Working Paper No. 1370

On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees

Published: November 24, 2020Pages: 37Keywords: Reporting Quality; Foreign Directors; Audit Committee; Investor ProtectionJEL-codes: F23; G34; K22; M16; M42

On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees Haroon Afzali, Minna Martikainen, Lars Oxelheim and Trond Randøy

Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection.

We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ.


Afzali, Haroon, Minna Martikainen, Lars Oxelheim and Trond Randøy (2020), "On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees", IFN Working Paper No. 1370. Stockholm: Research Institute of Industrial Economics (IFN).


Lars Oxelheim


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Interdisciplinary European Studies

The European Union and the Return of the Nation State


This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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