The authors attempt to address the effect of an audit committee’s composition on share prices during a period of increased market volatility. They use Australian data to identify the key characteristics of audit committee membership that lead to improved share price performance.

Much of the research on the impact of corporate governance on shareholder returns has produced conflicting results. But the majority of the research has been done under favorable market conditions. This study is different in that it is focused on the impact of audit committee composition on share price returns during the most volatile period of the global financial crisis. The authors contend that high-quality corporate governance (as it pertains to the audit committee) is likely to be valued most highly during periods of elevated volatility.

Their main findings are intuitive and include the observations that smaller, more experienced, and more financially literate audit committees tend to be associated with outperformance, whereas committees with a long-standing chairperson tend to underperform.

The authors’ research would be most useful for portfolio managers running portfolios with an environmental, social, and governance (ESG) or corporate governance focus or for managers using fundamental investment processes to filter out stocks with poor corporate governance characteristics.

The authors classify 120 stocks (from the S&P/ASX300) as either high or low performers based on share price performance over the one-year period between June 2008 and June 2009. Financial firms are excluded. Fifteen different characteristics of audit committee composition are investigated; annual reports are used to source the raw data. The 15 characteristics include the profile of the committee chairperson, the number and profile of committee members (including experience, education, and independence), and the number of meetings held. Control variables include size, beta, industry membership, and a leverage factor.

A logit regression model is used to identify key audit committee characteristics that are aligned with high performers. Variations of the base case include the grouping of committee characteristics into a broader governance index (to reduce the number of variables in the regression) and the use of principal component analysis to derive three unique factors that the authors designate as expertise, commitment, and independence. They also test different dependent variables. These robustness tests produce broadly similar results.

Share price return, rather than total return, is used in the analysis.

The authors are correct that the relevance of strong corporate governance is difficult to prove when investment conditions are favorable. But proving the assertion during such an extreme event as the crisis is equally difficult. In Australia, stock prices during the peak of the crisis downturn were heavily affected by liquidity issues; highly leveraged investors sold liquid assets to fund other obligations. Margin calls were a significant feature, particularly in resource companies, which is confirmed by the large number of resource companies classified as low performers.

The extremely elevated levels of market volatility experienced during the period under investigation make it difficult to ascribe outperformance of a group of stocks to such a relatively benign factor as audit committee composition. This issue is magnified by the use of a single time period (June 2008–June 2009). It would have been interesting to see if the results were replicated using a different and/or longer time period. Another concern is that the authors attribute performance during the crisis to the membership of the audit committee at that time, rather than allowing for the cumulative impact of audit committee decisions prior to the crisis, which may not have been the responsibility of the current audit committee.