supervisory if the credentials indicate a
CEO or a government official [8],[9].

4.3 Descriptive statistics

Table 1 presents the descriptive statistics of the variables used in the analysis. The mean
(median) of the level of cash holdings is 21.9% (11.3%) of the market value of equity,
suggesting that Korean listed firms hold a significant amount of cash during the sample
period. For comparison, Faulkender and Wang (2006) report that the average cash holdings
for the USA sample for the period 1972–2001 is 17.26%, while the median value is 9.45%.
With respect to AC characteristics, about 84% of the sample firms have at least one financial
expert on the AC [10]. The mean values of ACCEXPi,t, FINEXPi,t and SUPEXPi,t indicate
that 43.0%, 21.3% and 45.1% of firms have at least one accounting, finance and supervisory
MAJ Variable Obs Mean SD Q1 Median Q3
35,7
AC_EXPi,t 2,031 0.839 0.368 1.000 1.000 1.000
ACCEXPi,t 2,031 0.430 0.495 0.000 0.000 1.000
FINEXPi,t 2,031 0.213 0.409 0.000 0.000 0.000
SUPEXPi,t 2,031 0.451 0.498 0.000 0.000 1.000
ri,t – RVWBi,t 2,031 0.019 0.478
0.266
0.062 0.194
906 Ci,t
1/Mi,t
1 2,031 0.219 0.323 0.043 0.113 0.283
DCi,t/Mi,t
1 2,031 0.007 0.170
0.037 0.000 0.044
DEi,t/Mi,t
1 2,031 0.004 0.173
0.035 0.001 0.034
DNAi,t/Mi,t
1 2,031 0.026 0.777
0.060 0.055 0.204
DRDi,t/Mi,t
1 2,031 0.002 0.028 0.000 0.000 0.004
DIi,t/Mi,t
1 2,031
0.010 0.055
0.006 0.000 0.002
DDi,t/Mi,t
1 2,031 0.000 0.012 0.000 0.000 0.002
Li,t 2,031 0.015 0.017 0.003 0.011 0.020
NFi,t/Mi,t
1 2,031
0.027 0.424
0.060 0.000 0.068
AC_IND_RATIOi,t 2,031 0.945 0.123 1.000 1.000 1.000
lnAC_ACTIVITYi,t 2,031 1.668 0.592 1.386 1.609 1.946
lnAC_SIZEi,t 2,031 1.410 0.098 1.386 1.386 1.386
FRNOWNi,t 2,031 0.174 0.163 0.037 0.130 0.268
LARGESHAREi,t 2,031 0.400 0.162 0.294 0.389 0.505
AQi,t 2,031 0.084 0.058 0.048 0.072 0.103
Table 1. Notes: This table presents the descriptive statistics of variables used in the regressions. See the Appendix
Descriptive statistics for variable definitions

expert on their ACs, respectively. The high ratio of supervisory experts on AC is consistent
with the evidence in the USA (Dhaliwal et al., 2010).
Table 2 shows the Pearson correlation matrix for the full sample. Consistent with
Faulkender and Wang (2006), the level of cash (Ct
1/Mt
1), changes in cash (DCt/Mt
1),
changes in earnings before interest and taxes (EBIT) (DEt/Mt
1), changes in net assets
(DNAt/Mt
1) and changes in dividends (DDt/Mt
1) are positively related to excess stock
returns.

5. Empirical results
5.1 Financial experts on audit committees and the value of cash holdings
Table 3 presents the regression results of estimating equations (1) and (2). For the analyses,
we use robust standard errors clustered at the firm level (Petersen, 2009; Gow et al., 2010). In
column (1), we first present results from replicating Faulkender and Wang (2006) using our
sample as a benchmark. The estimated coefficient on the change in cash holdings (DCi,t/Mi,t
1)
(0.401) suggests that shareholders value an extra KRW 1 of cash at only KRW 0.4. The
results for the control variables are generally similar to those reported in Faulkender and
Wang (2006). For example, the annual excess return is negatively related to changes in
interest expense and the leverage ratio, whereas it is positively related to changes in
earnings and non-cash assets and the level of lagged cash holdings. Consistent with the
findings in Faulkender and Wang (2006), the coefficient on the interaction between the
change in cash and the level of cash ((Ct
1/Mt
1)  (DCi,t/Mi,t
1)) is negative, suggesting
that the value of an additional KRW 1 of cash decreases as firms hold more cash.
In column (2), where we include the interaction between financial expertise on the AC and
the change in cash holdings, the coefficient on AC_EXPi,t  (DCi,t/Mi,t
1) is negative and
significant (
0.314; t =
2.03), suggesting that AC financial expertise has a negative impact
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19)

(1) AC_EXPi,t

(2) ACCEXPi,t 0.381

<0.001
(3) FINEXPi,t 0.228
0.238
<0.001 <0.001
(4) SUPEXPi,t 0.398
0.216
0.050
<0.001 <0.001 0.023
(5) ri,t – RVWBi,t
0.048 0.008
0.038
0.040
0.029 0.721 0.083 0.074
(6) Ci,t
1/Mi,t
1 0.002
0.049 0.014 0.063 0.066
0.933 0.026 0.526 0.005 0.003
(7) DCi,t/Mi,t
1
0.020
0.018 0.008 0.005 0.101 0.398
0.356 0.413 0.725 0.833 <0.001 <0.001
(8) DEi,t/Mi,t
1
0.003
0.022 0.042
0.015 0.238 0.056 0.064
0.888 0.319 0.060 0.502 <0.001 0.012 0.004
(9) DNAi,t/Mi,t
1
0.018 0.013
0.047
0.019 0.087
0.066 0.048 0.092
0.418 0.554 0.035 0.396 <0.001 0.003 0.031 <0.001
(10) DRDi,t/Mi,t
1 0.019 0.013 0.002
0.012 0.019 0.040 0.065
0.019 0.041
0.381 0.548 0.926 0.603 0.388 0.072 0.004 0.391 0.068
(11) DIi,t/Mi,t
1 0.025 0.068
0.034
0.023
0.061
0.230 0.014
0.100 0.358 0.009
0.257 0.002 0.126 0.299 0.006 <0.001 0.521 <0.001 <0.001 0.687
(12) DDi,t/Mi,t
1 0.029 0.004 0.011 0.024 0.078 0.009 0.053 0.049 0.056 0.034
0.064
0.191 0.857 0.611 0.275 0.000 0.700 0.017 0.028 0.012 0.120 0.004
(13) Li,t
0.024
0.151 0.119 0.043
0.077 0.125
0.109 0.035
0.414
0.070
0.371
0.030
0.287 <0.001 <0.001 0.055 0.001 <0.001 <0.001 0.112 <0.001 0.002 <0.001 0.175
(14) NFi,t/Mi,t
1 0.002
0.001
0.028 0.022
0.060
0.194 0.091
0.117 0.481
0.060 0.420
0.042
0.261
0.942 0.973 0.210 0.326 0.007 <0.001 <0.001 <0.001 <0.001 0.007 <0.001 0.056 <0.001
(15) AC_IND_RATIOi,t 0.167 0.154 0.060 0.014
0.008
0.117
0.002
0.045
0.026 0.019 0.044
0.019
0.076 0.015
<0.001 <0.001 0.007 0.535 0.725 <0.001 0.938 0.044 0.249 0.380 0.045 0.397 0.001 0.506
(16) lnAC_ACTIVITYi,t 0.005
0.039
0.015 0.079
0.028
0.060 0.004
0.014 0.007 0.007 0.002
0.012
0.026
0.006
0.041
0.824 0.078 0.494 0.000 0.212 0.007 0.842 0.536 0.760 0.759 0.937 0.596 0.237 0.802 0.066
(17) lnAC_SIZEi,t 0.099 0.084 0.128 0.074
0.030 0.009
0.001
0.007 0.007
0.004 0.052 0.000
0.020 0.046 0.026 0.048
<0.001 0.000 <0.001 0.001 0.182 0.676 0.946 0.754 0.768 0.848 0.020 0.997 0.358 0.039 0.247 0.032
(18) FRNOWNi,t 0.055 0.180 0.019
0.029 0.047
0.117 0.037 0.007 0.045 0.027 0.063 0.061
0.225 0.047 0.142 0.037 0.175
0.014 <0.001 0.404 0.195 0.033 <0.001 0.093 0.750 0.041 0.219 0.005 0.006 <0.001 0.036 <0.001 0.091 <0.001
(19) LARGESHAREi,t
0.063 0.026
0.135
0.017
0.011 0.011
0.027
0.006 0.079
0.010 0.057
0.008
0.068 0.054
0.121 0.042
0.139
0.330
0.005 0.242 <0.001 0.444 0.619 0.616 0.221 0.771 0.000 0.669 0.011 0.734 0.002 0.014 <0.001 0.057 <0.001 <0.001
(20) AQi,t 0.018
0.046 0.096 0.042
0.050 0.069
0.059 0.043
0.103
0.023
0.085 0.016 0.197
0.040 0.035
0.139
0.055
0.112
0.002
0.411 0.039 <0.001 0.058 0.024 0.002 0.008 0.051 <0.001 0.307 0.000 0.472 <0.001 0.073 0.110 <0.001 0.013 <0.001 0.914

Notes: This table reports Pearson correlations amongst the variables used in our main analysis. See the Appendix for variable definitions

Correlations
Table 2.
Audit committee

907
CEO experience
members with
MAJ Value-weighted excess return (ri,t – RVWBi,t)
35,7 Dependent variable = (1) (2) (3)

Constant 0.534*** (6.59) 0.574*** (6.98) 0.660*** (3.18)

DCi,t/Mi,t
1 0.401*** (2.89) 0.656*** (3.31) 1.350 (0.95)
AC_EXPi,t(DCi,t/Mi,t
1)
0.314** (
2.03)
0.336** (
2.04)
AC_EXPi,t
0.037 (
1.24)
0.039 (
1.24)
908 DEi,t/Mi,t
1 0.566*** (6.43) 0.565*** (6.42) 0.588*** (6.41)
DNAi,t/Mi,t
1 0.052** (2.43) 0.052** (2.43) 0.048** (2.32)
DRDi,t/Mi,t
1 0.361 (0.88) 0.364 (0.88) 0.385 (0.94)
DIi,t/Mi,t
1
0.610** (
2.36)
0.624** (
2.43)
0.603** (
2.45)
DDi,t/Mi,t
1 1.052 (1.26) 0.978 (1.15) 0.925 (1.07)
Ci,t
1/Mi,t
1 0.096* (1.86) 0.095* (1.84) 0.095* (1.88)
Li,t
0.429*** (
10.50)
0.433*** (
10.47)
0.458*** (
10.05)
NFi,t/Mi,t
1
0.028 (
0.77)
0.031 (
0.84)
0.021 (
0.57)
(Ci,t
1/Mi,t
1)(DCi,t/Mi,t
1)
0.537*** (
2.80)
0.532*** (
2.87)
0.533*** (
2.94)
Li,t(DCi,t/Mi,t
1) 0.247 (1.11) 0.248 (1.15) 0.339 (1.40)
AC_IND_RATIOi,t(DCi,t/Mi,t
1)
0.233 (
0.43)
lnAC_ACTIVITYi,t(DCi,t/Mi,t
1)
0.051 (
0.54)
lnAC_SIZEi,t(DCi,t/Mi,t
1)
0.386 (
0.40)
FRNOWNi,t(DCi,t/Mi,t
1) 0.744 (1.25)
LARGESHAREi,t(DCi,t/Mi,t
1) 0.162 (0.47)
AQi,t(DCi,t/Mi,t
1)
0.580 (
0.63)
AC_IND_RATIOi,t 0.201* (1.89)
lnAC_ACTIVITYi,t
0.026 (
1.59)
lnAC_SIZEi,t
0.058 (
0.58)
FRNOWNi,t
0.147** (
2.09)
LARGESHAREi,t
0.037 (
0.56)
AQi,t
0.521** (
2.44)
Year/industry fixed effects Yes Yes Yes
Clustering Firm Firm Firm
Observations 2,031 2,031 2,031
Table 3. Adjusted R2 0.133 0.134 0.137
Financial expertise of
Notes: This table reports the regression results of estimating equations (1) and (2), which examine the
AC members and the effect of AC financial expertise on the marginal value of cash holdings. All t-statistics (in parentheses) are
value of cash based on the standard errors clustered by firm. *, ** and *** denote significance at the 10, 5 and 1% levels,
holdings respectively, in two-tailed tests. See the Appendix for variable definitions

on the marginal value of cash holdings. The finding shows that when the AC has at least one
financial expert, shareholders are more likely to discount the value of cash holdings, which
suggests that financial expertise impairs, rather than improves, the AC’s monitoring of
managerial actions.
To check whether other AC characteristics and corporate governance affect the marginal
value of cash holdings, we include in column (3) the variables for AC independence
(AC_IND_RATIOi,t), AC activity (lnAC_ACTIVITYi,t), AC size (lnAC_SIZEi,t), foreign
ownership (FRNOWNi,t), the ownership of largest shareholders (LARGESHAREi,t) and
accrual quality (AQi,t), along with their interactions with the change in cash. The coefficients
on the interactions between these variables and the change in cash are all insignificant,
suggesting that the independence, activity and size of ACs have no significant impacts on
the value of cash holdings [11]. In addition, the firm’s ownership structures or accrual
quality do not significantly affect the value of cash holdings [12]. More importantly, the
coefficient on AC_EXPi,t(DCi,t/Mi,t
1) remains negative and significant, indicating that Audit committee
our main result is robust to controlling for other factors. members with
Overall, the results in Table 3 imply that investors in Korea do not trust the monitoring CEO experience
and safeguarding role of AC financial experts. We next examine the impact of different
types of AC financial expertise (i.e. accounting, finance and supervisory) on the value of cash
holdings.
Panel A of Table 4 presents the results after separating AC_EXPi,t into ACCEXPi,t,
FINEXPi,t and SUPEXPi,t. In columns (1) and (2), the coefficients on ACCEXPi,t  (DCi,t/Mi,t
1)
909
and FINEXPi,t  (DCi,t/Mi,t
1) are not significant, suggesting that accounting and finance
experts on ACs do not significantly affect the value of cash holdings. Insignificant results for
accounting and finance experts are consistent with evidence in Gao and Jia (2016), who report
that both AC size and AC financial expertise have no significant impact on the value of cash
holdings. The results can be explained by the fact that AC members spend short time
reviewing a firm’s financial statements and thus even members with financial expertise may
have an only limited impact on the effectiveness of ACs. Furthermore, other members may
become less vigilant with the presence of members with financial expertise (Persons, 2005;
Mustafa and Ben Youssef, 2010).
In contrast to the results for accounting and finance expertise the coefficient on
SUPEXPi,t  (DCi,t/Mi,t
1) is negative and significant in column (3), suggesting that the
negative impact of AC financial expertise on the value of cash holdings, as shown in Table 3,
is mainly driven by the effects of supervisory experts on ACs. This finding is consistent
with the concerns raised about supervisory experts (Krishnan and Visvanathan, 2008;
Dhaliwal et al., 2010).
In column (4), we include ACCEXPi,t, FINEXPi,t and SUPEXPi,t and their interactions with
the change in cash in the model and find similar results. Specifically, the coefficient on
SUPEXPi,t(DCi,t/Mi,t
1) remains negative and significant, whereas the coefficients on
ACCEXPi,t(DCi,t/Mi,t
1) and FINEXPi,t(DCi,t/Mi,t
1) are not significant.
In Panel B of Table 4, we provide the economic significance of our results. Based on the
estimated coefficients in column (4), the marginal value of cash holdings of KRW 1 for an
average firm is KRW 0.272. When the AC has supervisory experts (SUPEXPi,t = 1), the
value deteriorates to KRW 0.109, whereas the marginal value of cash for firms without
supervisory experts (SUPEXPi,t = 0) increases to KRW 0.407. This indicates that the
presence of AC supervisory experts is associated with a KRW 0.298 (= 0.407
0.109)
discount for every KRW 1 of cash that firms hold.
Overall, the results in Table 4 suggest that when supervisory experts such as CEOs are
appointed as AC members, investors perceive the effectiveness of ACs to be weak, and thus
discount the value of cash holdings.

5.2 The mix of audit committee financial experts on the value of cash holdings
While the results in Table 4 suggest that the presence of supervisory experts impairs the
monitoring function of ACs, this effect can be influenced by the mix of financial expertise.
Table 5 reports the results with seven indicator variables representing the composition of
AC financial expertise and their interactions with the change in cash [13]. The negative and
significant coefficient on SUP_ONLYi,t(DCi,t/Mi,t
1) suggests that the monitoring role of
the AC is weakened when it has at least one supervisory expert but no accounting or finance
experts. The coefficient on FIN_SUPi,t(DCi,t/Mi,t
1) is also negative and significant,
indicating that the presence of finance experts does not mitigate the negative impact of
supervisory experts. By contrast, the coefficients on ACC_SUPi,t(DCi,t/Mi,t
1) and ALLi,
t(DCi,t/Mi,t
1) are insignificant, suggesting that the accounting experts mitigate the
 35,7

910
MAJ

holdings
Table 4.

financial expertise
Classification of AC

and the value of cash

Dependent variable = Value-weighted excess return (ri,t
RVWBi,t)
Financial expertise = (1) Accounting (ACCEXP) (2) Finance (FINEXP) (3) Supervisory (SUPEXP) (4) Pooled

Panel A: Regression results

Constant 0.673*** (3.27) 0.636*** (2.97) 0.657*** (3.15) 0.627*** (2.95)
DCi,t/Mi,t
1 1.288 (0.88) 1.301 (0.89) 1.048 (0.74) 1.041 (0.74)
ACCEXPi,t(DCi,t/Mi,t
1) 0.022 (0.15)
0.054 (
0.35)
FINEXPi,t(DCi,t/Mi,t
1)
0.003 (
0.02)
0.080 (
0.50)
SUPEXPi,t(DCi,t/Mi,t
1)
0.275** (
2.13)
0.298** (
2.19)
ACCEXPi,t 0.009 (0.45)
0.002 (
0.08)
FINEXPi,t
0.037 (
1.36)
0.038 (
1.33)
SUPEXPi,t
0.020 (
0.96)
0.022 (
1.02)
DEi,t/Mi,t
1 0.592*** (6.45) 0.595*** (6.53) 0.591*** (6.48) 0.593*** (6.46)
DNAi,t/Mi,t
1 0.047** (2.27) 0.047** (2.27) 0.044** (2.17) 0.045** (2.17)
DRDi,t/Mi,t
1 0.376 (0.92) 0.381 (0.93) 0.378 (0.93) 0.382 (0.94)
DIi,t/Mi,t
1
0.587** (
2.33)
0.586** (
2.32)
0.594** (
2.40)
0.601** (
2.40)
DDi,t/Mi,t
1 1.006 (1.19) 1.014 (1.23) 1.056 (1.23) 1.014 (1.20)
Ci,t
1/Mi,t
1 0.096* (1.89) 0.094* (1.86) 0.105** (2.05) 0.103** (2.05)
Li,t
0.452*** (
9.95)
0.452*** (
9.94)
0.454*** (
9.98)
0.451*** (
9.79)
NFi,t/Mi,t
1
0.017 (
0.48)
0.019 (
0.51)
0.021 (
0.57)
0.023 (
0.61)
(Ci,t
1/Mi,t
1)(DCi,t/Mi,t
1)
0.540*** (
2.93)
0.544*** (
2.98)
0.535*** (
2.94)
0.536*** (
2.99)
Li,t(DCi,t/Mi,t
1) 0.336 (1.33) 0.348 (1.39) 0.296 (1.17) 0.314 (1.25)
AC_IND_RATIOi,t(DCi,t/Mi,t
1)
0.424 (
0.79)
0.420 (
0.81)
0.288 (
0.57)
0.248 (
0.47)
lnAC_ACTIVITYi,t(DCi,t/Mi,t
1)
0.022 (
0.23)
0.023 (
0.24)
0.016 (
0.17)
0.019 (
0.21)
lnAC_SIZEi,t(DCi,t/Mi,t
1)
0.492 (
0.50)
0.505 (
0.51)
0.261 (
0.26)
0.245 (
0.25)
FRNOWNi,t(DCi,t/Mi,t
1) 0.723 (1.15) 0.763 (1.28) 0.577 (0.96) 0.645 (1.02)
LARGESHAREi,t(DCi,t/Mi,t
1) 0.267 (0.76) 0.274 (0.74) 0.126 (0.36) 0.104 (0.28)
AQi,t(DCi,t/Mi,t
1)
0.393 (
0.41)
0.404 (
0.43)
0.262 (
0.29)
0.283 (
0.32)
AC_IND_RATIOi,t 0.183* (1.78) 0.189* (1.84) 0.193* (1.87) 0.196* (1.88)
lnAC_ACTIVITYi,t
0.028* (
1.74)
0.029* (
1.77)
0.026 (
1.58)
0.026 (
1.56)
lnAC_SIZEi,t
0.080 (
0.79)
0.058 (
0.56)
0.071 (
0.69)
0.050 (
0.48)
FRNOWNi,t
0.149** (
2.05)
0.148** (
2.12)
0.148** (
2.09)
0.151** (
2.07)
LARGESHAREi,t
0.041 (
0.63)
0.042 (
0.65)
0.037 (
0.57)
0.041 (
0.64)
AQi,t
0.514** (
2.40)
0.496** (
2.33)
0.530** (
2.46)
0.505** (
2.34)
Year/industry fixed effects Yes Yes Yes Yes
Clustering Firm Firm Firm Firm
Observations 2,031 2,031 2,031 2,031
Adjusted R2 0.134 0.135 0.137 0.136
(continued)
Dependent variable = Value-weighted excess return (ri,t
RVWBi,t)
Financial expertise = (1) Accounting (ACCEXP) (2) Finance (FINEXP) (3) Supervisory (SUPEXP) (4) Pooled

Panel B. Marginal value of cash holdings for average firm

Variables Column (1) Column (2) Column (3) Column (4)
Sample means ACCEXPi,t 0.430 0.430
FINEXPi,t 0.213 0.213
SUPEXPi,t 0.451 0.451
Ci,t
1/Mi,t
1 0.219 0.219 0.219 0.219
Li,t 0.015 0.015 0.015 0.015
AC_IND_RATIOi,t 0.945 0.945 0.945 0.945
lnAC_ACTIVITYi,t 1.668 1.668 1.668 1.668
lnAC_SIZEi,t 1.410 1.410 1.410 1.410
FRNOWNi,t 0.174 0.174 0.174 0.174
LARGESHAREi,t 0.400 0.400 0.400 0.400
AQi,t 0.084 0.084 0.084 0.084
Marginal value of KRW 1 (average firm) 0.253 0.248 0.273 0.272
Marginal value of KRW 1 (ACCEXP) 0.265 0.241
Marginal value of KRW 1 (non-ACCEXP) 0.243 0.295
Marginal value of KRW 1 (FINEXP) 0.245 0.209
Marginal value of KRW 1 (non-FINEXP) 0.248 0.289
Marginal value of KRW 1 (SUPEXP) 0.122 0.109
Marginal value of KRW 1 (non-SUPEXP) 0.397 0.407

Notes: This table reports the regression results of estimating equation (2) after separating AC financial expertise (AC_EXPi,t) into three groups, namely, (1) accounting expertise
(ACCEXPi,t), (2) finance expertise (FINEXP) and (3) supervisory expertise (SUPEXPi,t). Panel B represents the marginal value of KRW 1 in cash for the average firm in the sample and
firms with different AC financial expertise. The marginal value for the average firm is calculated as {the estimated coefficient on DCi,t/Mi,t
1} þ R{the sample mean of each variable
that is interacted with DCi,t/Mi,t
1  the estimated coefficient on each interaction term}. All t-statistics (in parentheses) are based on the standard errors clustered by firm. *, ** and ***
denote significance at the 10, 5 and 1% levels, respectively, in two-tailed tests. See the Appendix for variable definitions

Table 4.
Audit committee

911
CEO experience
members with
MAJ Dependent variable = Value-weighted excess return (ri,t
RVWBi,t)
35,7
Constant 0.616*** (2.80)
DCi,t/Mi,t
1 1.308 (0.89)
ACC_ONLYi,t(DCi,t/Mi,t
1)
0.286 (
1.26)
FIN_ONLYi,t(DCi,t/Mi,t
1)
0.162 (
0.71)
SUP_ONLYi,t(DCi,t/Mi,t
1)
0.380* (
1.87)
912 ACC_FINi,t(DCi,t/Mi,t
1) 0.008 (0.03)
ACC_SUPi,t(DCi,t/Mi,t
1)
0.375 (
1.51)
FIN_SUPi,t(DCi,t/Mi,t
1)
0.762** (
2.55)
ALLi,t(DCi,t/Mi,t
1) 1.457 (1.04)
ACC_ONLYi,t
0.015 (
0.39)
FIN_ONLYi,t
0.086** (
2.04)
SUP_ONLYi,t
0.035 (
1.00)
ACC_FINi,t
0.041 (
0.69)
ACC_SUPi,t
0.063* (
1.87)
FIN_SUPi,t
0.062 (
1.07)
ALLi,t 0.076 (0.70)
Other Controls Yes
Year/industry fixed effects Yes
Clustering Firm
Observations 2,031
Table 5. Adjusted R2 0.139
The mix of AC
Notes: This table reports the results from estimating equation (2) after separating AC financial expertise
financial expertise into seven groups based on their composition. All t-statistics (in parentheses) are based on the standard
and the value of cash errors clustered by firm. *, ** and *** denote significance at the 10, 5 and 1% levels, respectively, in two-
holdings tailed tests. See the Appendix for variable definitions

adverse impact of supervisory experts, as predicted by H2. The results for the other
variables suggest that if the AC includes only accounting (finance) experts or it includes
both accounting and finance experts, it does not significantly affect the value of cash
holdings. Overall, the results in Table 5 confirm the value-destroying effect of supervisory
experts on ACs and further suggest that accounting experts can mitigate the detrimental
effect of supervisory experts.

6. Additional analyses
6.1 Using excess cash specification
While we follow the Faulkender and Wang (2006) model in the main analysis, we also use an
alternative approach using the level of cash and the level of shareholder value. Because total
cash includes the amount of cash needed for normal operations and investment decisions,
we follow prior studies (Opler et al., 1999; Dittmar and Mahrt-Smith, 2007) and use excess
cash, which is defined as cash holdings that are in excess of those for the normal operations
and investment. Specifically, to estimate the normal and excess cash, we estimate equation
(3) as follows:




Log Cashi;t =NAi;t ¼ b 0 þ b 1 Log Assetsi;t þ b 2 FCFi;t =NAi;t þ b 3 NWCi;t =NAi;t

d i;t þ b RDi;t =NAi;t

þ b 4 Industry Sigmat þ b 5 MTB 6
 Audit committee
þ Year and industry fixed effects þ « i;t (3)
members with
where, for firm i in year t, Log(Cashi,t/NAi,t) is the natural logarithm of cash and cash CEO experience
equivalents divided by total non-cash assets. To control for determinants of the expected
level of cash, we include firm size (Log(Assetsi,t)), free cash flows (FCFi,t/NAi,t), net working
capital (NWCi,t/NAi,t), industry risk (calculated as the industry average of 10-year standard
deviations of FCFi,t/NAi,t), the market-to-book ratio (MTBd i;t ) and R&D expenditures (RDi,t/ 913
NAi,t) [14]. Panel A of Table 6 presents the results of estimating equation (3). Consistent with
prior literature, we find that free cash flows (FCFi,t/NAi,t), industry risk (Industry Sigmat)
and R&D expenditures (RDi,t/NAi,t) are positively related to the level of cash, whereas firm
size (Log(Assetsi,t)) and net working capital (NWCi,t/NAi,t) are negatively associated. We use
the residual from equation (3) as an empirical measure of excess cash (XCashi,t).
Next, we examine the association between AC financial expertise and the value of excess
cash by estimating equation (4) as follows:


MVi;t =NAi;t ¼ b 0 þ b 1 XCashi;t þ b 2 FACTORi;t  XCashi;t þ b 3 FACTORi;t

þ b 4 Ei;t =NAi;t þ b 5 dEi;t =NAi;t þ b 6 dEi;tþ2 =NAi;t þ b 7 RDi;t =NAi;t

þ b 8 dRDi;t =NAi;t þ b 9 dRDi;tþ2 =NAi;t þ b 10 Di;t =NAi;t

þ b 11 dDi;t =NAi;t þ b 12 dDi;tþ2 =NAi;t þ b 13 Ii;t =NAi;t þ b 14 dIi;t =NAi;t

þ b 15 dIi;tþ2 =NAi;t þ b 16 dNAi;t =NAi;t þ b 17 dNAi;tþ2 =NAi;t


þ b 18 dMVi;tþ2 =NAi;t þ b 19 AC_IND_RATIOi;t  XCashi;t


þ b 20 lnAC_ACTIVITYi;t  XCashi;t þ b 21 lnAC_SIZEi;t



 XCashi;t þ b 22 FRNOWNi;t  XCashi;t þ b 23 LARGESHAREi;t



 XCashi;t þ b 24 AQi;t  XCashi;t þ b 25 AC_IND_RATIOi;t

þ b 26 lnAC_ACTIVITYi;t þ b 27 lnAC_SIZEi;t þ b 28 FRNOWNi;t

þ b 29 LARGESHAREi;t þ b 30 AQi;t þ Year and industry fixed effects

þ « i;t (4)

where for firm i in year t, XCashi,t is excess cash measured as the residual value from
equation (3); MVi,t is the market capitalisation of equity plus book value of liabilities; NAi,t is
total non-cash assets measured as total assets minus cash and cash equivalents; Ei,t is EBIT;
RDi,t is R&D expenditures; Di,t is dividends for common stocks; Ii,t is interest expenses; dXi,t
indicates a change in X from time t
2 to t; dXi,tþ2 indicates a change in X from time t to t þ
2. Finally, FACTORi,t is the variables for AC expertise such as AC_EXPi,t, ACCEXPi,t,
FINEXPi,t and SUPEXPi,t.
Panel B of Table 6 reports the results of estimating equation (4). The baseline results
reported in column (1) suggest that KRW 1 of excess cash is related to KRW 0.78 of market
value. When we include the interaction between the presence of AC financial experts and
excess cash in column (2), the coefficient on AC_EXPi,t  XCashi,t is negative but
MAJ Dependent variable = Log(Cashi,t/NAi,t)
35,7 Panel A. Excess cash estimation
Constant 0.726*** (17.06)
Log(Assetsi,t)
0.037*** (
18.65)
FCFi,t/NAi,t 0.497*** (18.66)
NWCi,t/NAi,t
0.031** (
2.55)
Industry Sigmat 0.230* (1.72)
d i;t
MTB
0.001 (
0.11)
914 RDi,t/NAi,t 0.855*** (11.14)
Year/industry fixed effects Yes
Observations 26,799
Adjusted R2 0.285

Panel B. Main regression

Dependent variable = MVi,t/NAi,t
(1) Baseline (2) AC characteristics (3) Types of experts
Constant
1.100*** (
3.00)
1.043*** (
2.60)
1.146*** (
2.79)
XCashi,t 0.778** (2.48) 5.856** (2.08) 6.500** (2.30)
AC_EXPi,t  XCashi,t
0.131 (
0.23)
ACCEXPi,t  XCashi,t 0.712 (1.41)
FINEXPi,t  XCashi,t 0.136 (0.20)
SUPEXPi,t  XCashi,t
0.721* (
1.89)
AC_EXPi,t
0.068 (
1.50)
ACCEXPi,t
0.053 (
1.11)
FINEXPi,t
0.060 (
1.04)
SUPEXPi,t
0.065 (
1.30)
Ei,t/NAi,t 4.862*** (5.50) 4.740*** (5.92) 4.917*** (6.13)
dEi,t/NAi,t
0.290 (
0.88)
0.296 (
1.01)
0.371 (
1.24)
dEi,t þ 2/NAi,t 1.649*** (3.39) 1.635*** (3.53) 1.634*** (3.54)
RDi,t/NAi,t 11.988*** (6.39) 11.193*** (6.41) 10.775*** (6.14)
dRDi,t/NAi,t
6.060*** (
3.20)
5.676*** (
3.25)
5.549*** (
3.21)
dRDi,t þ 2/NAi,t 3.677*** (4.89) 3.559*** (4.75) 3.421*** (4.77)
Di,t/NAi,t 13.458*** (6.89) 13.319*** (7.98) 13.157*** (8.11)
dDi,t/NAi,t
4.767*** (
5.24)
4.936*** (
6.01)
4.839*** (
5.80)
dDi,t þ 2/NAi,t 4.723** (2.56) 4.244** (2.47) 4.038** (2.37)
Ii,t/NAi,t 1.549 (0.68) 2.024 (0.79) 2.310 (0.89)
dIi,t/NAi,t
0.361 (
0.34)
0.548 (
0.50)
0.506 (
0.46)
dIi,t þ 2/NAi,t 1.645 (0.64) 1.608 (0.66) 1.785 (0.74)
dNAi,t/NAi,t 0.069 (1.36) 0.083 (1.59) 0.087* (1.67)
dNAi,t þ 2/NAi,t 0.086 (1.40) 0.114** (2.07) 0.118** (2.14)
dMVi,t þ 2/NAi,t
0.108* (
1.74)
0.110* (
1.81)
0.110* (
1.82)
AC_IND_RATIOi,tXCashi,t
1.277 (
0.72)
1.860 (
1.09)
lnAC_ACTIVITYi,tXCashi,t 0.924** (2.33) 0.972*** (2.62)
lnAC_SIZEi,tXCashi,t
3.789** (
2.11)
3.789** (
2.16)
FRNOWNi,tXCashi,t
1.182 (
0.54)
1.842 (
0.81)
LARGESHAREi,tXCashi,t
1.087 (
0.67)
1.469 (
0.95)
AQi,tXCashi,t 4.567 (1.62) 3.909 (1.46)
AC_IND_RATIOi,t 0.362** (2.10) 0.357** (2.09)
lnAC_ACTIVITYi,t
0.043 (
1.30)
0.044 (
1.33)
lnAC_SIZEi,t 0.621*** (2.65) 0.651*** (2.84)
FRNOWNi,t 0.386 (1.19) 0.373 (1.16)
LARGESHAREi,t
0.012 (
0.07)
0.011 (
0.06)
AQi,t 0.849** (2.24) 0.860** (2.23)
Year/industry fixed effects Yes Yes Yes
Clustering Firm Firm Firm
Observations 1,702 1,702 1,702
Adjusted R2 0.749 0.753 0.756

Notes: This table reports the results of estimating alternative specification to estimate the market value of cash holdings. Following Dittmar
and Mahrt-Smith (2007), we estimate the following model by each year and industry (two-digit Korea Standard Industry Code) (Panel A). We
use the residuals from the model as the measure of excess cash:




Log Cashi;t =NAi;t ¼ b 0 þ b 1 Log Assetsi;t þ b 2 FCFi;t =NAi;t þ b 3 NWCi;t =NAi;t þ b 4 Industry Sigmat
Table 6.
Alternative d i;t þ b RDi;t =NAi;t þ Year and industry fixed effects þ « i;t
þ b 5 MTB 6
specification using Panel B reports the results from estimating equation (4). All t-statistics (in parentheses) are based on the standard errors clustered by firm. *, **
excess cash and *** denote significance at the 10, 5 and 1% levels, respectively, in two-tailed tests. See the Appendix for variable definitions
statistically insignificant. In column (3), where we separate financial experts into Audit committee
accounting, finance and supervisory experts, only the coefficient on SUPEXPi,t  XCashi,t is members with
negative and significant (
0.721; t =
1.89). This finding suggests that the presence of CEO experience
supervisory experts on ACs is associated with a lower value of excess cash, which confirms
our results reported in Table 4.
With respect to other AC characteristics, the coefficients on lnAC_ACTIVITYi,t 
XCashi,t are positive and significant in columns (2) and (3), suggesting that more active ACs 915
are associated with a higher value of excess cash. On the other hand, the coefficients on
lnAC_SIZEi,t  XCashi,t are negative and significant in both columns, indicating that larger
ACs are negatively associated with a value of excess cash [15]. Overall, the results in Table 6
indicate that our main results are robust to using the alternative specification.

6.2 Propensity score-matching analysis

To test whether differences in firm characteristics, which may lead to different attributes of
ACs, affect our results, we perform a matched-sample analysis based on propensity score
matching (PSM).
Following Agrawal and Chadha (2005) and Krishnan and Visvanathan (2008), we first
run a regression model that estimates the probability of appointing AC financial experts (or
each subcategory of financial experts) as follows:

Expertisei;t ¼ b 0 þ b 1 SIZEi;t þ b 2 PROAi;t þ b 3 DEBTi;t þ b 4 SGROWi;t þ b 5 BSIZEi;t

þ b 6 AEMPi;t þ b 7 EVOLi;t þ b 8 AGEi;t þ Year and industry fixed effects

þ « i;t (5)

where for firm i in year t, Expertisei,t is either financial experts (AC_EXPi,t), accounting
experts (ACCEXPi,t), finance experts (FINEXPi,t) or supervisory experts (SUPEXPi,t) on
ACs; SIZEi,t is the log of total assets; PROAi,t is the average return on assets (net income
divided by total assets) over the past three years; DEBTi,t is long-term debt divided by total
assets; SGROWi,t is the annual percentage change in sales; BSIZEi,t is the log of total
number of directors on the board; AEMPi,t is a measure of capital intensity, calculated as
total assets divided by the number of employees; EVOLi,t is the earnings volatility over the
past six years; and AGEi,t is the firm age. Based on the estimated propensity score, we
match each firm with AC_EXPi,t = 1 with a control firm with AC_EXPi,t = 0 that has the
closest propensity score using one-to-one matching without replacement within a maximum
caliper distance of 0.05 (Shipman et al., 2017). We also perform similar procedures separately
for ACCEXPi,t, FINEXPi,t and SUPEXPi,t. As a result, we successfully match 618 (1,594, 808
and 1,650) treatment and control firms based on AC_EXPi,t (ACCEXPi,t, FINEXPi,t and
SUPEXPi,t). We then re-estimate our main analysis with the matched sample. The results
are presented in Table 7. In column (1), the coefficient on AC_EXPi,t  (DCi,t/Mi,t
1) is not
significant, suggesting that the overall effect of AC financial experts on the value of cash
holdings is not different from zero. The coefficient on SUPEXPi,t  (DCi,t/Mi,t
1) is negative
and significant in column (4), whereas the coefficients on ACCEXPi,t  (DCi,t/Mi,t
1) and
FINEXPi,t  (DCi,t/Mi,t
1) are insignificant in columns (2) and (3), respectively. These
results are consistent with those reported in Table 4. Overall, the result using the matched
sample suggests that it is unlikely that our main inferences are significantly affected by the
differences in firm characteristics.
 35,7

916
MAJ

Table 7.
PSM analysis
Dependent variable = Value-weighted excess return (ri,t
RVWBi,t)
Financial expertise = (1) AC_EXP (2) ACCEXP (3) FINEXP (4) SUPEXP

Constant
0.372 (
0.98) 0.228 (0.93) 0.530 (1.28)
0.013 (
0.05)

DCi,t/Mi,t
1 5.318* (1.68) 0.109 (0.07) 0.755 (0.33) 0.186 (0.13)
AC_EXPi,t(DCi,t/Mi,t
1)
0.302 (
1.38) 0.131 (0.83)
0.141 (
0.62)
0.239* (
1.85)
AC_EXPi,t
0.031 (
0.82) 0.018 (0.80)
0.026 (
0.79)
0.020 (
0.82)
DEi,t/Mi,t
1 0.616*** (3.88) 0.674*** (6.22) 0.507*** (4.08) 0.574*** (5.70)
DNAi,t/Mi,t
1 0.044 (1.49) 0.052* (1.73) 0.035 (1.01) 0.049** (2.09)
DRDi,t/Mi,t
1 0.953 (1.21) 0.328 (0.73)
0.089 (
0.20) 0.439 (1.03)
DIi,t/Mi,t
1
1.401*** (
4.83)
0.309 (
1.01)
0.717* (
1.76)
0.416 (
1.52)
DDi,t/Mi,t
1 0.585 (0.41)
0.441 (
0.44) 1.480 (0.95) 1.411 (1.46)
Ci,t
1/Mi,t
1 0.026 (0.28) 0.142** (2.13) 0.163* (1.86) 0.103 (1.58)
Li,t
0.404*** (
4.18)
0.489*** (
9.50)
0.572*** (
7.16)
0.479*** (
9.39)
NFi,t/Mi,t
1 0.046 (0.69)
0.059 (
1.38) 0.013 (0.23)
0.053 (
1.40)
(Ci,t
1/Mi,t
1)(DCi,t/Mi,t
1)
0.521* (
1.71)
0.551*** (
2.74)
0.613* (
1.87)
0.504** (
2.56)
Li,t(DCi,t/Mi,t
1) 0.586* (1.67) 0.226 (0.81) 0.153 (0.34) 0.308 (1.24)
AC_IND_RATIOi,t(DCi,t/Mi,t
1)
0.664 (
0.97)
0.210 (
0.32)
0.004 (
0.00)
0.265 (
0.46)
lnAC_ACTIVITYi,t(DCi,t/Mi,t
1)
0.034 (
0.23)
0.140 (
1.44)
0.333** (
2.58) 0.073 (0.72)
lnAC_SIZEi,t(DCi,t/Mi,t
1)
3.384 (
1.53) 0.516 (0.46)
0.070 (
0.05) 0.207 (0.21)
FRNOWNi,t(DCi,t/Mi,t
1) 1.818 (1.48)
0.090 (
0.14) 1.304 (1.35) 0.689 (1.15)
LARGESHAREi,t(DCi,t/Mi,t
1) 0.635 (1.08)
0.280 (
0.61) 0.409 (0.65) 0.140 (0.39)
AQi,t(DCi,t/Mi,t
1)
1.204 (
0.86) 0.530 (0.44) 2.284 (0.84)
0.553 (
0.61)
AC_IND_RATIOi,t 0.151 (1.02) 0.190* (1.68) 0.047 (0.27) 0.170 (1.46)
lnAC_ACTIVITYi,t
0.009 (
0.29)
0.019 (
1.09)
0.039 (
1.23)
0.021 (
1.10)
lnAC_SIZEi,t
0.121 (
0.46) 0.020 (0.17)
0.071 (
0.51)
0.001 (
0.01)
FRNOWNi,t
0.101 (
0.52)
0.208** (
2.55)
0.217* (
1.68)
0.186** (
2.21)
LARGESHAREi,t 0.163 (1.05)
0.011 (
0.16)
0.055 (
0.45)
0.073 (
0.97)
AQi,t
0.503 (
1.35)
0.482* (
1.92)
0.383 (
0.91)
0.467** (
2.27)
Year/industry fixed effects Yes Yes Yes Yes
Clustering Firm Firm Firm Firm
Observations 618 1,594 808 1,650
Adjusted R2 0.131 0.144 0.151 0.140

Notes: This table reports the results of estimating equation (2) based on the matched sample. All t-statistics (in parentheses) are based on the standard errors
clustered by firm. *, ** and *** denote significance at the 10, 5 and 1% levels, respectively, in two-tailed tests. See the Appendix for variable definitions
6.3 Different types of supervisory experts: CEOs and government officials Audit committee
Based on the definition of financial expertise by the Korean Commercial Act, we include members with
current or former government officials from specific organisations in our categories of CEO experience
financial and supervisory experts. Specifically, we classify individuals with work experience
at the FSS and the Board of Audit and Inspection (BAI) as supervisory experts. Therefore,
supervisory experts include CEOs and others from these two governmental organisations.
To further examine the impact of supervisory experts on the value of cash holdings, we
divide supervisory experts (SUPEXPi,t) into CEOEXPi,t and GOVEXPi,t, where CEOEXPi,t
917
(GOVEXPi,t) is an indicator variable that is equal to one if a firm has at least one AC member
with experience as a CEO (as a government official from the FSS or the BAI) and zero
otherwise [16]. We then estimate equation (2) with CEOEXPi,t, GOVEXPi,t and their

Dependent variable = Value-weighted excess return (ri,t – RVWBi,t)

Financial expertise = (1) CEO (CEOEXP) (2) Government official (GOVEXP) (3) Pooled

Constant 0.654*** (3.14) 0.660*** (3.13) 0.650*** (3.09)

DCi,t/Mi,t
1 1.045 (0.73) 1.279 (0.88) 1.038 (0.72)
CEOEXPi,t(DCi,t/Mi,t
1)
0.346*** (
2.62)
0.345*** (
2.62)
GOVEXPi,t(DCi,t/Mi,t
1)
0.011 (
0.03)
0.015 (
0.04)
CEOEXPi,t
0.014 (
0.68)
0.014 (
0.71)
GOVEXPi,t
0.021 (
0.54)
0.020 (
0.52)
DEi,t/Mi,t
1 0.597*** (6.55) 0.591*** (6.45) 0.596*** (6.54)
DNAi,t/Mi,t
1 0.045** (2.18) 0.047** (2.30) 0.045** (2.20)
DRDi,t/Mi,t
1 0.363 (0.90) 0.380 (0.93) 0.366 (0.90)
DIi,t/Mi,t
1
0.605** (
2.45)
0.582** (
2.33)
0.601** (
2.43)
DDi,t/Mi,t
1 1.041 (1.21) 0.996 (1.17) 1.037 (1.21)
Ci,t
1/Mi,t
1 0.105** (2.04) 0.096* (1.89) 0.106** (2.05)
Li,t
0.454*** (
9.99)
0.453*** (
10.01)
0.453*** (
9.93)
NFi,t/Mi,t
1
0.022 (
0.60)
0.018 (
0.49)
0.022 (
0.59)
(Ci,t
1/Mi,t
1)(DCi,t/Mi,t
1)
0.532*** (
2.93)
0.541*** (
2.95)
0.531*** (
2.93)
Li,t(DCi,t/Mi,t
1) 0.293 (1.16) 0.336 (1.33) 0.292 (1.15)
AC_IND_RATIOi,t(DCi,t/Mi,t
1)
0.289 (
0.58)
0.407 (
0.78)
0.285 (
0.57)
lnAC_ACTIVITYi,t(DCi,t/Mi,t
1)
0.010 (
0.11)
0.024 (
0.24)
0.010 (
0.11)
lnAC_SIZEi,t(DCi,t/Mi,t
1)
0.221 (
0.22)
0.494 (
0.50)
0.220 (
0.22)
FRNOWNi,t(DCi,t/Mi,t
1) 0.536 (0.89) 0.740 (1.23) 0.538 (0.90)
LARGESHAREi,t(DCi,t/Mi,t
1) 0.046 (0.13) 0.281 (0.75) 0.054 (0.14)
AQi,t(DCi,t/Mi,t
1)
0.248 (
0.28)
0.406 (
0.43)
0.254 (
0.29)
AC_IND_RATIOi,t 0.193* (1.88) 0.189* (1.84) 0.195* (1.89)
lnAC_ACTIVITYi,t
0.026 (
1.57)
0.029* (
1.77)
0.026 (
1.59)
lnAC_SIZEi,t
0.074 (
0.73)
0.075 (
0.73)
0.072 (
0.70)
FRNOWNi,t
0.146** (
2.05)
0.147** (
2.09)
0.148** (
2.09)
LARGESHAREi,t
0.037 (
0.56)
0.037 (
0.55)
0.036 (
0.55)
AQi,t
0.533** (
2.47)
0.522** (
2.42)
0.536** (
2.46)
Year/industry fixed effects Yes Yes Yes
Clustering Firm Firm Firm
Observations 2,031 2,031 2,031
Adjusted R2 0.138 0.134 0.137

Notes: This table reports the regression results of estimating equation (2) after separating the supervisory Table 8.
expertise of the AC (SUPEXPi,t) into two different groups, namely, (1) individuals with CEO experience
(CEOEXPi,t) and (2) government officials (GOVEXPi,t). All t-statistics (in parentheses) are based on the Additional analysis:
standard errors clustered by firm. *, ** and *** denote significance at the 10, 5 and 1% levels, respectively, CEOs vs Government
in two-tailed tests. See the Appendix for variable definitions officials
MAJ interactions with changes in cash holdings (DCi,t/Mi,t
1). The results using CEOEXPi,t and
35,7 GOVEXPi,t are reported in Table 8. We find that the coefficient on CEOEXPi,t  (DCi,t/Mi,t
1)
in column (1) is negative and significant, which is consistent with the results based on
SUPEXPi,t. However, the coefficient on GOVEXPi,t(DCi,t/Mi,t
1) is insignificant in column
(2), suggesting that the AC with government officials do not have significant effects on the
value of cash holdings. Overall, the results in Table 8 indicate that the detrimental effect of
918 supervisory experts on the value of cash holdings is mainly driven by AC members with
CEO experience.

6.4 Financial experts on audit committees and earnings quality

The results so far suggest that investors discount the value of cash holdings for firms with
supervisory experts on ACs because they perceive such ACs to be ineffective. To explore the
potential channel for this result, we test whether the different types of AC financial expertise
affect earning quality (Krishnan and Visvanathan, 2008; Dhaliwal et al., 2010). Specifically,
we estimate equation (6) as follows:

AQi;t ¼ b 0 þ b 1 ACCEXPi;t þ b 2 FINEXPi;t þ b 3 SUPEXPi;t þ b 4 SIZEi;t

þ b 5 BTMi;t þ b 6 LOSSi;t þ b 7 CFOi;t þ b 8 LEVERAGEi;t

þ b 9 ZSCOREi;t þ b 10 CFVOLi;t þ b 11 SALEVOLi;t þ b 12 SGROWi;t

þ b 13 AC_IND_RATIOi;t þ b 14 lnAC_ACTIVITYi;t þ b 15 lnAC_SIZEi;t

þ b 16 FRNOWNi;t þ b 17 LARGESHAREi;t þ Year and industry fixed effects

þ « i;t (6)

where for firm i in year t, AQi,t is accrual quality measured as the standard deviation of the
residuals from the Dechow and Dichev (2002) model. We also include various control
variables that may affect the quality of reported earnings such as firm size (SIZEi,t), the
book-to-market ratio (BTMi,t), a loss indicator (LOSSi,t), CFO (CFOi,t), a leverage ratio
(LEVERAGEi,t), Altman’s (1968) z-score (ZSCOREi,t), cash flow volatility (CFVOLi,t), sales
volatility (SALEVOLi,t) and sales growth (SGROW). Additionally, we include AC
characteristics and ownership characteristics included in equation (2) such as
AC_IND_RATIOi,t, lnAC_ACTIVITYi,t, lnAC_SIZEi,t, FRNOWNi,t and LARGESHAREi,t.
Untabulated results show that SUPEXPi,t is positively related to AQi,t, whereas
ACCEXPi,t and FINEXPi,t are not significantly related to AQi,t. These results suggest that
the presence of supervisory experts on ACs is associated with poor accrual quality,
corroborating our argument that supervisory experts impair the effectiveness of ACs.
Therefore, the quality of financial reporting can be a channel through which AC supervisory
experts affect the value of cash holdings [17].

6.5 Robustness tests

To check the robustness of our results, we conduct three untabulated analyses. First, we
replace the dependent variable in equation (2) with an equally weighted portfolio (size and
book-to-market) adjusted returns (ri,t – REWBi,t) and find similar results. Second, we use the
ratio of accounting, finance and supervisory experts to the total number of AC members,
instead of the indicator variables for their presence [18]. We find that the ratio of supervisory
experts, but not the ratio of accounting or finance experts, is negatively associated with the
value of cash holdings. Finally, as the Korean Commercial Act mandated firms to have at Audit committee
least one financial expert on ACs in 2004, we restrict our sample period to 2004–2015 and members with
find similar results. CEO experience
7. Conclusion
In this study, we examine whether AC members with CEO experience, who are
classified as financial experts under the regulations of the USA and Korea, affect the 919
market value of cash holdings. Using a sample of 2,031 firm-year observations listed on
the KSE from 2000 through 2015, we find that the presence of supervisory experts on
ACs has a negative impact on the value of cash holdings. This result suggests that
supervisory experts, who often do not have specific knowledge of accounting and
financial issues, weaken, rather than improve, monitoring of managerial actions
regarding the use of corporate cash. We also find that the AC that includes only
supervisory experts and one that includes both supervisory and finance experts are
associated with a lower value of cash holdings, whereas we find no such evidence when
the AC includes both supervisory and accounting experts. These results indicate that
the weak monitoring role of ACs with supervisory experts is mitigated by the presence
of accounting experts on ACs.
This study contributes to the literature by examining the role of AC financial expertise in
the emerging markets. Our finding that AC members with supervisory expertise weaken the
monitoring role of ACs has policy implications because the current regulations in many
countries including the USA and Korea use a broad definition of AC financial expertise that
includes supervisory expertise.

Notes
1. Consistent with our argument that corporate governance plays an important role in determining
the value of cash holdings, Tong (2011) reports that firm diversification is not significantly
associated with the value of cash holdings for firms with strong corporate governance because
agency problems are alleviated for these firms.
2. Cash can be regarded as valuable assets when access to capital markets is constrained and
when a firm’s demand for financing is high. For example, Faulkender and Wang (2006) and
Denis and Sibilkov (2010) report that the market value of cash holdings is higher for
financially constrained firms than for financially unconstrained firms because cash holdings
mitigate the high costs associated with external financing. Weidemann (2018) provides a
comprehensive review of research on corporate cash holdings based on the theories of capital
structure and agency conflicts. Specifically, Weidemann (2018) identifies 10 determinants of
levels of corporate cash holdings and their market value and summarises relevant empirical
evidence.
3. The value of high-quality financial reporting can be particularly important when firms’
information asymmetry is high. Huang et al. (2014) report that the value of cash holdings is low
for firms with high information asymmetry.
4. While ACs in the USA focus on the financial reporting aspect, the powers and duties of ACs
in Korea are much broader than their US counterparts. Specifically, in Korea, ACs are
expected to monitor not only financial reporting but also other aspects, including firms’
operation and compliance activities. The Korean commercial act defines the responsibility of
ACs as “auditing the execution of directors’ duties”. It also provides specific duties including
requesting a business report from directors and subsidiaries to investigate operational and
financial matters; reviewing directors’ proposals and documents for a general shareholders’
meeting and commenting on their compliance with the law and articles of incorporation; and
MAJ filing a lawsuit against a director on behalf of the corporation (Kim, 2007). This unique
characteristic of Korean ACs ensures that members can use their financial expertise to
35,7 monitor managers’ operational and investment decisions, for example, those regarding the
accumulation and use of cash holdings.
5. To construct size and book-to-market portfolios, we classify firms into three size groups and
three book-to-market ratio groups in each year and industry. After constructing the
portfolios, we subtract the value-weighted mean value of each portfolio return from the
920 annual return of firm i in year t. Using 5x5 size and book-to-market portfolio return does not
change the results.
6. Section 4.2 provides detailed definitions of financial expertise and specific expertise (accounting,
finance and supervisory expertise).
7. Following Lee and Lee (2009) and Gao and Jia (2016), we control for AC size (lnAC_SIZEi,t). To
control for other corporate governance mechanisms, we include foreign ownership (FRNOWNi,t)
and controlling shareholders’ shares (LARGESHAREi,t) because Kim et al. (2019) find that
foreign investors have more resources and expertise to monitor management more effectively
than local investors and Steijvers and Niskanen (2013) report that the concentration of ownership
affects corporate cash holdings. Because prior studies suggest that financial reporting quality
affects the value of cash holdings (Louis et al., 2012; Sun et al., 2012; Kim et al., 2015), we also
include accrual quality (AQi,t) in the model.
8. As the Korean law also includes current or former government officials from some organisations
in the definition of financial experts, we classify them as accounting, finance and supervisory
experts according to the nature of the government organisation. For example, individuals from
the FSS (equivalent to the SEC in the USA) and the BAI of Korea are classified as supervisory
experts, while individuals from the national tax service (equivalent to the internal revenue
service in the USA) are classified as accounting experts.
9. In Section 6.3, we exclude those with non-CEO experience from the classification of supervisory
experts and find similar results.
10. The requirement of appointing at least one financial expert on ACs is mandated only for firms
that are required to establish an AC and not for firms that establish ACs voluntarily.
11. These results are consistent with the findings of Krishnan and Visvanathan (2008), who find that
AC size, AC independence and the frequency of AC meetings are not significantly associated
with accounting conservatism for the USA sample. Bédard et al. (2004) examine the effect of AC
characteristics on earnings management and report similar results. In addition, Gao and Jia
(2016) report that AC size and the percentage of AC financial experts are not significantly related
to the value of cash holdings for the USA sample.
12. We do not provide discussions on the main effects of these control variables because our focus is
on the variables interacted with changes in cash (DCi,t/Mi,t
1), which reflect the effect of the
variables on the value of cash holdings.
13. For brevity, we do not report the coefficients on other control variables.
14. Following Dittmar and Mahrt-Smith (2007), we use the prior three-year SGROW as a proxy for a
market-to-book ratio. Using a direct proxy of the market-to-book ratio (market value of equity
divided by book value of equity) does not change the results.
15. The coefficients on AC_IND_RATIOi,t  XCashi,t are insignificant in both columns,
suggesting that AC independence is not significantly associated with the value of cash
holdings. This result is consistent with the findings in Gao and Jia (2016), who report an
insignificant association between board independence and the value of cash holdings. In a
similar vein, Kusnadi et al. (2016) find an insignificant association between AC independence
and financial reporting quality for firms in Singapore, which is presumably because a
majority of AC members are already independent. The proportion of independent AC
 members is 94.5% in our sample, suggesting that little variation in AC independence can be Audit committee
the reason for insignificant results in our study. members with
16. In our sample, about 40.5% of the observations have at least one AC member with CEO CEO experience
experience (i.e. CEOEXPi,t = 1) and 6.6% of firm-year observations have at least one AC member
with experience as a government official at the FSS or the BAI (i.e. GOVEXPi,t =1).
17. We also use absolute values of discretionary accruals (Dechow et al., 1995) and their variations
(Kothari et al., 2005; Collins et al., 2017) as the dependent variable but find no significant 921
association with supervisory experts. Thus, we caution readers in interpreting the results on
earnings quality.
18. The mean value of the ratios of accounting, finance and supervisory experts on the AC are 0.152,
0.080 and 0.191, respectively.

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Appendix Audit committee
members with
CEO experience
Variable Definition

Dependent variable
ri,t – RVWBi,t Size and book-to-market portfolio adjusted returns measured as the annual stock return for firm i
over the fiscal year, minus benchmark portfolio returns over the same period. The benchmark
925
portfolio return is measured by the value-weighted average return of 3  3 size and book-to-market
portfolios (Fama and French, 1993)

Independent variables
AC_EXPi,t An indicator variable that equals one if a firm has at least one financial expert on its AC and zero
otherwise
ACCEXPi,t An indicator variable that equals one if a firm has at least one accounting expert on the AC and zero
otherwise
FINEXPi,t An indicator variable that equals one if a firm has at least one finance expert on the AC and zero
otherwise
SUPEXPi,t An indicator variable that equals one if a firm has at least one supervisory expert on the AC and zero
otherwise
ACC_ONLYi,t An indicator variable that equals one if a firm has at least one accounting expert on the AC but does
not have any finance or supervisory experts and zero otherwise
FIN_ONLYi,t An indicator variable that equals one if a firm has at least one finance expert on the AC but does not
have any accounting or supervisory experts and zero otherwise
SUP_ONLYi,t An indicator variable that equals one if a firm has at least one supervisory expert on the AC but does
not have any accounting or finance experts and zero otherwise
ACC_FINi,t An indicator variable that equals one if a firm has both accounting and finance experts on the AC but
does not have any supervisory experts and zero otherwise
FIN_SUPi,t An indicator variable that equals one if a firm has both finance and supervisory experts on the AC
but does not have any accounting experts and zero otherwise
ACC_SUPi,t An indicator variable that equals one if a firm has both accounting and supervisory experts on the
AC but does not have any finance experts and zero otherwise
ALLi,t An indicator variable that equals one if a firm has all three types of financial experts (accounting,
finance and supervisory) on the AC and zero otherwise
DCi,t/Mi,t
1 Changes in cash and cash equivalents divided by lagged market value of equity
DEi,t/Mi,t
1 Changes in EBIT divided by the lagged market value of equity
DNAi,t/Mi,t
1 Changes in total assets minus cash and cash equivalents divided by lagged market value of equity
DRDi,t/Mi,t
1 Changes in research and development expenditures divided by the lagged market value of equity
DIi,t/Mi,t
1 Changes in interest expense divided by the lagged market value of equity
DDi,t/Mi,t
1 Changes in common dividends divided by the lagged market value of equity
Li,t Market leverage calculated as total debt divided by the market value of equity plus total debt
NFi,t/Mi,t
1 Net financing divided by the lagged market value of equity, where net financing is measured as total
equity issuance minus repurchases plus changes in total debt
AC_IND_RATIOi,t The ratio of independent directors in the AC to the total number of AC members
LnAC_ACTIVITYi,t The natural logarithm of the number of AC meetings held during year t
lnAC_SIZEi,t The natural logarithm of the number of AC members in year t
FRNOWNi,t The percentage of stocks held by foreign investors in year t
LARGESHAREi,t The percentage of stocks held by the largest shareholders in year t
AQi,t The standard deviation of residuals of Dechow and Dichev (2002) model from year t
4 to year t

Variables used in additional analyses

SIZE The natural logarithm of total assets
BTM A book-to-market ratio calculated as the book value of equity divided by market value of equity in
year t
LOSS An indicator variable that equals one if a firm reports net loss in year t and zero otherwise
CFO CFO divided by total assets
LEVERAGE A leverage ratio calculated as short-term debt plus long-term debt divided by total assets Table A1.
(continued) Variable definitions
MAJ Variable Definition
35,7
ZSCORE 1.2(working capital/total assets) þ 1.4(retained earnings/total assets) þ 3.3(EBIT/total assets) þ 0.6
(market Value of equity/book value of total liabilities) þ (sales/total assets) (Altman, 1968),
multiplied by negative one so that a greater value indicates a higher likelihood of bankruptcy
CFVOL Standard deviation of CFO from year t
4 to year t
SALEVOL Standard deviation of sales divided by total assets from year t
4 to year t
926 SGROW SGROW calculated as the change in sales from year t
1 to t divided by sales in year t
1
Log(Cashi,t/NAi,t) The natural logarithm of cash and cash equivalents divided by non-cash assets
Log(Asseti,t) The natural logarithm of total assets
FCFi,t/NAi,t Operating income minus interest and taxes divided by non-cash assets
NWCi,t/NAi,t Current assets minus current liabilities and cash and cash equivalents divided by non-cash assets
Industry Sigmat Industry average of the standard deviations of FCF/NA over the past 10 years
d i;t
MTB Past three-year SGROW (an instrument variable for a market-to-book ratio)
RDi,t/NAi,t Research and development expenditures divided by non-cash assets
XCashi,t The residual from the equation below by each year and two-digit Korean standard industry
classification:




Log Cashi;t =NAi;t ¼ b 0 þ b 1 Log Assetsi;t þ b 2 FCFi;t =NAi;t þ b 3 NWCi;t =NAi;t

d i;t þ b RDi;t =NAi;t

þ b 4 Industry Sigmat þ b 5 MTB 6

þ Year and industry fixed effects þ « i;t :

Ei,t/NAi,t EBIT divided by non-cash assets

Di,t/NAi,t Common dividends divided by non-cash assets
Ii,t/NAi,t Interest expense divided by non-cash assets
MVi,t/NAi,t Market value of equity plus total liabilities divided by non-cash assets
PROA Prior three-year average return on assets (= net income divided by total assets)
DEBT Long-term debt divided by total assets
BSIZE Log of total number of directors on the board
AEMP Capital intensity, defined as total assets divided by the number of employees
EVOL Earnings volatility over the past six years
AGE Age of the firm from the date of establishment
CEOEXPi,t An indicator variable that equals one if a firm has at least one AC member with CEO experience and
zero otherwise
GOVEXPi,t An indicator variable that equals one if a firm has at least one government official on the AC and
Table A1. zero otherwise

Corresponding author
Sunhwa Choi can be contacted at: schoi7@snu.ac.kr

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