The impact of audit committee financial expertise on corporate financial decisions

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

Audit committee (AC) financial experts is considered one of the important corporate governance mechanisms due to their vital role in overseeing companies’ financial reporting procedures and enhancing corporate financial decisions. Regulators and policymakers require Omani firms to have at least one director with financial expertise sitting on ACs. Therefore, we aim to investigate the effect of AC financial expertise on corporate financial decisions (capital structure, dividend payment and cash holdings). We use a data set of all Omani financial institutions (36 firms) listed on the Muscat Stock Exchange (MSX) over the period from 2014 to 2019, consisting of 216 firm-year observations. The paper contributes to the growing body of the literature by being the first study to examine the impact of AC financial expertise on financial decisions. The study also contributes to the literature by integrating multiple theories: agency, resource dependence and signalling, to enlighten the effect of the unique power of financial expertise on making financial decisions. We find that AC members with financial expertise are positively related to the level of cash holdings, leverage and dividend payment in financial companies. The findings provide empirical evidence to regulators to encourage companies to exceedingly appoint financial experts as AC members due to their unique resources, which improve their monitoring role and constraining management opportunistic behaviour.

Keywords: Audit Committee, Financial Expertise, Capital Structure, Dividend Policy, Cash Holdings, Oman

Authors’ individual contribution: Conceptualization — H.A.L. and K.H.; Methodology — H.A.L.; Validation — K.H.; Formal Analysis — H.A.L.; Investigation — H.A.L.; Resources — H.A.L. and K.H.; Writing — Original Draft — H.A.L.; Writing — Review & Editing — K.H.; Visualization — K.H.; Supervision — K.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G34, G35, M42, G23, M41

Received: 14.03.2021
Accepted: 26.05.2021
Published online: 28.05.2021

How to cite this paper: Al Lawati, H., & Hussainey, K. (2021). The impact of audit committee financial expertise on corporate financial decisions [Special issue]. Corporate Ownership & Control, 18(3), 348–359. https://doi.org/10.22495/cocv18i3siart9