Audit committees, corporate governance, and shareholder wealth: Evidence from Korea

Abstract

This paper examines the effect of audit committee appointments on shareholder wealth in Korea after the Asian financial crisis. We find that stock prices generally increase with audit committee appointments. In contrast, chaebol (business group) affiliates and firms switching audit committee membership are associated with significantly lower stock returns, probably due to the management's opportunistic behavior. However, the independence and financial literacy of the audit committee members appear to mitigate the opportunistic behavior. Therefore, our result confirms that the characteristics of the audit committee strengthen or weaken the existing corporate governance. We discuss the implications of our results obtained under Korea's unique corporate governance structure.