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Are CEO Power and Audit Committee Quality Substitutes or in Conflict?

CEO power can influence a CEO’s incentives to disclose information, in turn affecting the information environment. Audit committees can also affect the information environment, because they serve as the watchdog for financial reporting quality and the audit process. Thus, our research explores whether CEO power and the audit committee are substitute or conflicting mechanisms in improving information transparency. Our evidence supports a simultaneous inverse association between CEO power and audit committee quality. In addition, a simultaneous inverse association between CEO power and audit committee quality for firms with more complex accounting policies or in high-tech industries is significantly stronger than that of firms with less complex accounting policies or in other industries. Finally, the evidence shows that firms with more powerful CEOs experience more information transparency. Thus, powerful CEOs and an audit committee with high quality play the same role in improving information transparency. As a result, our evidence indicates that the firm’s CEO and its audit committee are substitutes for each other.