Audit Committee Reputation Incentives

The demand for qualified directors to serve in audit committee chair and designated financial expert positions has grown in recent years, increasing the number of these directors that serve on multiple audit committees. Past research has examined the effect of these directors holding multiple audit committee seats on audit committee effectiveness, but no studies to date have examined how these directors allocate their monitoring effort across their multiple audit committee seats. Using a sample of audit committee chairs and financial experts that serve on multiple audit committees from 2004-2014, I examine whether the reputation incentives for these directors are associated with audit committee effectiveness at the firms they serve. Reputation incentives theory suggests that these directors will allocate more monitoring effort to the firms in their portfolio that offer them a greater opportunity to enhance their reputation as a monitor (higher reputation incentives). Consistent with this theory, I find that audit committee effectiveness is higher at firms that offer these directors high reputation incentives as compared to firms that do not. My results suggest that these directors exert varying levels of monitoring effort based on the relative importance of any one audit committee to their portfolio of audit committees. My findings should be of interest to boards, investors, and regulators considering the implications of service on multiple audit committees.