A Study On The Governance Function Of Audit Committee And The Protection Of Bank Creditors' Equities

The aim of corporate governance is to protect the equities of investors including share holders and creditors.The research of corporate governance, however, is now mainly concentrated on the share holders rather than the creditors, especially the bank creditors, whose equities are more often not protected effectively. Although the company is founded by the share holders who of course should be highlighted, it doesn't mean that as the financial suppliers of the company, the creditors are of little significance.The more the creditors invest into the company, the more wealthy the company gains as a result of the financial leverage.The creditors do contribute much to the growth and development of the company, so their equities protection ought to be enhanced. Moreover, it's possible to find some effective approaches to protect the creditors'equities in the process of research on corporate governance.As the main source of company information, accounting information plays a key role in alleviating the information asymmetry as well as protecting the investors primarily by its functions of pricing and governance. The former one can do much to the information asymmetry beforehand, lowering the information cost and helping the investors make the right decisions.The latter one will influence the information asymmetry afterwards, constraining the insiders' opportunistic behavior and helping the investors obtain investment returns.As an important class of investors, the bank creditors'protection will be undoubtedly affected by the accounting information too.It's only the accounting information of high quality, however, that can protect the bank creditors.But how to guarantee the quality of accounting information? Audit Committee will do it.As a core mechanism of corporate governance,it should serve the investors well by reinforcing the quality of accounting information.The regulations for the responsibility of Audit Committee in the world all have referred to improving the quality of accounting information.From this point of view, it can be seen as a feasible method to improve the quality of accounting information in order to offer protection to the bank creditors.Therefore, this article attempts to correlate the protection of bank creditors with Audit Committee's function of corporate governance by using the quality of accounting information as a linkage, and establish a theoretical framework of how Audit Committee protect the bank creditors'equities by enhancing the quality of accounting information, and examine whether the establishment and operation of Audit Committee.can perform well in that way by adopting the empirical research method. Through these above researches, this paper attempts to (1) widen the way to protect the bank creditors'equities, and (2) test and develop the governance function of Audit Committee in the listed companies.This article includes Introduction, Body, and Conclusion, Innovative Points and Follow-up Study Recommends, which has five chapters in total divided into three parts.The first part (Chapter 1):Introduction. This part mostly introduces the research background, domestic and international literature review as well as research methodology.The second part:Body. This part is the core content of this paper, including Chapter 2-Chapter 4 for totally 3 chapters.Chapter 2:the theoretical analysis of Audit Committee's role in protecting the bank creditors'equities.First, it defines some relevant concepts (quality of accounting information, creditors and creditor equities).Accounting information refers to such a kind of economic information that reflect the economic contents included in various economic activities of an accounting entity, and that are demonstrated by a specific tool and for some certain usage.In addition, accounting information quality are these features or characteristics that meet the common needs of information users.The bank creditors'equities mean in the normal state a bank creditor's rights on the debtors (fixed-return rights, encumbrances and mortgages, etc.).Second, basing on the contract theory, agency theory and stakeholder theory, it discusses that Audit Committee is able to protect the bank creditors'equities, and the accounting information play a protective role in this protection directly. Then, this paper analyzes the mechanism that how Audit Committee can achieve the target by improving the quality of accounting information, following two aspects:the pricing and governance function of accounting information which can alleviate information asymmetry and reduce the risk,and the role of Audit Committee which is capable of monitoring the production and disclosure of accounting information directly and affecting the internal control and the independent auditor indirectly to guarantee the quality. Last, some possible problems are analyzed.Chapter 3:the empirical test to explore the relationship between the establishment and operation of Audit Committee and the protection of bank creditors'equities.The author selects the sample companies listed in Shenzhen Security Exchange from 2002 to 2007 as the research objects.Then we choose the score of information quality of each company marked by Shenzhen Security Exchange every year as the proxy of accounting information quality, the agency cost of debt to measure the degree of protection of bank creditors'equities, and the dummy variables to represent whether Audit Committee is set or not. Furthermore, in order to measure the operating efficiency of Audit Committee, we design a series of variables covering its structural characteristics, professional characteristics and behavioral characteristics, which composes of size, independence,professional competence,educational background, the designed policy, the degree of diligence and the degree of incentive.Last, we built a regression equation to examine the relationship and try to find the answer to the hypothesis.Controlling other factors, we observe the results that (1) the quality of accounting information can play a positive role in protecting the banking creditors; (2) compared with those samples without Audit Committee, these ones with Audit Committee have little impacts on the improvement of accounting information quality,and this consequence also happens when comparing Audit Committee that is not set and set in the consecutive two years in the same sample company; (3) compared with those samples without Audit Committee, these ones with Audit Committee have little impacts on the protection of bank creditors'equities, and this consequence also happens when comparing Audit Committee that is not set and set in the consecutive two years in the same sample company; (4) the operation of Audit Committee fails to effectively strengthen the bank creditors' equities for the reason that the positive influences of size of Audit Committee, number of highly educated member, designed charter of Audit Committee and salary are less than those negative ones of independence, professionalism and equity-based incentives.In total, the operational efficiency of Audit Committee is not high.Chapter 4:policy recommendations. It suggests that we should find the solution of the above results from Audit Committee's status as well as the role of bank creditors in corporate governance, and puts forward the following policy recommendations:(1)Re-positioning Audit Committee, that is to say, the independent directors in the listed companies should be appointed by China Securities Regulatory Commission, so that Audit Committee can be parallel to the board. Moreover, modifying and increasing the responsibilities of Audit Committee, improving the incentive regulation, and increasing Audit Committee's service object, namely, not only for shareholder services, but also for the other stakeholders including bank creditors.(2) Let bank creditors play a positive role in corporate governance, which means they can be a member both in company board and Audit Committee in order to participate actively in corporate governance activities.The third part, namely, Chapter 5:the conclusion of this study, the innovative points and follow-up research proposals. This chapter summarizes the preceding theoretical analysis and empirical analysis and gets the conclusions, the innovative point and the study limitations and put forward a proposal in the direction of follow-up study.The principal innovations of this article are:First, it connects Audit Committee with the protection of bank creditors' equities using the quality of accounting information as a linkage.Second, it designs nine indexes to quantify the operational efficiency of Audit Committee,covering the structural characteristics,professional characteristics and behavioral characteristics which compose of size, independence, professional competence, educational background, the established policy, the degree of diligence and the degree of incentive.Then the paper systematically studies the relationship between them and finally gains a number of meaningful conclusions.Additionally, it attempts to create a new model of Audit Committee, which is appointed by China Securities Regulatory Commission (CSRC) and is parallel to the board in the listed company. Obviously, the independence of Audit Committee of this model is therefore to be enhanced and the quality of accounting information is to be guaranteed. Surely, it also finds another avenue for the protection of bank creditors'equities, that is, let the bank creditors become a part of the listed company, thereby they-are able to endeavor for their own equities.