The Voluntary Adoption of an Audit Committee and Earnings Quality: Evidence from China

Abstract

This study investigates the causes and consequences of firms’ voluntarily adoption of the audit committees, using a sample of China’s listed firms from 2001 to 2008 when no regulations or listing rules existed for audit committees. We develop and test two hypotheses. The ‘‘demand’’ hypothesis holds that firms with greater agency costs are more likely to have an audit committee. In contract , the ‘‘opportunistic behavior’’ hypothesis predicts that the bargaining power of the CEO relative to the rest of the board of directors will determine the level of composition of the board and the extent of board monitoring. In this study, we empirically investigate the validity of these two hypotheses and further compare the quality of accounting numbers produced by China’s listed firms with and without an audit committee, in order to shed light on the determinants and effectiveness of audit committee in emerging markets.