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Audit committee ownership and the cost of equity capital

Ahsan Habib (School of Accountancy, Massey University, Auckland, New Zealand)
Md. Borhan Uddin Bhuiyan (School of Accountancy, Massey University, Auckland, New Zealand)
Julia Y.H. Wu (Department of Accounting and Information Systems, College of Business and Law, University of Canterbury, Christchurch, New Zealand)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 6 August 2021

Issue publication date: 10 August 2021

410

Abstract

Purpose

This paper aims to investigate whether audit committee ownership (consisting of both equity holdings and option holdings) is associated with the cost of equity capital.

Design/methodology/approach

This paper uses regression analysis to examine the association between audit committee ownership and the cost of equity capital. The data set consists of 2,825 firm-year observations for companies listed on the ASX between 2001 and 2015. This paper also conducts tests to explore the mediating effects of financial reporting quality, firm performance and the risk of reporting problems, on the relation between audit committee ownership and cost of equity capital.

Findings

The analyses reveal that audit committee ownership reduces the firm’s cost of equity and, thereby, support the incentive alignment view. However, the association is driven primarily by audit committee equity ownership, with option holdings having an insignificant effect. This paper also finds that firm performance mediates the association between audit committee ownership and the cost of equity capital.

Practical implications

Findings of the existing corporate governance research relating to the cost of equity capital and audit committee ownership remain sparse in the context of “comply-or-explain” types of regulatory environment, like that of Australia. The findings indicate that principle-based discretionary governance arrangements, e.g. compensating audit committee members with company equity, may bring benefits to firms in terms of cheaper financing. Regulators, scholars and practitioners are invited to consider further the comprehensive implications of the structure and transparency of audit committee incentives on the effective functioning of security markets.

Originality/value

The effects of audit committee ownership on the cost of equity capital are an issue of direct economic consequence for equity investors. The main finding of this study, namely, that a firm with higher audit committee share ownership is likely to benefit from a lower cost of equity capital, therefore adds value to the limited extant literature.

Keywords

Acknowledgements

The authors appreciate Steve Salterio for his insightful comments and guidance in the earlier version of this manuscript.

Citation

Habib, A., Bhuiyan, M.B.U. and Wu, J.Y.H. (2021), "Audit committee ownership and the cost of equity capital", Managerial Auditing Journal, Vol. 36 No. 5, pp. 665-698. https://doi.org/10.1108/MAJ-05-2020-2671

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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