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Wilfrid Laurier University Leaf
October 27, 2016
Canadian Excellence

Robert Mathieu


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Robert Mathieu

2003-02 ACC: Information Risk and Earnings Announcements: The Effect of Director Monitoring (Working Paper)

Libby, T., Mathieu, R., & Robb, S.

published: 2003 | Research publication | Working Paper - Accounting

ABSTRACT† The separation of ownership and control in large public corporations results in asymmetry of information between managers and shareholders (Fama and Jensen 1983). Monitoring of firms by governance agents (e.g., boards of directors and influential shareholders) may result in reduced information risk for the firm (Fama and Jensen 1983). This paper examines whether the market attributes less information risk with firms that are monitored by a relatively higher rather than lower proportion of three specific types of monitoring agents: outside board members, outside board members on the audit committee, and directors who also own shares in the firm. We use changes in bid-ask spreads and depths posted by market specialists as proxies for changes in information risk in the market at the time earnings are announced. Our study is innovative in its association of monitoring aspects of board and audit committee composition and director shareholdings with levels of information risk for the firm as reflected in specialistsí quoted spreads and depths. Results indicate information risk faced by the specialist is decreasing in the number of outside directors on the board and the audit committee. Contrary to expectations that higher director ownership would result in lower information risk due to increasing monitoring, results imply specialists may actually increase their evaluation of the risk of dealing with privately-informed traders as director ownership increases.

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revised Dec 1/04

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