The Impact of Audit Oversight Quality on the Financial Performance of U.S. Firms: A Subjective Assessment

Round 1

Reviewer 1 Report

The article THE IMPACT OF AUDIT OVERSIGHT QUALITY ON THE FINANCIAL PERFORMANCE OF U.S. FIRMS: A SUBJECTIVE ASSESSMENT is interesting to read because of the topic it covers. However, for the purpose of improving the article, I make the following comments:

The text is not written on the template available on the journal page under Journal Menu/Instructions for Authors/Accepted File Formats: „Authors are encouraged to use the Microsoft Word template or LaTeX template to prepare their manuscript“. 

Chapter “I.INTRODUCTION”: the chapter number should be written in the correct way: 1. INTRODUCTION.

In the chapter 2.2. Literature on the Impact of Audit Committee Characteristics on Firm Performance on page 7, the following text does not need to be marked separately: Audit Committee Size, Independence, and Frequency of Meetings:

On page 8 in the same chapter, the following text should not be marked separately: Earnings, Debt, and Firm Size:

In the chapter 3. Hypotheses Development on page 12, Hypotheses 2a and 2b were established and Hypothesis 2 should be added in front of them.

In the Chapter 4.1. Data Collection on page 13, mentions the two measures that were created for this research. In the following, for each measure, it should be added which authors applied the same or similar measures in their research. In the same chapter on pages 13 and 14, the assessment method is disputed: “A score of 1 showed the least involvement by the audit committee, such as the review of financial reports and the hiring of auditing firms. A score of 2 showed some interaction between the audit committee and management. A score of 3 indicated the highest level of involvement in strategic decision making with audit committee members closely working with management in gleaning information from the financial reports and setting a strategic direction for the firm” so it is necessary to explain in detail why exactly that assessment method was applied.

In the Chapter 4.2. Data Analysis on page 14, it is necessary to better describe the variables: which are dependent variables and which are independent variables, indicate with each variable the method of calculation and especially the data source. For the variables named: Tangibility and Covid, it is necessary to explain what their purpose is in the model. I suggest that the list of variables with all the mentioned explanations be presented in the form of a table. Explain why the two-stage least squares model was used and not some other method.

I suggest dividing Chapter 6. Discussion, Implications, and Limitations into two chapters, so that subchapters 6.3. and 6.4. moved to the new chapter 7. Conclusions.

Author Response

See attached table of changes. Document changes are in yellow.

Author Response File: Author Response.pdf

Reviewer 2 Report

Dea authors, 

I had the opportunity to review the paper. Please, find here some comments.

1) I think it's needed a more in-depth discussion of how your measure 1 and 2 of audit oversight quality are related to previous literature, and how your contribution adds to that literature. I am worried about the interpretation of the "subjective measure". COuld it be generalized and reduce this subjectivity?

2) From an econometric perspective, the empirical exercise needs to be revised: 

2.a: you need year fixed effects. 

2.b: you need to rescale your coefficients and do not refer to powers of 10 in the coefficient and magnitude. 

2.c: your measure 1 seems categorical. It's better to include dummy variables instead of 1 categorical variable, to have less biased results related to the distribution of the variable.

2.d: From your descriptive statistics, it seems that you have some distributional problems on variables with high skewness and kurtosis. Please, winsorize all variables to avoid outlier biases.

2.e: I would add as a robustness an analysis of other audit oversight variables from the literature or, for instance, a Governance Score from an ESG rating data provider, to enhance your findings. 

3) please, in the discussion section, refer to previous literature and how your paper contributes to the academic debate. 

Author Response

See attached table for a list of changes made. Document changes are in green in the revised document.

Author Response File: Author Response.pdf

Reviewer 3 Report

The paper titled "The Impact of Audit Oversight Quality on the Financial Performance of U.S. Firms: A Subjective Assessment", delves into the pivotal role of audit committees within corporations, specifically focusing on their impact on the financial performance of U.S. pharmaceutical and energy companies from 2010 to 2022. It introduces two innovative measures of audit oversight quality: a subjective scale assessing audit committees' fulfilment of their responsibilities and a frequency measure counting the mentions of 'audit committee' in official documents. The study reveals that higher audit oversight quality, as captured by these measures, is associated with reduced return on equity and a disciplining effect on debt, suggesting a cautious approach towards borrowing. Moreover, it suggests that for larger firms, enhanced audit oversight quality potentially boosts firm value, albeit with indications that this may primarily apply to the subjective measure of audit oversight quality.

I commend the authors for their novel approach in measuring audit oversight quality and their comprehensive analysis across two significant sectors.

However, I recommend further exploration into the direct impact of audit oversight activities on specific managerial decisions to strengthen the link between audit oversight quality and financial outcomes. Additionally, considering the varied nature of the pharmaceutical and energy sectors, a more detailed examination of sector-specific factors influencing the relationship between audit oversight quality and financial performance could provide deeper insights or this can be mentioned in the limitation and further research avenues. Also, it should be mentioned in the limitations that while the subjective measure of audit oversight quality offers a novel perspective, it also introduces subjectivity and potential biases in assessment; thus, future research might benefit from developing more objective, quantifiable measures of audit committee effectiveness to complement the current methodology.

Please ensure the manuscript undergoes a thorough proofreading process to eliminate any linguistic inaccuracies and enhance its overall linguistic quality.

Please ensure the manuscript undergoes a thorough proofreading process to eliminate any linguistic inaccuracies and enhance its overall linguistic quality.

Author Response

See the attached table listing changes in blue. The document shows the modifications in blue. 

Author Response File: Author Response.pdf

Reviewer 4 Report

Dear authors,

I consider that your research accomplishes all the criteria to be published. I liked it and I did not found any major mistakes, it has a proper structure, the statements have a clear presentation. It is your work, it integrates your original perspective. The results about audit quality should be correlated with the pharmaceutical and energy sector. It would be interesting to see how the hypothesis are confirmed in other industries.

Author Response

No changes requested.

Round 2

Reviewer 1 Report

I have no more suggestions.

Author Response

No changes required.

Reviewer 2 Report

Dear Authors,

I had the opportunity to revise your paper. Please, find below some comments

1) The section on Theoretical implications, in my opinion, does not give "theoretical" implications, but practical ones. Henceforth, please merge sections 6.2 and 7.1. 

2) Please, again, rescale coefficients. Especially in tables 7, 8 9 and 10, eliminate the notation in powers of 10. 

3) Which Fixed effects are included in the analysis? 

4) Please, discuss the high kurtosis and the low R-squared that you obtain in the text.

Author Response

See the attached table of changes made. Changes in the document are in grey. 

Author Response File: Author Response.docx

Round 3

Reviewer 2 Report

Dear authors, 

I think that the paper now is in a better shape for the journal. 

Some of the results could be further investigated and strengthened with other robustness tests to check potential endogeneity concerns.