Corporate Governance and Firm Performance: Impact of Board Competence, Board Diversity and Audit on Firm Performance

Abstract

Effective corporate governance practices are believed to be critical success factor for developing and transforming economies like Pakistan. To contribute in prevailing financial and economic crisis, this study has started to scratch the surface in terms of corporate governance. The research study is explained by two research models. The dependent variable of the study in both models is firm performance measured by three proxy variables including return on assets, return on equity and Tobin’s Q. The independent variable in first model is board competence while in second model independent variables are board diversity, quality audit and audit cost. The study sample comprises of two hundred listed companies in Pakistan Stock Exchange. Panel data set is developed for analysis with ten year time range from 2008 to 2017. Hausman test, fixed effect model and random effect model are used as the primary analysis techniques for testing the hypothesis of study. For dealing with issues of multicollinearity and heteroskedasticity, variance inflation factor and white test have been incorporated in the study. Results in first model concluded that optimal combination of board structure produce board competence to properly incorporate the strategies for achieving the targets which in turn provide organization with competitive advantage. For second model results reported that, at one side diverse board is associated with better decision making and efficient monitoring that leads to enhanced firm performance but at the same time greater diversity in board can lead to underperformance. Furthermore good quality audit based on prior knowledge, training and experience have positive impact on firm performance. Extended audit hours with the combination viii of expert audit staff is believed to conduct more comprehensive investigation, which ultimately cost higher audit fees.