Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1370: On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees

Haaron Afzali , Minna Martikainen , Lars Oxelheim () and Trond Randoy
Additional contact information
Haaron Afzali: Hanken School of Economics, Helsinki, Finland
Minna Martikainen: University of Vaasa, Faculty of Business Studies, Vaasa, Finland
Lars Oxelheim: School of Business and Law, University of Agder, Kristiansand, Norway, Postal: and Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Trond Randoy: School of Business and Law, University of Agder, Kristiansand, Norway

Abstract: Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection. We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ.

Keywords: Reporting Quality; Foreign Directors; Audit Committee; Investor Protection

JEL-codes: F23; G34; K22; M16; M42

37 pages, November 24, 2020

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