Audit Committee, Underpricing of IPOs, and Accuracy of Management Earnings Forecasts

摘要

Manuscript Type: Empirical Research Question/Issue: This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. Research Findings/Results: Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Quebec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. Theoretical Implications: Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory. Practical/Policy Implications: Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance.