Board Structure and Audit

Committee Monitoring:
Effects of Audit Committee
Monitoring Incentives and
Board Entrenchment on Audit
Fees

Journal of Accounting,
Auditing & Finance
1–28
ÓThe Author(s) 2015
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DOI: 10.1177/0148558X15583412
jaf.sagepub.com

Khondkar Karim1, Ashok Robin2, and
SangHyun Suh1

Abstract
Our study addresses two research questions. First, are audit fees related to the presence
of common members in audit and compensation committees (committee overlap)? Second,
are audit fees related to whether board membership is protected by the use of a staggered
voting system (board classification)? Using a treatment effects model to control for endogeneity, we find a negative relationship between audit fees and committee overlap, which is
consistent with the argument that committee overlap is associated with weak corporate
governance and that in an environment with weak governance, monitoring efforts by the
audit committee are similarly weak. We find a positive relationship between audit fees and
board classification, indicating that firms with classified boards seek greater monitoring,
which is consistent with the prior literature which suggests that such firms seek the ‘‘quiet
life’’ and wish to avoid reporting-related problems.
Keywords
corporate governance, board overlap, classified board, audit fees

Introduction
The audit committee is a critical player in financial reporting and is arguably one of the
most important board committees. Section 301 of the Sarbanes–Oxley Act (hereafter, SOX)
not only provides more powers to this committee but also adds to its responsibilities (e.g.,
Hoi, Robin, & Tessoni, 2007). A key responsibility of the audit committee in the post-SOX
era is auditor engagement, the hiring and firing of auditors as well as the determination of
1

University of Massachusetts Lowell, MA, USA
Rochester Institute of Technology, NY, USA

2

Corresponding Author:
Khondkar Karim, Robert J. Manning School of Business, University of Massachusetts Lowell, Lowell, MA 01854,
USA.
Email: khondkar_karim@uml.edu

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2

Journal of Accounting, Auditing & Finance

the terms of engagement (fees, structure of work, etc.). As the auditor has direct as well as
indirect effects on information disclosure, the audit committee has the potential to influence
operations, strategy, and firm performance. For example, auditing influences reporting
quality, which, in turn, can influence compensation contracts (e.g., Leone, Wu, &
Zimmerman, 2006; Peng, 2011), and, in turn, can influence operations, strategy, and performance. Given the economic significance of these relationships, it is useful to understand
how audit committees’ actions (principally, auditor engagement) are influenced by committee (and board) characteristics. Our study therefore examines how audit fees are influenced
by audit committee and board characteristics.
The literature examining the effect of audit committee or board characteristics on audit
fees is well established; an excellent review may be found in Carcello, Hermanson, and
Ye (2011). Prior works include Carcello, Hermanson, Neal, and Riley (2002); Abbott,
Parker, Peters, and Raghunandan (2003); Hay, Knechel, and Wong (2006); Zaman, Hudaib,
and Haniffa (2011); and Bliss (2011). These studies focus mostly on audit committee characteristics such as independence, expertise, and diligence. To the best of our knowledge,
ours is the first to examine the effects of committee overlap and board classification. As
these two characteristics reflect monitoring incentives and board entrenchment, respectively, we are able to add to the existing literature in a meaningful manner.
Audit committees hire auditors, so their incentives, capabilities, and constraints are relevant to the discussion. Audit committees can vary with respect to independence, expertise,
monitoring incentives, and entrenchment. This variance will likely affect the committees’
monitoring decisions and efforts and will therefore affect audit fees. As the prior literature
has mostly focused on issues of independence and expertise, we examine the remaining
issues, monitoring incentives and entrenchment. Accordingly, our study addresses two
research questions:
Research Question 1: Are audit fees related to the presence of common members in
audit and compensation committees (committee overlap)?
Research Question 2: Are audit fees related to whether board membership is protected by the use of a staggered voting system (board classification)?
By bringing evidence to bear on these questions, we are able to add to the literature
relating audit fees to board structure generally and to audit committee characteristics
specifically.
Committee overlap has become an important issue in the post-SOX era primarily
because of membership constraints imposed both by SOX and by stock exchanges. For
example, SOX requires that the audit committee be staffed only by independent directors
(Section 301). Similar and, indeed, more stringent constraints are imposed by stock
exchanges affecting the composition of various committees and the composition of the
overall board.1 Consequently, and also because of tightness in the director labor market,
firms deploy certain board members in multiple committees creating committee overlap.
While such overlap enhances intercommittee information flows, it also leads to concerns of
diminished effort by overextended directors (Jiraporn, Davidson, DaDalt, & Ning, 2009).
This in turn suggests that overlapping committees expend a lower level of monitoring
effort.
Laux and Laux (2009) examine the issue of committee overlap analytically. In their
model, the effect of ‘‘task separation’’ (the extent to which board members are allocated to
committees without overlap, that is, without common committee membership) is examined

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we also examine the effect of board classification on audit fees. the issue concerns whether or not a greater auditing effort. This relationship holds true in the full sample as well as in the subperiods. In this context. one could also argue that directors themselves are entrenched when they are members of a classified board and are not as accountable as they would be in a nonclassified (or unitary) board. Our sample is from the period 2000-2011. 3 in the context of decisions involving executive compensation and financial reporting. we also report results for the pre-SOX (2000-2002) and the post-SOX (2003-2011) periods. When there is task separation. we find a significantly positive relation between audit fees and board classification. 2010). respectively. we may predict a positive or negative relation between board classification and audit fees.sagepub. In the whole board scenario (no task separation). and the allocation may even be thought of as an insurance premium to obtain protection against any reporting-relation perturbation to quiet life. 1983. Such a view would predict a negative relation between audit fees and board classification. common members in compensation and audit committees) will coincide with lower monitoring effort. a higher allocation to auditing (i. similar to committee overlap.. We confirm the results using Fama–MacBeth regressions. contribute to the literature examining audit fees. Based on this study. a lower level of incentive compensation is awarded. Accordingly. We refer to this as the board classification hypothesis. we provide further evidence of how incentives and entrenchment play a role in determining audit fees. The data therefore span SOX. As the audit fee may be a substitute for monitoring effort by the board. and a lower level of monitoring effort is expended as well. one would expect a diminution of the effectiveness of the audit committee when boards are classified. As mentioned earlier. as our study is in the context of financial reporting. These authors argue that board classification entrenches directors and enables them to enjoy the ‘‘quiet life. On balance. We control for endogeneity using the treatment effects model. 2015 . Thus. and Wang (2010) and Wysocki (2010) provides evidence of how audit fees are related to audit committee members’ compensation and executive compensation. We provide evidence of whether auditing complements or substitutes for other corporate governance measures. especially those concerning audit fees and committee overlap. in addition to full-sample results. Thus. higher audit fees) would be consistent with bonding to a less-troublesome disclosure environment. Thus. However. we place a greater weight on the evidence in Zhao and Chen and hypothesize a positive relation between board classification and audit fees. We refer to this as the committee overlap hypothesis.com at UNIV OF CONNECTICUT on June 15. The insight from this model is that committee overlap (specifically. we therefore expect a negative relation between audit fees and committee overlap. Consistent with the committee overlap hypothesis. While committee overlap is the main issue we study. Zhao and Chen (2008) present evidence supporting the opposite prediction.e. unlike the predicted relation between committee overlap and audit fees (negative). For example. we are able to extend this literature and provide consideration to recently researched board structure features. Specifically.’’ So that the quiet life is not disturbed. Laux and Laux suggest that both incentive compensation to the CEO and monitoring effort are increased. Hayes. We extend this line of research by linking audit fees to committee overlap and board classification. Our findings. Also. Downloaded from jaf. it appears that firms with classified boards engage in earnings management to a smaller extent.Karim et al. which simultaneously estimates the selection model as well as the test model using full information maximum likelihood (Maddala. we find a significantly negative relationship between audit fees and committee overlap. Tucker. research by Engel. Faleye (2007) shows that classified boards decrease firm value because they entrench managers and they also make directors less effective.

For example. including robustness concerns. Bedard and Johnstone (2004). sample selection. Cohen and Hanno (2000). Knechel.com at UNIV OF CONNECTICUT on June 15. and hypotheses development. and Fan and Wong (2005).4 Journal of Accounting.. This relationship is perhaps best explained in Abbott et al.. Accordingly. the classic Simunic (1980) model relates fees to work-related explanatory variables. (2002). an audit committee could increase costs (audit fees) by more robustly demanding work when the auditing firm presents its plan. (2011). researchers have added other explanatory variables to the Simunic model to test specific theories and hypotheses. prior literature. Over time. The literature examining committee overlap is quite limited. the audit committee. Lont. Cohen. Gilson. 2015 . The substitution argument is evident in studies such as Tsui. influences the amount of effort expended by the auditor and. 1990). see Larcker and Richardson (2004). The complementarity argument is evident in studies such as Bliss (2011). 2002). First. Committee Overlap Our article examines the role of the overlap between audit and compensation committees in determining audit fees. consequently. For example. How exactly would audit committee characteristics affect auditor engagement? Would positive committee characteristics such as greater expertise or greater independence lead to greater demand for quality as well as quantity in auditing? A widely accepted concept is that a highcaliber board has incentives to safeguard its reputation and to avoid lawsuits (e. Krishnamoorthy.. and Gul (2001). through its influence on audit scope and plan. an audit committee with greater financial expertise may demand a more thorough and higher quality audit to protect itself. such as firm size and the number of segments. As the audit committee is the main entity within a corporation with audit oversight responsibilities. Auditing & Finance evident in fees. For example. Downloaded from jaf. most studies relating governance to audit fees focus on audit committee characteristics. Of these efforts. (2003). and model specification. Section ‘‘Research Methodology’’ describes the methodology. The rest of this study is organized as follows: Section ‘‘Background and Hypotheses’’ discusses background. such as leverage and financial losses. the audit committee affects fees through its choice of auditors. one stream of research. and risk-related explanatory variables. Section ‘‘Results’’ reports descriptive and multivariate statistics. For instance. such as the amount/complexity of work and the risk inherent in client engagement. is positively or negatively related to other corporate controls. and Gul and Goodwin (2010). Zaman et al. Background and Hypotheses Audit Fee Literature The structure of audit fees is a well-researched topic in accounting. (2008). Jaggi. 1983. Carcello et al.sagepub. and Ling (2008). Hay. Our evidence is consistent with the former viewpoint. This general idea can be applied specifically to audit committees and to their members (e. Carcello et al. examines the effect of governance factors on audit fees. Generally speaking. Section ‘‘Summary and Conclusion’’ concludes. Fama & Jensen. Griffin et al. and Wright (2002). closely related to our study. (2011) for a recent review of the literature. also see Carcello et al. Second. and Sun (2008). and Griffin. Abbott et al. measurement. (2003) who argue that the audit committee affects fees in two important ways. if a high-quality auditor is chosen.g. the costs. Such reasoning implies a direct relationship between committee characteristics and audit fees.g. audit fees are a function of factors. the fee is high.

thereby entrenching insiders. the analytical model of Laux and Laux (2009) makes the opposite prediction that committee overlap is a negative characteristic. the empirical analysis in their article shows that committee overlap potentially produces higher quality financial reporting. so it is unclear how exactly membership on the compensation committee allows greater understanding of how compensation affects reporting. A small stream of research offers some evidence regarding CEO pay and reporting quality. Chang. In the opposite scenario.. Chang et al. Board Classification The literature on board classification is relatively more mature compared with the literature on committee overlap. The relation between audit fees and committee overlap is therefore determined by the weight one gives to the positive effect of knowledge spillover between the two committees and to the significance of the monitoring burden of audit committee members. (2012). board members weigh characteristics of compensation packages against the associated monitoring requirements. One important way in which insiders boost entrenchment is through staggered or classified boards. The Laux and Laux model views the monitoring effort of board members as a costly commodity similar to the viewpoint advocated in the director busyness literature (e.. Recognizing that the award of equity incentives brings tension between higher incentives for the CEO to generate firm value and higher incentives to manipulate earnings. In contrast to Chandar et al. Typical mechanisms for changing control such as proxy contests and hostile takeovers are less effective against firms with classified boards. This knowledge spillover potentially enhances oversight. report that committee overlap is associated with accruals management. 2009). details of compensation contracts are available to all board members whether they serve on the compensation committee or not. the literature offers conflicting evidence. and Zheng (2012) argue that audit committee members who are also compensation committee members have knowledge of how compensation affects managerial reporting behavior. Thus far. compensation committee members will no longer bear monitoring costs personally and will be more likely to offer equity incentives to CEOs. Bebchuk and Cohen (2005) show that classified boards lower firm value. Luo. As monitoring costs are borne personally by directors. a greater monitoring effort is required on the part of the audit committee. Chang.Karim et al. Nevertheless. consistent with the entrenchment argument outlined above. In an influential study. compensation committee members who are also on the audit committee will be less likely to offer equity incentives. in practice. Classical ‘‘theory of the firm’’ literature provides a robust analysis of corporate entrenchment wherein managers or directors not subject to market discipline are viewed as value destroyers. if there is no overlap. and audit fees will be correspondingly higher. While this is possible. 5 Chandar. In this arrangement. at least two annual elections are necessary to effect a change in control.g. and Sun (2011) support the prediction of Laux and Laux (2009) that firms with overlapping committees offer their CEOs less equity incentives. 2015 . the literature offers no evidence concerning the level of monitoring effort as evident in audit fees. However. shareholders cannot replace a majority of the board in a single election. in this same study. Downloaded from jaf. Thus. Turning to the issue of committee overlap and reporting quality. Jiraporn et al. (2012). in this scenario.com at UNIV OF CONNECTICUT on June 15. in turn. the opposite result is reported in Chandar et al. this implies a lower level of monitoring effort by the audit committee and correspondingly lower fees. they find that there is no relationship between committee overlap and CEO pay-performance sensitivity.sagepub.

deals with audit fees and board classification and is once again stated in the null form. Thus. affect the monitoring effort of the audit committee. Based on Bebchuk and Cohen (2005) and Faleye (2007). is that there is a negative relation between audit fees and committee overlap. The ‘‘quiet life’’ argument would suggest that in firms with classified boards. the board classification hypothesis. Hypothesis 2: There is no association between audit fees and board classification. Also. Interestingly. As the context of our study is allocation toward monitoring of financial reporting. This suggests a lower monitoring effort by the audit committee for firms with classified boards or a negative relation between audit fees and board classification. Faleye shows that CEO turnover in response to poor performance is lower in these firms as is the sensitivity of CEO pay to performance. principally committee overlap and board classification. Following Abbott et al. This is because managers who are not working on behalf of their shareholders would wish to obscure firm performance by promoting opacity in financial reporting. According to Bebchuk and Cohen (2005) and Faleye (2007). The alternative hypothesis. This suggests the opposite: a positive relation between audit fees and classification. board classification constitutes a weakness in corporate governance. Auditing & Finance In a comprehensive analysis of firms with classified boards. The alternative hypothesis could potentially specify a negative or positive relation.sagepub. Statement of Hypotheses Our study focuses on how board features. Zhao and Chen (2008) show that classified boards are associated with lower likelihoods of committing fraud and smaller magnitudes of abnormal accruals.6 Journal of Accounting. Our second hypothesis. relates audit fees and committee overlap and is stated as follows in the null form. Faleye (2007) confirms the Bebchuk and Cohen (2005) finding concerning firm value. Hypothesis 1: There is no association between audit fees and committee overlap. Faleye examines the channels through which entrenchment is achieved and firm value destroyed in these firms. firms with classified boards deter proxy contests and are less likely to implement shareholder-approved proposals. however. The relation between audit fees and board classification could be positive or negative depending on which argument prevails. In addition. one would expect a poorer reporting quality in firms with classified boards. following Laux and Laux (2009). Downloaded from jaf. the committee overlap hypothesis. This counterintuitive result is explained by Zhao and Chen as follows: Classified boards enable managers to enjoy the quiet life which in turn means that they are less motivated to increase firm value or to manipulate earnings. 2015 .com at UNIV OF CONNECTICUT on June 15. we place a greater weight on the latter explanation and hypothesize a positive relation between audit fees and board classification. Alternatively. Our first hypothesis. managers of firms with classified boards wish to ensure a quiet life by expending more resources in monitoring. according to the quiet-life conjecture of Zhao and Chen (2008). Importantly. the firm allocates more resources to monitoring to ensure that reporting lapses do not disturb the quiet life. we argue that this effort will be reflected in the audit fee. (2003). Faleye concludes that classified boards are adopted for managerial self-serving purposes and are associated with weak corporate governance. it appears that classified boards are associated with higher reporting quality.

2015 .1058 0.0602 0.5140 1.3771 0. Number of observations Firm-years with potential data availability in the Compustat database during 2000-2011 Less Observations from finance industries (SIC code: 6000-6999) Observations with missing identifiers (CUSIP and FYEAR) Potential Compustat sample Less Missing data for control variables from Compustat Missing data from AuditAnalytics (audit fees) Missing data from RiskMetrics (committee overlap) Final sample used in the baseline regression analysis for committee overlap 132.3333 1 0 0 1 1.1876 14.1349 0. To start with.422 11.2075 1.422 9.2696 7. The information in this panel is geared toward explaining the sample of 11.1956 0.422 11.0928 0.577) (15) 96.422 7.9549 2. the Compustat database potentially provides 96.1717 0.422 11.3935 0. Model (1)). 7 Table 1.3053 0.1780 0. Research Methodology Our sampling procedure is explained in Table 1.4252 7.577 observations from financial firms Standard Industry Classification (SIC codes 6000-6999) and 15 observations with missing firm identifier Committee on Uniform Securities Identification Procedures (CUSIP) or fiscal year end. we obtain 132.422 11. Overall Variable LNAUDIT OVLAP CLASS ACEXPERT ACATTEND BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP n M Median SD 11.0515 1.536) (425) (38.9460 0. Panel A: Sample Selection.0223 0.5833 0.6999 1. Panel A.2331 0.8323 0.898 (36.2281 Note.803 11. CUSIP = Committee on Uniform Securities Identification Procedures.923) 11.0118 0.422 11.4593 0.422 11.277 14.Karim et al.0758 0.306 observations.898 potential observations (firm-years) from Compustat for the 2000-2011 period.8137 7.422 11.2086 0.com at UNIV OF CONNECTICUT on June 15.422 11. From this set.sagepub.422 11.4691 2.0986 7.306 (45.1192 0.1021 0.3205 0.0987 0. we delete 36.422 11.2007 0 0.0079 0.422 11. SIC = Standard Industry Classification.0778 0. Most of our controls (see Equation 1.4930 0. Sample Selection and Descriptive Statistics.422 Panel B: Descriptive Statistics.1095 0.422 observations used in the baseline regression for committee overlap (Table 4.0429 0.1884 0.422 11. also Downloaded from jaf. Thus.

and 0 if a firm has unitary board. This leaves us with 11. Francis and Simon (1987).536 observations in this step. We winsorize the top and bottom 1% of all independent variables to control for potential outliers. INV = total inventories divided by total assets. we lose 45. 2015 . some of our models use equity compensation obtained from the ExecuComp database. A smaller set of observations is used for the analogous baseline regression for board classification because of a larger missing set of observations from RiskMetrics for the classification variable. Sankaraguruswamy. We estimate the following model to examine the effect of committee overlap or board classification on audit fees: LNAUDIT = a + b OVLAP ðor CLASSÞ + d CONTROLS + e. we obtain committee overlap and audit committee information from RiskMetrics. in robustness tests we run a model with controls for SOX Section 404-related internal control weakness. GROW = (Sales at time ‘‘t’’ 2 Sales at time ‘‘t 2 1’’) / Sales at time ‘‘t 2 1’’. where cash compensation = salary + bonus.and industry-fixed effects. we lose 38. CLASS = 1 if a firm has classified board.8 Journal of Accounting. Also.sagepub.com at UNIV OF CONNECTICUT on June 15. Whisenant. and 0 otherwise. the data for which are only available since 2004. SEG = log of number of segments. BIG = 1 if the financial statement is audited by a Big 4 audit firm. REC = total receivables divided by total assets. We follow prominent works such as Simunic (1984). LEV = sum of debt in current liabilities and long-term debt scaled by total assets. LOSS = 1 if Income before Extraordinary Items \ 0. we lose 425 observations in this step. (Test) OVLAP = number of directors serving in both the audit and compensation committees divided by the number of directors serving on the audit committee. Downloaded from jaf. test. and Raghunandan (2003). Finally. For example. a control variable) and audit fees (dependent variable) from AuditAnalytics. Other regressions we present have fewer observations because of additional data requirements.923 observations in this step. Larcker and Richardson (2004). We also insert dummies for years and industries to control for year. we obtain auditor name (to determine whether the auditor is big. ACEXPERT = percent of audit committee composed of financial experts.422 observations for the baseline regression for committee overlap. ð1Þ where the dependent. CR = current assets divided by current liabilities. ROA = income before extraordinary items scaled by average total assets. Auditing & Finance see the appendix for variable definitions and sources) are obtained from Compustat. EQUITYCOMP = log of CEO’s (total compensation 2 cash compensation). Next. SIZE = log of total assets. and control variables are as follows: (Dependent) LNAUDIT = log of total audit fees. (Control) ACATTEND = percent of audit committee members attending less than 75% of committee meetings.2 and 0 otherwise.

g. The studies also use the characteristics of firms such as firm age. Krishnan.43. LNMV = log of common shares outstanding 3 fiscal close price. 1983). 1986). and Wang (2005). we include leverage (LEV). we control for audit committee characteristics: the level of financial expertise (ACEXPERT) and attendance of members in meetings (ACATTEND). BSIZE = log of total number of directors on board. The test variables are OVLAP and CLASS. has a mean of Downloaded from jaf. and firm risk.. which entails simultaneous estimation of Equation 1 along with a selection model for committee overlap (or board classification) using full information maximum likelihood (Maddala. 2005). POUT = total number of outside directors / total number of directors. the risk that the client’s business will deteriorate. LNAUDIT.3 Finally. Dharwadkar.5 We identify the set of variables listed above from the prior literature (e. consistent with Abbott et al. In addition. 0 otherwise. We include receivables (REC). & Suh. and Elder. 1979). BM = total equity / (common shares outstanding 3 fiscal close price). The parameter b indicates the sensitivity between audit fees and our two test variables. debt-to-equity ratio (DE). The average firm size as measured by log of total assets in thousands (SIZE) is 7.. Reichelt. and current ratio (CR).Karim et al. 2014. provides the descriptive statistics for the variables described above.6 Results Table 1. Chang et al. Ahmed & Duellman. Chandar et al. Zhou. Francis & Stokes. To control for client-business risk. (2003). We present an initial set of results using only Equation 1. 9 Francis. and loss (LOSS). Because prior studies find higher audit fees for the perceived higher quality of services from former Big 8 firms (Francis. but most tables displaying results incorporate controls for endogeneity by incorporating a selection model (Heckman. BIG. log of firm age (AGE). Panel B. firm size and growth. we run models with and without EQUITYCOMP as control to examine the Laux and Laux (2009) argument that board characteristics affect monitoring through incentive compensation. These controls account for various risks faced by the audit firm as well as the effort level in the engagement (Johnstone. book-to-market ratio (BM). and Zhou (2009) to determine our list of control variables. inventory (INV). 2015 . return on assets (ROA). Brandes. DE = (debt in current liabilities + long-term debt) / total equity. CEO duality (CEODUALITY). firm’s sales growth (GROW). Zhang. free cash flows (FCF). 2011. We estimate Equation 1 using panel data as described above.. We also control for firm size (SIZE).com at UNIV OF CONNECTICUT on June 15. and ratio of outside (inside) directors (POUTSIDE) as the characteristics of the board. 2012. 1984. and regulation (REG). we include the dichotomous variable.7 Our dependent variable in the analysis. Palmrose. REG = 1 if two-digit SIC code equals 49. FCF = (cash flows from operations 2 dividends) / total assets. CEODUAL = 1 if CEO is chair.sagepub. 0 otherwise. 1986.4 We use the treatment effects approach. The selection model uses the following independent variables: AGE = log of number of years listed on Center for Research in Security Prices (CRSP) from 1925. and firm complexity using number of business segments (SEG). the log of total audit fees. 2000). log of market value (LNMV). 2007. Committee overlap is influenced by the characteristics of the board and firm. Prior studies use board size (BSIZE).

has an average of 0.72). we test whether values differ between firms with overlapping directors (OVLAPDUMMY = 1) and firms without any overlapping directors (OVLAPDUMMY = 0). and have fewer financial experts. LNAUDIT and CR (2. reviewing all correlations and not just those involving LNAUDIT.58. firms with classified boards have higher leverage.000. In both cases. and between firms with classified boards (CLASS = 1) and firms without classified boards (CLASS = 0).39. indicating substantial committee overlap in sample firms. The correlation between OVLAP and CLASS (our two test variables) is 2. OVLAP and SIZE (2.19). High values among remaining correlations are as follows: LNAUDIT and SEG (. we also note a high degree of variability in OVLAP because its standard deviation is 0. indicating the high prevalence of classified boards. return on assets (ROA) is about 4%. but there are no other correlations exceeding . however. indicating the necessity of models with controls (as in Table 4).8 As would be expected in a sample of this type (containing some very large firms). Table 2 presents univariate tests of differences in values between treatment firms and control firms. between ROA and LOSS (2. perhaps indicating that SIZE is the most important determinant of audit fees.02.20). both SIZE and LNAUDIT have lower medians than means. Auditing & Finance 14. We also note that. compared with firms without classified boards.10 Journal of Accounting.50. the difference in fees is quite high: Converting to dollar values. more segments. firms audited by Big N auditors (BIG) is about 95%. ROA and GROW (. receivables as a proportion of total assets (REC) is about 13%. The average values of some of the control variables are as follows: growth in sales (GROW) is about 10%.05.com at UNIV OF CONNECTICUT on June 15. firms with overlapping committees and classified boards are significantly smaller than firms without overlapping committees and without classified boards. firms with losses (LOSS) is about 17%. the analogous difference attributable to classified boards is about US$200. The following are findings from Panel A. OVLAP. compared with firms without overlapping committees. which contains Pearson’s correlations. fewer segments. LNAUDIT is significantly negatively correlated with OVLAP (correlation = 2. Turning to our test variable. More generally. firms with overlapping committees have lower leverage.32. about 20% of the audit committee is comprised of financial experts (ACEXPERT). Turning to Downloaded from jaf.34). Also. and LOSS and GROW (2. the current ratio (CR) is about 2. Finally. inventory as a proportion of total assets (INV) is about 11%. However. the proportion of common directors on audit and compensation committees as a fraction of audit committee members.07). 2015 . has an average of 0. LNAUDIT and ACEXPERT (. we note that the difference in fees (implied from the displayed log of fees) between firms with and without overlapping directors is about US$400. are less likely to be audited by a Big N auditor.20). we note that the values of variables that affect audit fees (the control variables) are also different between treatment and control firms. which is significant but not very high. Our other test variable. LNAUDIT is correlated with several firm measures of audit risk. SIZE.5. and SEG. respectively.22) as well as with CLASS (correlation = 2.sagepub. we note another high value. Table 3 presents the correlation matrix.23). including LEV. The former is consistent with our hypothesis. the result concerning committee overlap is consistent with expectations while that concerning board classification is not. but the latter is not.000.29).70). consistent with the prior literature. CLASS. We note that audit fees (LNAUDIT) are significantly lower in firms with overlapping directors and in firms with classified boards. are more likely to be audited by a Big N auditor. The highest correlation is between LNAUDIT and SIZE (. Specifically. and have fewer financial experts. For example. whether the firm has a classified board.

085 4.330 8.2032 0.693 3.29 20.9643 2. OVLAPDUMMY = 1 Variable n LNAUDIT CLASS ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP 8.3333 0 0 1 1.085 4.0479 0.085 4.092 3.0927 0.2137 0.085 2.0481 0.0989 0.47 3.0534 1.774 14.718 3.1825 0.5138 0.sagepub.1322 0.092 3.085 4.085 4.91*** 0.092 3.3023 0.76*** 25.1761 0.8656 0.14*** Test of difference in M Test of difference in median Panel B: Board Classification.0022 0.718 5.1598 0.5938 0.0768 0.9483 2. so we do not repeat our findings.73 29.7987 7.0949 0.1896 0.1506 7.0237 0. containing Spearman’s correlations.085 4.085 4.5926 7.718 5.718 5.330 8.23*** 21.62*** 3.0697 0. 2015 .1975 0.718 5.718 5.3059 7.14*** 29.718 5.110 8.35*** 26.085 4. Table 4 presents our baseline results by estimating Equation 1 without controls for endogeneity.50*** 2.76*** 214.94* 23.31*** 5.7467 7.4586 4.1633 0.092 1.0981 0. Panel A: Committee Overlap.672 14.9334 0.0727 0.44*** 2.31*** 28.2616 0.38*** 24.9467 2.1146 14.4121 7.0111 0.62*** 0. The various models in this table relate LNAUDIT to OVLAP and to CLASS.718 5. Model (1) assesses the effect of OVLAP separately.8726 7.1184 0.1145 0.0114 0. respectively.718 5.76* 21.1359 0.2017 0.26 21.330 8.91 29.330 8.092 3.404 0.15** 4. Model (2) assesses the effect of CLASS Downloaded from jaf.3937 14.5176 0.3217 0.092 3.9172 1 0 0 1 1.0128 0.5793 0.82*** 6.1019 0.57*** 3.092 3.306 OVLAPDUMMY = 0 Test of difference in M Test of difference in median M Median n M Median t z 13.1342 0.05*** 27.971 14.78 5.11 26.28*** 3.718 5.3333 0 0 1 2.29 26.2446 0.6997 27.330 8.8541 7.90*** 1.330 8.1*** 24.0879 0.41*** 23.0754 0.9786 0.330 7.87*** 24.2117 0 0.112 13.25*** 4.77*** 0.3699 0.092 3.7619 213.86*** 24.21*** 21.1684 0.092 2.0986 7.08 6.35*** 22.0548 1.12*** ***.94*** 4.0507 1.2714 1 0 0 1 1.330 8.7819 7.44** 23.28*** 20.1939 0 0.34*** 213.085 4.1878 0 0.052 1.718 5.0211 0.29 21.085 4.330 8.0814 0.041 0.718 5.Karim et al.1259 0.0986 7.1064 0.085 4.15 0.085 4.2213 0 0.330 8. 11 Table 2.718 5.21*** 0.13 21.4032 7. Panel B.1376 0. Univariate Tests.1194 0.8623 0.0102 0.08 23.092 3.422 3. 5%.092 3.085 4.06** 0.09*** 25.077 0.5887 7. we find similar results.com at UNIV OF CONNECTICUT on June 15. **.092 3. and 10% levels.0771 0.22*** 25.330 8.0986 7.1044 0.092 3.73 22.13** 1.10** 1.3911 14.89 25.11 0.63*** 214.1523 0.718 5.2759 7. and * indicate significance at the 1%.2232 0.330 5.2118 0.0459 0.330 8.01*** 22.977 2. CLASS = 1 Variable LNAUDIT OVLAP ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP CLASS = 0 n M Median n M Median t z 5.16*** 25.0986 7.38*** 22.

120 . OVLAP 3.088 2.189 .090 .020 2.064 2.010 2.sagepub. 1. REC 13. CLASS 4.128 .095 .089 .056 .001 2.047 2. INV 10.037 .088 2.028 .001 .339 .332 2.039 2.089 .340 2.106 2.025 .025 .196 .350 16 (continued) . 3 4 5 6 7 8 9 10 11 12 13 14 1 2.002 2.150 2.147 .105 2.006 2.018 . LNAUDIT 2.com at UNIV OF CONNECTICUT on June 15. OVLAP 3. LOSS 12.026 .189 .199 2. CR 8.103 .041 .063 2.018 2.386 .288 2.034 2.044 . ROA 14. ACATTEND 5.058 .067 .697 2. Correlations.231 2.026 .040 2.033 .024 .009 3 4 5 6 7 8 9 10 11 12 13 2.011 .074 2. CLASS 4.025 .220 2.012 .715 2.103 2. 2015 1.006 2. SIZE 16.029 2.054 2.013 .193 2.026 .006 2 .313 2.028 2.003 2.061 2.011 2.003 2. 14 15 16 .015 2.059 .030 2.063 .004 2.017 2.126 . LNAUDIT 2.050 .189 .002 2.163 .098 .056 .015 .044 1 Table 3.150 2.059 2.022 .220 2.007 2.005 .063 2. ACEXPERT 6.122 .064 2.097 .054 2. SEG 15.169 2.046 .072 .12 Downloaded from jaf. LEV 11.068 .050 .017 2.117 2.116 .054 .116 .222 2.081 2. BIG 7. GROW 9.056 2. EQUITYCOMP Panel A: Pearson.084 .308 15 .032 .052 2.040 .045 2.053 2.093 2.039 2.001 2 2. ACATTEND Panel B: Spearman.009 2.006 2.144 2.106 .

070 .349 .086 2. ACEXPERT 6.198 2.028 2.397 .342 2.032 .096 2.444 . INV 10. SEG 15. (continued) 2. LEV 11.077 2.002 .136 .063 .063 2.653 2. 5.009 2.050 2.189 2.089 14 .041 2.003 2.104 .053 2.041 2. ROA 14.067 2.074 .091 .263 2.055 .034 2.022 .053 . REC 13.039 2. BIG 7.496 1 3 2.155 2.140 .089 11 .211 .com at UNIV OF CONNECTICUT on June 15.439 2.062 2.140 7 2.012 .115 12 2.019 .165 2.089 2 2.529 15 16 .059 .011 .070 .217 Note.008 .111 .002 2.187 .227 2.123 13 .008 .012 .001 2.030 4 5 2. 2015 .014 2.159 6 .026 . Table 3.011 .sagepub.018 . CR 8.004 2.052 2. Boldface font indicates significance at levels of 5% or better.048 .024 2.094 9 .118 2.202 . EQUITYCOMP Panel B: Spearman.196 .141 .13 Downloaded from jaf.291 .045 .070 .022 .030 .015 2. LOSS 12.112 2.023 2.097 10 2.037 .116 .028 .061 2.043 2.024 .075 .194 2.239 2.077 8 2.097 .044 2.250 .021 2.115 .051 2.014 .094 .060 2.707 .150 2.040 . SIZE 16.162 2. GROW 9.061 .019 2.316 .066 .031 2.032 .

33) 0.3387*** (13.1443*** (4.12) 0.0221 (20.0846** (22.0066 (1.1940*** (27.55) 20.0071 (20.1020*** (23. The controls also behave as expected.30) 0.0410 (20.5871*** (97.04) 20.11) 20.sagepub.04).63) 9. The regression R2 is about 58% (most studies report a value exceeding 50%).70) 0.79) 20.18) Yes Yes .92) 0.85) 20.85).446 Yes Yes .1480*** (25.5319*** (70.02) 20.71) 20.4874*** (29.5831*** (90.60) 2.48) 0. Auditing & Finance Table 4.08) 20.4566*** (150.55) 20.50) 20.4626*** (28.99) 0.4741*** (18.4938*** (135.06) 20.5477*** (75.2977*** (11. 5%.5014*** (23.71) 20.93) 20.56) 0.0776** (22.1242*** (3.1151*** (4.10) 9.0480*** (11.4926*** (20.0191 (20.0735* (21.1655*** (13.com at UNIV OF CONNECTICUT on June 15.16) 2.1444*** (24.98) Yes Yes .0660 (0.27) 20.5805 9.5006*** (211.4852*** (19.26) 20. Baseline Results Without Endogeneity Controls.0076 (1.446 ***.4095*** (26. and Model (3) assesses the combined effects of these two variables. Models (4) to (6) are analogous models using EQUITYCOMP as an additional control.1364*** (4.803 Yes Yes .30) 0.59) 9. **.12) 0.56) 2.0488 (21. and 10% levels.0976** (22.73) 20.0417** (22.31) 0.27) 9.87) 0. the main ones appear to be SIZE (t = 97.1067*** (23.0030 (20.14 Journal of Accounting.56) 20.8589*** (26. and * indicate significance at the 1%.86) 20.5780 9.75) 20.5387*** (71.0025 (20.89) 0. and REC (t = 26.1013 (20.0487*** (22.55) 0.4113*** (23.27 (significant at the 1% level).77) 20.1763*** (13.16) 20.0454*** (22. the coefficient of OVLAP is equal to 20.45) 0.1655*** (22.0536*** (23. The result that LNAUDIT and OVLAP are negatively related is consistent with the complementary Downloaded from jaf.36) 20.75) 2.5847 11.22) 20.8735*** (26.4934*** (23.89) 20.61) 20.1667*** (23.1493*** (26.00) 0.1102*** (23.89) 2.0039 (0.4299*** (129.74) 20.70) 20.86) 0.04) 20.1701*** (22.422 2000-2011 Yes Yes .38) 20.5922*** (23.0474*** (11.1673*** (13.6105 7.62) 0.92) 0.76) 20.0068 (1.5917*** (93.46) 9.45) 0.49) 20.1398*** (4.94) 0.57) 0.21) 0.19 and is statistically significant with a t statistic of 28.0048 (20.53) 0.0611 (20. Among these.1125*** (22.17) 20.1227*** (3.1537*** (25.4959*** (29. Dependent variable Log (audit fees) Log (audit fees) Variables (1) (2) (3) (4) (5) (6) Intercept 9.1134 (21.46) 20.31) 20.1778*** (14. In Model (1).5683*** (124.277 20.0078 (1.1725*** (15.1066** (22.8244*** (25.27) 2.4083*** (26.0683* (21.31) 2000-2011 Yes Yes .1914*** (28.00) 0.5765*** (23.53).35) 0.6124 6.4723*** (133.99) 20.09) 20.803 OVLAP CLASS ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP Testing period Industry-fixed effect Year-fixed effect R2 n 20.89) 0.41) 20.36) 20.0484 (20.21) 0.3190*** (140.48) 0.0397*** (9.9408*** (27.90) 20.78) 20.1760*** (13. SEG (t = 15.3076*** (11.11) 0.07) 20. separately.46) 0. respectively.88) 0.6106 6. 2015 .17) 20.89) 0.

and the controls behave as expected.05. We find that both variables maintain significance. We note that the results are fairly stable. consistent with the Laux and Laux model. respectively. we add EQUITYCOMP as an additional control and find a similar result. it appears that OVLAP and CLASS are not redundant measures (the correlations between the two measures are also low) and have separate effects on audit fees. the relation between board structure and monitoring is not fully explained by executive compensation. committee overlap) affects monitoring through its effect on executive compensation. The coefficient of OVLAP is significantly negative in all specifications. We note that at least in our research setting. (2012). Downloaded from jaf. However.86 (significant at the 1% level). Tucker (2010) as well as Guo and Fraser (2010) make the case that a one-step maximum likelihood estimation of the selection and test models produces more efficient estimators compared with the two-step procedure (the procedure involving the Inverse Mills Ratio). and the firm is regulated. In Model (2). free cash flows are low. Model (3) shows that the coefficients of OVLAP and CLASS are 20.15 in Model (4) vs. the coefficient equals 20. For example.com at UNIV OF CONNECTICUT on June 15. 15 argument that board overlap is associated with weak corporate governance and that in an environment with weak governance. the R2 value is high (about 58%). the values of the coefficients of these variables are quite similar to those reported in previous models. This result is consistent with expectations. This result is consistent with a lower level of monitoring by firms with a classified board compared with firms without a classified board. We next examine the relation between LNAUDIT and CLASS. Lennox. Panel B. Table 5 presents results from the treatment effects model for committee overlap. we conduct sensitivity tests by varying the set of controls in the test model.sagepub. the percent of outside directors is low. Following recommendations in Lennox et al.05 with a t statistic of 22. firm age is high. In fact. and Wang (2012) indicate that the Heckman (1979) two-step procedure might help alleviate such a concern but also note challenges in properly using the method. We find that the significance of OVLAP and CLASS is maintained.45 (significant at the 5% level). and are significant at the 1% level. This result is not consistent with expectations. 2015 . Model (2) in Table 4 presents this result. Models (4) to (6) reflect the argument in Laux and Laux (2009) that board structure (specifically. Results show that firms are more likely to have an overlapping board if board size is small.Karim et al. Thus. accordingly. as with the previous regression of LNAUDIT on OVLAP. We next include both OVLAP and CLASS together as test variables in Model (3) of Table 4. presents estimates of the test model. We therefore include EQUITYCOMP as an additional control to test whether this variable relates to LNAUDIT and reduces the significance of the board structure variables. Table 5. Panel A presents the selection model for committee overlap (OVLAPDUMMY). In studies of this type. In Model (1). we find that EQUITYCOMP loads positively and the coefficient of OVLAP is lower (20. we use this treatment effects approach in subsequent tests. Once again. These tests are represented by Models (3) to (6) in which either ROA or LOSS is removed as an independent variable. 20. it is conceivable that an unspecified risk factor that lowers monitoring (hence lowers audit fees) also leads firms to adopt boards with overlapping committees or with classification.19 in Model (1)).19 and 20. endogeneity is an important consideration. both audit fees and the governance mechanism in question (board overlap or board classification) may be jointly determined by unobservable factors in such a way that a spurious relation between the two results. We find that the coefficient of CLASS is 20. monitoring efforts by the audit committee are also weak. the CEO is not the chair. Specifically.07 with a t statistic of 22. Francis.

2126*** (7.05) 20.3501*** (5.0186* (21. overlapping committees and classified boards. Thus far.3753*** (21.77) 20.24) 0. Audit Fees and Committee Overlap: With Endogeneity Controls.5848** (22. Panel A: Selection Equation. are significantly related to audit committee monitoring as Downloaded from jaf.70 (significant at the 1% level). 2015 .91) 20.3172*** (214. We find that firms are more likely to have a classified board if they have large boards. Table 6 presents analogous results for board classification.49) 21.5757*** (211.3591*** (28. and low log of market value.24) 20.0019 (21. This result is preserved in all six models and is robust with respect to the inclusion of EQUITYCOMP as control and to the exclusion of ROA and LOSS as controls.71) 0. In the selection model presented in Panel A. managers of firms with classified boards wish to ensure a quiet life by expending more resources in monitoring through the external audit.0034 (21. CEOs who also serve as chair.6154*** (215. low book-to-market ratio. we find that the coefficient of CLASS is .0439 (21.27 with a t statistic of 3. Auditing & Finance Table 5. CLASS is regressed on a set of explanatory variables identical to the one used to explain OVLAPDUMMY in the previous table. Dependent variable (1)a (2)b OVLAPDUMMY OVLAPDUMMY 4.96) 4.sagepub.3474*** (4.5570*** (23.58) 20.17) 21.49) 20.22) 20.0330** (22.98) 0.68) 21.1926*** (9.12) 20.80) 0.0262 (21.16 Journal of Accounting.1085*** (23.com at UNIV OF CONNECTICUT on June 15. This result is surprising because it is the opposite of the one indicated when we do not use endogeneity controls. These results justify the use of endogeneity controls and indicate that consistent with the quiet-life conjecture of Zhao and Chen (2008). low age. In the Test Model (1) presented in Panel B.55) 20.3208*** (218. we find that overlapping committees are associated with reduced monitoring as reflected in audit fees.0525 (21.66) Variables Intercept BSIZE CEODUAL POUT AGE BM DE FCF LNMV REG a Without control for equity compensation in the test model With control for equity compensation in the test model b (continued) Overall. we presented robust results that the two governance mechanisms.39) 20.82) 21.

3699*** (3.44 10.19) 10.5570*** (78.15) 20.060.434 1.67) 0.0782** (2.1375*** (12.644.8401*** (67.0412*** (29. Significantly.0927*** (22.0041 (1.25) 0..68) 0.60) 0.0040 (1.4310*** (17.0038 (1.0793*** (2.66) 1.3701*** (3.28) 0.0362 (20.54 10.70) 0.55) 0.0836** (22. **.2457*** (28.0224 (0.69) 20.00) 0.38) 0.3533*** (4.0943*** (4.2254*** (27.33) 0. 2015 .021 2000-2011 Yes Yes 31.0445*** (210.5598*** (79.07 6.1284*** (13.4700*** (17.80) 9.0345*** (26. respectively.732.0056 (0.68) 20.20) 0.58) 0. But the role of the audit committee may have changed over time.71) 0.8710*** (67.0797 (20.1257 (21.92) 0.5441*** (15.1299*** (13.11) 20.34) 0.07) 1. 5%.0731 (20.59) 20.5693*** (102.5737*** (16. and 10% levels.21) 2000-2011 Yes Yes 20.3482*** (4.33) 0.1259 (21.33) 20.9065*** (67.Karim et al.7823*** (211.90) 20.00) 0.01) 20. reflected in audit fees.82) 1.88) 0.15) 2000-2011 Yes Yes 20.703.63) 20.01) 0.66) 0.2109*** (25.56) 20.95) 0.0368*** (27.46 6.1336*** (11.0198 (0.0376 (20.98) 20.2729*** (42.27) 10.0207 (0.5651*** (16.0775** (2.36) 20.22) 0.22) 0. and * indicate significance at the 1%.45) 20.28) 0.0081 (0.0335*** (26.17) 0.8836*** (29.0779** (2. (continued) Panel B: Test Models.0063 (0.13) 0.44) 20.1819*** (25.50) 0.63) 0.28) 20.3474*** (42.0131 (20.45) 20.021 2000-2011 Yes Yes 31.61) 0.71) 0.0714** (22.68 10.24) 2000-2011 Yes Yes 20.38) 20. we separate the sample into two subperiods: the pre-SOX period (2000-2002) and the postSOX period (2003-2011). Accordingly.49) 0.08 6. thereby influencing these relationships. 17 Table 5.74) 0.61) 20.0714** (22.1905*** (25.434 9.5428*** (26.0897*** (3.25) 1.26) 20.3610*** (4.00) 20.1321*** (13. Downloaded from jaf.0422*** (210.06) 20.0818** (22.45) 20. we note that the SOX of 2002 increased the role of the audit committee significantly (Hoi et al.com at UNIV OF CONNECTICUT on June 15.29) 0.0810** (2.70) 20.5702*** (102.1193 (21.11) 0.53) 10.021 ***.6495*** (25.4650*** (17.0190 (0.54) 20. 2007).10) 20.87) 20.09) 0.sagepub.41) 20.0756*** (22.69) 0.57) 20.1832*** (10.434 Variables Intercept OVLAP ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP Testing period Industry-fixed effect Year-fixed effect Wald x2 n 2000-2011 Yes Yes 31.110.80) 20.5585*** (78.5672*** (102.2349*** (28.0480 (20.3184*** (42.73) 0.0078 (20.44) 0.111.3662*** (3.85) 0.41) 20.27) 1.1323*** (11.1874*** (8.42) 20.82) 20.0066 (0.0797** (2. Dependent variable (1) (2) (3) (4) (5) (6) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) 9.

com at UNIV OF CONNECTICUT on June 15.1774*** (4.90) 20. the use of subperiods appears to weaken the significance of OVLAP. Again. both at the 10% level.1208 (0. we find that the coefficient of OVLAP is significantly negative in both subperiods.02) 0. This is consistent with the interpretation that SOX. we run a combined-sample model and use a dummy variable for SOX.59) 0. the coefficients of OVLAP are significant.1151*** (24.21) 20. the coefficient is 20. Dependent variable (1)a (2)b CLASS CLASS 20.0007 (0. Panel A: Selection Equation.1394*** (24.04). Models (1) and (2) present the results for the two subperiods using the baseline specification without controlling for equity compensation.9711*** (11. in both models.08) Variables Intercept BSIZE CEODUAL POUT AGE BM DE FCF LNMV REG a Without control for equity compensation in the test model With control for equity compensation in the test model b (continued) Table 7 presents our subperiod results.0641 (0.63) 0. We find that the coefficient of CLASS is significantly positive in one of two models in the pre-SOX Downloaded from jaf.18 Journal of Accounting.31) 20. Panel A presents results concerning committee overlap.0012 (0.13 (t = 22. Table 7.10) 20.28) 0.56) 1. Models (3) and (4) control for equity compensation.61).1299*** (26.4803*** (23.36) 0. we find that the interaction of SOX and OVLAP is significantly positive.2004 (1. Panel B.1820*** (6.76) 20. Overall.88) 0. and there is a suggestion that SOX may have weakened the relationship somewhat. Auditing & Finance Table 6.2937*** (25. In these models.27) 20.0469 (0. 2015 .41) 0.0291 (20.52) 0.sagepub. by structurally making the audit committee more responsible and creating monitoring incentives through this (and possibly other mechanisms such as top official certification of financial statements).1596*** (214.05 (t = 21.12) 20.0152 (0. We use controls for endogeneity as in the previous two tables but for space considerations present the test model only. presents analogous results concerning classified boards.30) 20.1997 (213. and during the post-SOX period. it is 20.54) 0.0965 (20. During the pre-SOX period. Audit Fees and Board Classification: With Endogeneity Controls.0444*** (15. makes it less likely that the firm will call for less monitoring when there is committee overlap.56) 0. We confirm that this is indeed the case: In an untabulated test.

0989*** (2.22) 20.688.72) 0.860.0979 (0.72) 0.1289*** (12.803 1.36) 2000-2011 Yes Yes 17.82) 1.0953*** (2.52 8.0368*** (26. 5%. 19 Table 6.31) 0.4247*** (4.0147 (20.70) 20.75) 20.65) 20.70) 20. Downloaded from jaf.5382*** (15.34) 1.80) 0.4342*** (16.0233 (20.49) 1.65) 0.803 9. and * indicate significance at the 1%.60) 0.65) 0. we run an aggregate model (combined sample) using a dummy variable for SOX and find that the interaction of SOX and CLASS is positive.95) 20.0958*** (2.17) 0.5887*** (72.35) 0.1976*** (25.38) 20.28) 1.29 8.85) 20.84) 0.13) 0.4114*** (3.93) 0.1336*** (11.3458 (63.5880*** (99.932 ***.64) 0.14) 0.4209*** (3.7252*** (210.0028 (0.0415*** (29.94) 0.15) 0.420.932 2000-2011 Yes Yes 27.Karim et al.2068*** (25.72) 0.0942*** (3.83) 0.0340*** (26.1272*** (12.08) 0.1711*** (9.3185*** (63.43) 20.65) 20.sagepub.0347*** (26.04) 0.0422*** (29.0972*** (2.15) 0. respectively.75) 20.35) 0.2470*** (28.5878*** (71.29) 0.22) 0.0189 (20.6335*** (25.10) 0.0506 (20.92) 0.32) 20.3822*** (63.0890 (0.5272*** (38.93) 20.932 2000-2011 Yes Yes 27.43) 0.2641*** (28.1261*** (12.96) 20.76) 20.98) 20.3987*** (16.29) 0.936.0317 (20.36) 0.0179 (20.21) 20.91) 0.30) 9.5948*** (39.6382*** (39.2929*** (3.0260 (0. **. The coefficients appear larger in the post-SOX period.2712*** (3.4289*** (16. period and in both models in the post-SOX period.57) 0.40) 9.979.00) 9.4974*** (25.61) 0.21) 0.0013 (0.21) 0.73 8.5905*** (100.2239*** (26.1294*** (10.57 5.0213 (0.72) 0.00) 0.19) 1.14 5.0334 (20. In untabulated tests.0965*** (2.0091 (0.99) 0.21) 0.5895*** (100.803 Variables Intercept CLASS ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP Testing period Industry-fixed effect Year-fixed effect Wald x2 n 2000-2011 Yes Yes 27.3581*** (3.08) 0.0538 (20.4260*** (4. (continued) Panel B: Test Models.0049 (0.33) 0.5075*** (15.72) 0.4342*** (4.0986*** (2.62) 0.1889*** (8.78) 20.34) 9.5278*** (15.4026*** (4.79) 20.56) 20. 2015 .5866** (72.34) 0.8793*** (29.30) 0.1305*** (10.2565*** (28.com at UNIV OF CONNECTICUT on June 15.81) 20.91) 20.0896*** (3.913. and 10% levels.0439*** (29.0076** (2.23) 0.86) 20.58 5.47) 0.0235 (0.15) 2000-2011 Yes Yes 17. Dependent variable (1) (2) (3) (4) (5) (6) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) Log (audit fees) 9.1244 (0. This is consistent with firms with classified boards investing more in monitoring in the post-SOX era and is consistent with SOX increasing the demand for monitoring by the audit committee.3443*** (3.0083** (2.2676*** (3.29) 2000-2011 Yes Yes 17.72) 20.85) 0.4176*** (3.0080** (2.

99) 20. Auditing & Finance Table 7.2096* (21.2456*** (41.71) 20. 2015 .2806** (2.27) 0.0322*** (26.79) 0.61) 20.0013 (0.0228 (0.2162*** (2.86) 20.3167 (20.4244*** (15.61) 1.18) 20.4073*** (4.41) Yes Yes 5.1281*** (26.17) 20.78) 9.16) 7.97) 0.15) 20.63) 20.1867*** (6.6404*** (29.0283 (0.1598 (0.12) 0.5535*** (88.5588* (1.54) 0.98) 20.79) 20.5003 (1.sagepub.28) 0.1519 (21.0334*** (27.86) 0.09) 0.98) 10.1098** (22.22) 20.89 5.513 Yes Yes 1.40) 0.11) 0.0587** (2.1461*** (23.46) 0.1770*** (27.3194* (21.45) 0.1333** (22.2209 (1.05) 20.4881*** (14.4897*** (22.8026*** (44.66) 0. Variables Intercept OVLAP ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE (1) Pre-SOX (2000-2002) (2) Post-SOX (2003-2011) (3) Pre-SOX (2000-2002) (4) Post-SOX (2003-2011) 8.1103 (0.22) 0.35) 0.33) 0.01) 1.1347*** (13.1130*** (2.48) 0.0953*** (2.75) 20.37) 20.0552 (21.0893 (0.2196** (2.3706*** (3.1215 (20.0987*** (3.15) 20.27) 0.0658*** (2.071.0442*** (22.70) 20.534 (1) Pre-SOX (2000-2002) (2) Post-SOX (2003-2011) (3) Pre-SOX (2000-2002) (4) Post-SOX (2003-2011) 8.34) 0.4077*** (18.com at UNIV OF CONNECTICUT on June 15.0132*** (52.04) 20.0461 (0.85) 0.1851 (21.1339*** (11.0419 (1.8748*** (27.64) 20.71) 0.1430*** (3.3467*** (23.2243 (1.1087*** (4.6289*** (51.63) 8.5513*** (75.6940*** (26.50) 0.809.051.3434*** (26.8036*** (9.27) 20.9263*** (46.16) 9.13 900 Yes Yes 16.12 7.1623** (2.0516* (21.67) 0.46) 8.56) 0. SOX Analysis.08) 0.0606* (21.89) 0.0631*** (27.74) 2.35) EQUITYCOMP Industry-fixed effect Year-fixed effect Wald x2 n Panel B: Board Classification.1809*** (25.31) 20.03) 0.17) 1.913.20) 0.0051 (1.56) 20.79) 0.1163 (1. Panel A: Committee Overlap.20 Journal of Accounting.49 2.08) 0. Variables Intercept CLASS (continued) Downloaded from jaf.03) 0.89) 0.55) 20.508 Yes Yes 20.

In Table 8.61) 20. **.06) 0.3587*** (26.com at UNIV OF CONNECTICUT on June 15.0063 (0.2074*** (25.0350*** (26.0295 (20. Variables ACATTEND ACEXPERT BIG CR GROW INV LEV LOSS REC ROA SEG SIZE (1) Pre-SOX (2000-2002) (2) Post-SOX (2003-2011) (3) Pre-SOX (2000-2002) (4) Post-SOX (2003-2011) 20.28) Yes Yes 4.38) 0.63) 20.Karim et al.1302*** (4. and * indicate significance at the 1%.76) 20.43) 0.3712*** (23.757. respectively.4792*** (2.8644*** (26.53) 20.57) 20. and 10% levels.03) 0.76) 20.1312*** (10.93) 0.58) 0.1013 (4. 1973).800 Yes Yes 1.0744 (21.3526*** (6.83) 0.05) 20.3385* (21.1327** (22. We present results without (Models (1) and (2)) and with (Models (3) and (4)) control for equity compensation.0699 (20. Raghunandan & Rama.0645** (2. 2015 .043 EQUITYCOMP Industry-fixed effect Year-fixed effect Wald x2 n ***.61) 20..0287 (0. Although most annual estimates of the coefficients of OVLAP and CLASS are insignificant.35) 1.7674*** (8.21) 0. 5%.53) 0.05) 20.16) 0.4638*** (4.14) 1.1918 (0.43) 20. they are of the same sign as reported earlier.17) 20.0681 (0.53) 0.4134*** (3.65) 20.6560*** (26. Panel B. 21 Table 7.4547* (1.78) 0.80) 0.39) 0.0619** (2.sagepub.53) 20.6835*** (26.63 2.1298*** (2.76) 0.73) 20.0343* (22.84) 0.4509*** (14.498.44) 0.1207*** (3.6324* (1.0448 (1.g.0473 (20.88) 0. (continued) Panel B: Board Classification. We report the results of Fama–MacBeth regressions: We run out the test model annually and present the significance of the average coefficients of OVLAP and CLASS (Fama & MacBeth.65 760 Yes Yes 15.0996 (20. Downloaded from jaf.5743*** (88.449.64) 20.132 Yes Yes 19.56) 20. The mean coefficients are significant and consistent with the results presented earlier.39) 20.74 6.3908* (1.0374*** (27. our results are robust to an alternate method.0089** (2.35) 0.1654*** (24.44 5. Thus.60) 0.4118** (22.03) 20.03) 0.388.58) 2.6384*** (50.32) 0.35) 0. To be consistent with earlier tests.0569*** (25.5764*** (68. Table 8 presents a robustness check.2177*** (2. we once again use the Fama–MacBeth method but use internal control weakness (SOX Section 404) as an additional control (e.1732 (21.23) 0.52) 0.1088 (1.4180*** (15. we use the treatment effects approach to control for endogeneity.36) 0.58) 1.1336*** (12.54) 0.1076*** (2.

1138 (20.72) 20.06) 0.1616 (21.0167 (0.81) 20.52) 0.22 Journal of Accounting.34) 20.52) 0.1085 (0.2919 (1.37) 20.0315 (20.37) 0.26) 20.16) 0.4423 (1.04) 0. Without control for equity compensation Year With control for equity compensation Committee overlap (1) Estimate Board classification (2) Estimate Committee overlap (3) Estimate Board classification (4) Estimate 20.09) 0.0817 (20.86) 0.40) 0.1231 (21.0928 (21.4058* (1.0240 (0.1024 (20.2237* (21.49) 20. Fama–MacBeth Regressions.1299* (21.3706 (1.0433 (20.0456 (20.1438* (21.57) 20.1627*** (2.15) 0.0041 (20.5414 (1.69) 20.37) 0.10) 0.40) 20.0325 (20.1633 (0.0136 (20.5809 (1.4905** (2.25) 2000 2001 2002 2003 2004 (continued) Downloaded from jaf.com at UNIV OF CONNECTICUT on June 15.28) 20.2172 (20.0358 (0. Auditing & Finance Table 8.96) 0.24) 0.0263 (20.0141 (0.0249 (0.98) 20.04) 0.19) 0.4594* (1.3339 (1.1203 (0.57) 0.76) 20.14) 20.19) 20.16) 20.2602 (1.4695 (0. 2015 .0646*** (23.66) 0.0907 (21.23) 20.39) 0. Without control for equity compensation Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 M With control for equity compensation Committee overlap (1) Estimate Board classification (2) Estimate Committee overlap (3) Estimate Board classification (4) Estimate 20.0411 (20.2876 (1.2946*** (3.1581 (20.94) 0.1771 (0.1121 (20.78) Panel B: Controlling for Internal Control Weakness.1192 (20.89) 20.14) 20.49) 20.0212 (20.0249 (0.0917*** (23.48) 0.18) 20.29) 0.09) 20.48) 0.38) 0.80) 0.08) 20.65) 20.2475** (22.36) 0. Panel A: Main Specification.sagepub.13) 0.0298 (0.50) 0.65) 20.0877 (0.69) 20.58) 0.7523** (2.0036 (20.0784 (0.5020* (1.

0434 (20. Hoitash. respectively.06) 0.0225 (0.14) 0.1428* (21.63) 0.57) 0.18) 0.85) 0.24) 20.0488* (21.3519 (1.30) 0.89) 20.1062 (21.0458** (22.0059 (20. The focus of our study is on two recently researched governance mechanisms or indicators: committee overlap and board classification. **.17) 0.0254 (20. Turning to the other board structure variable. 5%. perhaps because of the additional risk and effort for auditors.1090 (20.82) 20. we find that the mean coefficient of OVLAP is significantly negative and the mean coefficient of CLASS is significantly positive. We find the same result.2605 (1.com at UNIV OF CONNECTICUT on June 15. we Downloaded from jaf. and entrenchment in determining monitoring levels.41) 0. Summary and Conclusion One perspective concerning audit fees is that they reflect the monitoring effort expended by external auditors. 2006).55) 0. & Bedard. there is a suggestion that internal control weaknesses reflect corporate governance weaknesses (e. Turning to our test variables.34) 20.27) 0.24) 20.0212 (0.79) 20.07) 20. incentives. and 10% levels.g.5132* (1.1468 (21.11) 0. Specifically.1163 (0.0830 (0..18) 20.71) 0.35) 0.52) 20.67) 20. Without control for equity compensation Year 2005 2006 2007 2008 2009 2010 2011 M With control for equity compensation Committee overlap (1) Estimate Board classification (2) Estimate Committee overlap (3) Estimate Board classification (4) Estimate 20.2364 (1.11) 0. In previous studies. 23 Table 8.25) 0.Karim et al. This restricts our sample to the 2004-2011 period. we hypothesize that committee overlap will decrease audit fees.60) 20.64) 0. Both mechanisms pertain to board structure and are reflective of incentives and entrenchment.1633 (0. Therefore. It is therefore of interest to examine whether specific governance mechanisms affect the level of monitoring and thereby audit fees.sagepub.60) ***. we argue that committee overlap (the presence of common members in audit and compensation committees) is consistent with reduced incentives to monitor.17) 20. These relationships would help us better understand the role of agency.1591*** (2.43) 20.0130 (20.1283 (21. Hoitash.0405 (20.4838* (1. 2015 .1209 (0. and * indicate significance at the 1%.06) 20.0296 (20.1102 (20. This result is invariant whether we control for equity compensation (Models (3) and (4)) or not (Models (1) and (2)). (continued) Panel B: Controlling for Internal Control Weakness. 2009).0349 (0.0145 (0. But the same literature also finds that audit fees rise with internal control weaknesses.0952 (21.0298 (0.2015*** (2.0152 (0.

24 Journal of Accounting. (RiskMetrics) Equals 1 if OVLAP . and 0 if a firm has a unitary board. (RiskMetrics) Total number of financial expert directors in the audit committee scaled by the total number of directors in the same committee. and 0 otherwise.e. are of interest to regulators who have taken actions that may have inadvertently exacerbated the situation: The rising demand for independent directors resulting from regulations may have indirectly Appendix Variable Definition (data source) Test model variables LNAUDIT OVLAP (Board overlap) OVLAPDUMMY CLASS (Board classification) ACATTEND ACEXPERT BIG CR Log of total audit fees. We regress audit fees on test variables (measuring committee overlap and board classification) and a number of controls suggested by the literature on audit fees. board classification). We extend this literature by examining two newly researched board characteristics affecting monitoring incentives (i. consistent with a prior study indicating the desire for the ‘‘quiet life’’ in firms with classified boards. Therefore. Ernst & Young. 0 otherwise.. composition of specific committees) affects fees.. and the resources allocated to monitoring (audit fees) may be thought of as the purchase of insurance against reporting problems.com at UNIV OF CONNECTICUT on June 15. The result concerning committee overlap is consistent with this board structure feature signaling a weak governance environment. But. (Compustat) (continued) Downloaded from jaf. Consistent with Bebchuk and Cohen (2005). (RiskMetrics) Equals 1 if a firm has a classified board. composition of board.g. (AuditAnalytics) Total number of directors serving both the audit committee and the compensation committee scaled by the total number of directors serving the audit committee. We test our hypothesis using a sample from the period 2000-2011. we hypothesize that board classification would serve to increase audit fees. 2015 . (RiskMetrics) Total number of directors attending fewer than 75% of meetings in audit committee scaled by the total number of directors in audit committee. KPMG. committee overlap) and entrenchment (i. In particular. Our results. (RiskMetrics) Equals 1 if auditor is PricewaterhouseCoopers. 0. we argue that in such firms there will be a demand for monitoring.sagepub. (AuditAnalytics) Current assets scaled by current liabilities. especially those concerning committee overlap. we find that the coefficient of committee overlap is significantly negative and the coefficient of board classification is significantly positive. The result concerning board classification is consistent with the conjecture in Zhao and Chen (2008) that insiders in firms with classified boards do not want to ‘‘rock the boat.’’ We contribute to the audit fee literature that had earlier examined a variety of governance factors determining fees. Deloitte & Touche. Auditing & Finance recognize that board classification (the use of staggered elections) is consistent with increased entrenchment.. When we control for endogeneity using the treatment effects approach.e. our study relates to studies examining how board structure (e. we assume that the governance provisions for any given year for which data are not available are the same as those of the preceding year. and Arthur Andersen.

(Compustat) Note. and 0 otherwise. 0 otherwise. (ExecuComp) Log of number of years listed on CRSP from 1925.Karim et al. (Compustat) Log of common shares outstanding 3 fiscal close price. (Compustat) Log of total number of directors on board. and/or publication of this article. 2015 . (RiskMetrics) 1 if CEO is chair. authorship. (Compustat) Total number of outside directors / total number of directors. Downloaded from jaf. SIC = Standard Industry Classification. Declaration of Conflicting Interests The author(s) declared no potential conflicts of interest with respect to the research. (Compustat) Log of CEO’s (total compensation 2 cash compensation). (Compustat) Log of total assets. 0 otherwise. (Compustat) Income before extraordinary items scaled by average of total assets. authorship. (RiskMetrics) 1 if two-digit SIC code equals 49. (Compustat) (Cash flows from operations 2 dividends) / total assets. cash compensation = salary + bonus. and/ or publication of this article. (CRSP) Total equity / (common shares outstanding 3 fiscal close price). led to individual directors used in multiple committees with governance consequences not fully appreciated at the moment. (Compustat) (Debt in current liabilities + long-term debt) scaled by total assets.sagepub. 25 Appendix (continued) Variable GROW INV LEV LOSS REC ROA SEG SIZE EQUITYCOMP Selection model variables AGE BM BSIZE CEODUAL DE FCF LNMV POUT REG Definition (data source) (Sales at time t 2 Sales at time t 2 1) / Sales at time t 2 1. Notes 1. both National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchange (NYSE) require their listed firms that have nominating or compensation committees to only have independent directors in these committees. CRSP = Center for Research in Security Prices. (Compustat) Log of number of segments. (RiskMetrics) (Debt in current liabilities + long-term debt) / total equity. For example. Funding The author(s) received no financial support for the research. (Compustat) Total receivables scaled by total assets. (Compustat) Total inventories scaled by total assets.com at UNIV OF CONNECTICUT on June 15. (Compustat) Equals 1 if income before extraordinary Items \ 0.

S. 5. our results remain unchanged whether or not we provide these controls. These variables are obtained from Compustat (BM.. CEO duality. & Johnstone. Sarbanes–Oxley Act [SOX]). Contemporary Accounting Research..26 Journal of Accounting. & Cohen.. 277-304. Hermanson. Accounting & Finance. Parker. 11. & Raghunandan. & Sun. (2003). 1-31.e. A. & Suh. A recommended practice in the implementation of selection models is the use of the so-called exclusionary variables. Finally... Deloitte & Touche. Peters. L. The mean of total assets is about US$5. and future research directions. 411-437. We also display results without endogeneity controls because of continuing concerns that Heckman selection models provide volatile results (Lennox. FCF. J. & Zheng. we need a continuous and not a dummy variable for expertise. Does overlapping membership on audit and compensation committees improve a firm’s financial reporting quality? Review of Accounting and Finance. (2007). 7. we have multiple exclusionary variables. 54-84.4 million and the median is about US$1.. Peters. Carcello. The impact of independent and overlapping board structures on CEO compensation. Hermanson. 141-165. 2012). LNMV. Board characteristics and audit fees. The costs of entrenched boards. Z.sagepub. 3. H. K. M. Journal of Financial Economics. Auditing: A Journal of Practice & Theory. 51. Syracuse. H. This allows the reader to form an independent assessment of results. 22(2). 17-31. J... J. Neal. R.. 361-380. (2012). DE.. Chandar. References Abbott. A. NY: Syracuse University. X. and percentage of outsiders. for the reasons outlined above. (2011). while audit fees are rarely conjectured to depend on these variables. corporate governance risk. 30(3). BIG is defined as 1. I know something you don’t know!: The role of linking pin directors in monitoring and incentive alignment (Working paper). Furthermore. 50(2)... committee overlap is conjectured to be related to other board characteristics such as board size. (2002). In our research design. Accounting conservatism and board of director characteristics: An empirical analysis. Journal of Accounting & Economics. and REG). Center for Research in Security Prices (CRSP) (AGE). N. Dharwadkar. 19. practice implications. and auditors’ planning and pricing decisions. This arises naturally because the variables identified in the board structure literature (used in the selection model) do not coincide with the variables identified in the audit fee literature (used in the test model). they are not identical. Carcello. requiring independence of all audit committee members (i. Does CEO duality constrain board independence? Some evidence from audit pricing. Ahmed. 8. pay-performance sensitivity and earnings management. Bebchuk. Corporate governance research in accounting and auditing: Insights. Ernst & Young. Downloaded from jaf. 78. Francis. If auditor is PricewaterhouseCoopers. L. A. or KPMG. S. 43. and RiskMetrics (BSIZE. (2011). & Ye. G. & Duellman. (2014).7 billion and the median is about US$1. & Riley. as SOX requires at least one financial expert in the audit committee. (2011). J. Chang. T. D. Parker. Chang.com at UNIV OF CONNECTICUT on June 15. 365-384.. Bliss. 6. and Raghunandan (2003). Auditing: A Journal of Practice & Theory. Auditing & Finance 2. D. CEODUAL). 79. S.. These are variables in the selection model that are excluded in the test model. & Wang. For example. 2015 . Earnings manipulation risk. The mean of audit fees is about US$2... The association between audit committee characteristics and audit fees.. M. K. Bedard.. (2005). Brandes.2 million. Quarterly Journal of Finance and Accounting. While our audit committee characteristic variables are consistent with Abbott. We are unable to control for independence because most of our sample postdates legislation 4. unlike studies using pre-SOX samples. The Accounting Review. Luo. (2004).4 billion. 409-433. P.

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