Audit committee member busyness and risk factor disclosure

Abstract

Audit committees in the U.S. oversee risk management within organizations, including oversight of the disclosure of risk factors in periodic filings. Because audit committees have become increasingly over-burdened, we examine the impact of the busyness of audit committee members, measured via members’ service on other boards, on risk factor disclosures. We find firms with busy members issue disclosures that are of lower quality (i.e., less readable and less focused on firm fundamentals). Further, we find that firms with busy members are more likely to issue timely updates to disclosures. However, these updates are more likely to be vague—implying they are inconsequential to the market. We find these results are primarily driven by service in other non-audit committee roles. In additional cross-sectional tests, we find that our results are strongest when there is more uncertainty or complexity in the business environment. Finally, additional specifications and tests show that our results are robust to concerns related to endogeneity. Overall, we find that the busyness of audit committee members has important implications for risk factor disclosures.