The Effect of Audit Committees on Voluntary Disclosure in Korea

It requires firms to disclosure management earning forecasts since the enforcement of Reg. fair disclosure in November 2002. But very few studies have examined the relationship between firm characteristics and management forecasts in Korea. And the prior studies document that corporate governance structures can control manager effectively. So we analyze the relationship between management earning forecasts and corporate governance structures. This study analyzes how audit committees are associated with management earning forecast which was a proxy for voluntary financial disclosure practices. The characteristics of audit committee here are proxies as control mechanism about voluntary disclosure. We used forecast dummy(FDUM) which is a proxy whether or not to disclose. To calculate management forecasts bias(FBIAS), we subtract real net income from the number of earning forecasts. And Forecasts accuracy(FACC) is the absolute value of FBIAS. The measure of audit committee variables are comprised of the existence and the independence of an audit committee. This study uses 104 firm-years(firms with earning forecasts) listed between 2002 and 2005 in Korea. The results support our expectation that audit committee variables have influence on forecasts disclosure, bias and accuracy. Our empirical evidence is broadly consistent with the notion that effective audit committee is associated with higher quality of financial disclosure. This study may have implication that policy makers can achieve improvements in the quality of financial disclosure by encouraging public firms to implement sound governance practices.