Audit Committee Financial Expertise and the Value of Cash Holdings

Abstract

Since 2000, the Korean government mandated the establishment of audit committees for large companies listed on the stock market to improve corporate governance. Also, since 2003, large companies are required to have at least one financial expert on the audit committees to enhance credibility of financial reporting. If the audit committee effectively improves corporate governance, then investors can feel more confident and secure

resulting in an increase in the value of cash holdings in the firm. I investigate how the audit committees financial expertise impacts the value of cash holds in firms, specifically those listed on the Korean Stock Exchange. The results of this investigation show that the audit committee does not have an impact of the value of cash holdings. On the contrary, when a firm appoints a former high-ranking official from government offices or financial institutions as an audit committee member, negative effects are found. Contrary to the regulators expectation, investors do not trust the monitoring and safeguarding role of the audit committee, and even regard the supervisory experts as deteriorating the corporate governance mechanism.