Market reaction to voluntary announcements of audit committee appointments: The effect of financial expertise

This paper investigates stock returns surrounding the appointment of directors to audit committees. We examine 136 voluntary appointment announcements over 1990-2001. Most of the announcements are issued after year 1999 and by small, NASDAQ firms. We find significantly positive stock price reaction when new members of audit committees have financial expertise. These results are robust to control for state of audit committees prior to director appointment and for an alternative definition of financial expertise. Our evidence suggests that market rewards firms that appoint financial experts to their audit committees.