Financial expertise on audit committees of loan applicants: a research note to test the effects on lending decisions

The purpose of this study is to examine whether audit committee financial expertise matters when making commercial lending decisions. Commercial lenders rely on audited financial statements in making lending decisions, and the quality of these financial statements is impacted by the capabilities of audit committees having oversight of financial reporting. It is widely believed that this oversight is enhanced when audit committees contain members with financial expertise. A behavioural experiment is conducted where commercial lending officers make risk assessments and provide probabilities of granting loans based on a hypothetical scenario. This paper finds insufficient evidence to conclude that the existence of financial expertise on audit committees makes a difference to lenders. When replacing audit committee members, however, financial expertise does appear to matter to lenders in some cases.