Risk Management and Corporate Governance: the Importance of Independence and Financial Knowledge for the Board and the Audit Committee

Georges Dionne () and Thouraya Triki

Abstract: The new NYSE rules for corporate governance require the audit committee to discuss and review the firm's risk assessment and hedging strategies. They also put additional requirements for the composition and the financial knowledge of the directors sitting on the board and on the audit committee. In this paper, we investigate whether these new rules as well as those set by the Sarbanes Oxley act lead to hedging decisions that are of more benefit to shareholders. We construct a novel hand collected dataset that allows us to explore multiple definitions for the financially knowledgeable term present in this new regulation. We find that the requirements on the audit committee size and independence are beneficial to shareholders, although maintaining a majority of unrelated directors in the board and a director with an accounting background on the audit committee may not be necessary. Interestingly, financially educated directors seem to encourage corporate hedging while financially active directors and those with an accounting background play no active role in such policy. This evidence combined with the positive relation we report between hedging and the firm's performance suggests that shareholders are better off with financially educated directors on their boards and audit committees. Our empirical findings also show that having directors with a university education on the board is an important determinant of the hedging level. Indeed, our measure of risk management is found to be an increasing function of the percentage of directors holding a diploma superior to a bachelor degree. This result is the first direct evidence concerning the importance of university education for the board of directors.

Keywords: Corporate governance; risk management; corporate hedging; financial knowledge; board independence; audit committee independence; board of directors; university education; empirical test; unrelated directors; NYSE rules; Sarbanes Oxley act; audit committee size; financially educated directors; financially active directors; firm performance (search for similar items in EconPapers)
JEL-codes: G18 G30 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-acc, nep-fin, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Working Paper: Risk management and corporate governance: The importance of independence and financial knowledge for the board and the audit committee (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0515

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