Do Audit Committees Manage Legitimacy through Increased Voluntary Reporting? Evidence from a Large-Scale Textual Analysis

SUMMARY This study investigates whether audit committees voluntarily increase disclosure of their audit oversight activities to manage their legitimacy and, if so, whether such disclosure strategy is effective. Voluntary increases in audit committee disclosures would suggest that a regulatory mandate to require expanded audit committee reports may not be necessary. Analyzing approximately 26,000 U.S. audit committee report disclosures between 2005 and 2017, we find that audit committees voluntarily increase disclosure of their audit oversight activities following (1) the SEC’s 2015 Concept Release which encouraged greater audit committee disclosure and (2) a company’s restatement announcement. However, we find that increased audit committee disclosure only partially mitigates the negative restatement impact on shareholder satisfaction with the audit committee. We also provide some evidence that voluntary disclosure increases are concentrated among larger companies. Overall, our findings suggest that, although a regulatory mandate may not be necessary, audit committees may benefit from enhanced disclosure guidance. Data availability: The data used in this paper are publicly available from the sources indicated in the text. JEL Classifications: M41; M48.