Skip to main content

Advertisement

SpringerLink
Log in

Effect of the board of directors and the audit committee on firm performance: a panel data analysis

  • Published:
Journal of Management & Governance Aims and scope Submit manuscript

Abstract

This research examines the relationship between independent directors, the audit committee (AC), and firm performance, taking into account the impact of the chief executive officer’s powers and block shareholders. We use the maximum likelihood estimator, based on agency theory assumptions and cylindered panel data, to examine three models of firm performance. The results show that the independence of the board is reflected clearly by increased economic and equity performance of the firm. However, an AC that is fully independent or meets frequently is associated with lower firm performance. Unlike pension funds, institutional shareholders can be considered an effective control mechanism in the context of France. Our results development includes advanced explanations for market liquidity and shareholders’ portfolios. The study period ends before the European regulation on ACs came into effect in 2008. This allows for an appreciation of soft law in French corporate governance. It also lets us compare the data with the way firms operate their boards one decade later. The evidence provides useful guidelines on the supremacy of soft law in corporate governance and suggests that the composition and functioning of the board of directors should be moderated based on the firms’ context. The specificity of the cylindered panel data helps to better examine the impact of the board and AC’s independence and functioning in French corporate governance structure.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. We use the Breusch-Pagan Lagrange multiplier (LM) to test the hypothesis of random effects for our models and the Hausman specification test (1978) to differentiate between the assumptions of fixed effects and random effects.

References

  • AFEP-CNPF, Viénot corporate governance report. (1995). http://www.ecgi.org/codes/documents/vienot1_fr.pdf.

  • AFEPMEDEF. (2015). http://www.afep.com/uploads/medias/documents/Code_de_gouvernement_entreprise_revise_novembre_2015.pdf.

  • AFEP-Medef. (2002). Bouton corporate governance report, http://www.paris-europlace.net/files/a_09-23-02_rapport-bouton.pdf.

  • AFEPMEDEF, Viénot corporate governance report. (1999).http://www.ecgi.org/codes/documents/vienot2_fr.pdf.

  • Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48, 371–406.

    Article  Google Scholar 

  • Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial & Quantitative Analysis, 3, 377–397.

    Article  Google Scholar 

  • Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics accounting report integrity, and the cost of debt. Journal of Accounting and Economics, 37, 315–342.

    Article  Google Scholar 

  • Ben Barka, H. (2012). L’indépendance des administrateurs les risques du métier face à la mondialisation de la finance. Revue Française de Comptabilité, 451, 36–39.

  • Berle, A. A., & Means, G. C. (1932). The modern corporation and private proprety. London: The MacMillan corporation.

    Google Scholar 

  • Black, B., & Kim, W. (2012). The effect of board structure on firm value: A multiple identification strategies approach using Korean data. Journal of Financial Economics, 104, 203–226.

    Article  Google Scholar 

  • Brick, I. E., & Chidambaran, N. K. (2010). Board meetings, committee structure, and firm value. Journal of Corporate Finance, 16, 533–553.

    Article  Google Scholar 

  • Brickley, J., Coles, J., & Terry, R. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics, 35, 371–390.

    Article  Google Scholar 

  • Broye, G., & Moulin, Y. (2012). Les déterminants de la rémunération des administrateurs externes dans les sociétés françaises du SBF 120. Finance Contrôle Stratégie, 15, 53–78.

    Google Scholar 

  • Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific Basin Finance Journal, 35, 163–181.

    Article  Google Scholar 

  • Cai, J., Garner, J. L., & Walkling, R. A. (2009). Electing directors. Journal of Finance, 64, 2389–2421.

    Article  Google Scholar 

  • Cai, C. X., Hillier, D., Tian, G., & Wu, Q. (2015). Do audit committees reduce the agency costs of ownership structure. Pacific Basin Finance Journal, 35, 225–249.

    Article  Google Scholar 

  • Carcello, J., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75, 453–468.

    Article  Google Scholar 

  • Cavaco, S., Challe, E., Crifo, P., & Reberioux, A. (2012). Conseils d’administration et performance des sociétés cotées, Report for CDC Research Institute, http://www.tresor.economie.gouv.fr/File/381034.

  • Chen, G., Firth, M., Gao, D. N., & Rui, O. M. (2006). Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 12, 424–448.

    Article  Google Scholar 

  • Chen, H. L., Hsu, W. T. & Chan, C. Y. (2016). Independent directors’ human and social capital, firm internationalization and performance implications: An integrated agency-resource dependence view. International Business Review, 25(4), 1265–1278.

    Article  Google Scholar 

  • Choi, J. J., Park, S. W., & Yoo, S. S. (2007). The value of outside directors: Evidence from corporate governance reform from Korea. Journal of Financial and Quantitative Analysis, 42, 941–962.

    Article  Google Scholar 

  • Coffee, J. (1991). Liquidity versus control: The institutional investor as corporate monitor. Columbia Law Review, 91, 1277–1368.

    Article  Google Scholar 

  • Cornett, M. M., Marcus, A. J., Saunders, A., & Tehranian, H. (2007). The impact of institutional ownership on corporate operating performance. Journal of Banking & Finance, 31, 1771–1794.

    Article  Google Scholar 

  • Cotter, J. F., Shivdasani, A., & Zenner, M. (1997). Do independent directors enhance target shareholders wealth during tender offers? Journal of Financial Economics, 43, 195–218.

    Article  Google Scholar 

  • Dahya, J., & McConnell, J. (2005). Outside directors and corporate board decisions. Journal of Corporate Finance, 11, 37–60.

    Article  Google Scholar 

  • Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy Management Review, 22(1), 20–47.

    Google Scholar 

  • Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177.

    Article  Google Scholar 

  • Duru, A., Iyengar, R. J., & Zampelli, E. M. (2016). The dynamic relationship between CEO duality and firm performance: The moderating role of board independence. Journal of Business Research,. doi:10.1016/j.jbusres.2016.04.001.

    Google Scholar 

  • Faccio, M., & Lasfer, M. A. (2000). Do occupational pension funds monitor companies in which they hold larges takes? Journal of Corporate Finance, 6, 71–110.

    Article  Google Scholar 

  • Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Public Economics, 88(2), 288–307.

    Google Scholar 

  • Fama, E. F., & Jensen, M. C. (1983). The separation of ownership and control. Journal of Law and Economics, 26, 327–349.

    Article  Google Scholar 

  • Feldmann, D. A., & Schwarzkopf, D. L. (2003). The effect of institutional ownership on board and AC composition. Review of Accounting & Finance, 2(4), 87–109.

    Article  Google Scholar 

  • García-Sánchez, I. M., Frías Aceituno, J. V., & Domínguez, L. R. (2015). The ethical commitment of independent directors in different contexts of investor protection. Business Research Quarterly, 18, 81–94.

    Article  Google Scholar 

  • Gillan, S. L., & Starks, L. T. (2007). The evolution of shareholder activism in the United States. Journal of Applied Corporate Finance, 19, 55–73.

    Article  Google Scholar 

  • Godard, L., & Schatt, A. (2005). Faut-il limiter le DUALITY des fonctions dans les conseils d’administration? Le cas français. Revue des sciences de gestion, 213, 61–72.

    Article  Google Scholar 

  • Goh, B. W. (2009). ACs, Boards of Directors, & Remediation of Material Weaknesses. Contemporary Accounting Research, 26(2), 549–557.

    Article  Google Scholar 

  • Hahn, P. D., & Lasfer, M. (2015). Impact of foreign directors on board meeting frequency. International Review of Financial Analysis,. doi:10.1016/j.irfa.2015.11.004.

    Google Scholar 

  • Hartzell, J., & Starks, L. (2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351–2374.

    Article  Google Scholar 

  • Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88(1), 96–118.

    Google Scholar 

  • Hermalin, B. E., & Weisbach, M. S. (2003). Boards of directors as an endogenously determined institution : A survey of the economic literature. Federal Reserve Bank of New York Economic Policy Review, 9(1), 7–26.

    Google Scholar 

  • Hou, W., Li, S., & Priem, R. L. (2013). How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures. Journal of International Management, 19, 138–151.

    Article  Google Scholar 

  • Hutchinson, M., & Gul, F. A. (2004). Investment opportunity set, corporate governance practices and firm performance. Journal of Corporate Finance, 10, 595–614.

    Article  Google Scholar 

  • Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Kamarudin, K. A., Ismail, W. A. W., & Samsuddin, M. E. (2012). The influence of CEO duality on the relationship between audit committee independence and earnings quality. Procedia-Social and Behavior Science, 65, 919–924.

    Article  Google Scholar 

  • Karamanou, I., & Vafeas, N. (2005). The association between Corporate Boards, audit committees and management earnings forecasts: An empirical analysis. Journal of Accounting Research, 43(3), 453–486.

    Article  Google Scholar 

  • Khondkar, K., Ashok, R., & Sanghyun, S. (2015). Board structure & AC monitoring: Effects of AC monitoring incentives & board entrenchment on audit fees. Journal of Accounting, Auditing & Finance, 31(2), 17–31.

    Google Scholar 

  • Klein, A. (2002). Economic determinants of AC independence. The Accounting Review, 77(2), 435–452.

    Article  Google Scholar 

  • Komarev, I., C. & Prat Dit Hauret, C. (2011). Le comité d’audit dans la gouvernance des sociétés cotées, Revue Française de Comptabilité, no 441.

  • KPMG, Practice audit committees, in France and in the world. (2015). http://www.kpmg.com/fr/fr/issuesandinsights/articlespublications/pages/pratique-des-comites-audit-2015.aspx.

  • Krivogorsky, V. (2006). Ownership, board structure, and performance in continental Europe. The International Journal of Accounting, 41, 176–197.

    Article  Google Scholar 

  • LaPorta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471–517.

    Article  Google Scholar 

  • Masulis, R. W., Wang, C., & Xie, F. (2012). Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53, 191–213.

    Article  Google Scholar 

  • Miletkov, M. K., Poulsen, A. B., & BabajideWintoki, M. (2014). The role of corporate board structure in attracting foreign investors. Journal of Corporate Finance, 29, 143–157.

    Article  Google Scholar 

  • Morck, R., Shleifer, A., & Vishny, R. W. (1988). Managerial ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.

    Article  Google Scholar 

  • Murphy, K. J., & Van Nuys, K. (1994). Governance, Behavior, and Performance of State and Corporate Pension Funds. Working Paper: Harvard University.

  • Park, Y. W., & Shin, H. H. (2003). Board composition and earning management in Canada. Journal of Corporate Finance, 185, 1–27.

    Google Scholar 

  • Short, H., & Keasey, K. (1997). Institutional shareholders and corporate goverance in the United Kingdom. In K. S. Keasey, S. Thompson & M. Wright (Eds.), Corporate Goverance: Economic, Management, Financial Issues (pp. 18-53). Oxford: Oxford University Press.

  • Singh, M., & Davidson III, W. N. (2003). Agency costs, ownership structure and corporate governance mechanisms. Journal of Banking and Finance, 27, 793–816.

    Article  Google Scholar 

  • Sun, J., Lan, G., & Liu, G. (2014). Independent audit committee characteristics and real earnings management. Managerial Auditing Journal, 29(2), 153–172.

    Article  Google Scholar 

  • Thomsen, S., Pedersena, T., & Kvist, H. K. (2006). Blockholder ownership: Effects on firm value in market and control based governance systems. Journal of Corporate Finance, 12(2), 246–269.

    Article  Google Scholar 

  • Vafeas, N. (2005). ACs, boards, and the quality of reported earnings. Contemporary Accounting Research, 22(4), 1093–1122.

    Article  Google Scholar 

  • Villiers, C., Naiker, V., & Van Staden, C. J. (2011). The effect of board characteristics on firm environmental performance. Journal of Management, 37(6), 1636–1663.

    Article  Google Scholar 

  • Walls, J. L., Berrone, P., & Phan, P. H. (2012). Corporate governance and environmental performance: Is there really a link? Strategic Management Journal, 33, 885–913.

    Article  Google Scholar 

  • Walters, B. A., Kroll, M. J., & Wright, P. (2007). CEO tenure, boards of directors, and acquisition performance. Journal of Business Research, 60, 331–338.

    Article  Google Scholar 

  • Ya’acob, N. S. (2016). CEO duality and compensation in the market for corporate control: Evidence from Malaysia. Procedia Economics and Finance, 35, 309–318.

    Article  Google Scholar 

  • Yang, T., & Zhao, S. (2014). CEO duality and firm performance: Evidence from an exogenous shock to the competitive environment. Journal of Banking & Finance, 49, 534–552.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. ISCCB, Carthage University, Bizerte, Tunisia

    Hazar Ben Barka

  2. CEPN-CNRS UMR no 7234, University Paris 13, PRES Sorbonne Paris Cité, 99 Avenue JB Clément, 93430, Villetaneuse, France

    Hazar Ben Barka

  3. Érudite, University Paris Est Créteil, Créteil, France

    François Legendre

Authors
  1. Hazar Ben Barka
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. François Legendre
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Hazar Ben Barka.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ben Barka, H., Legendre, F. Effect of the board of directors and the audit committee on firm performance: a panel data analysis. J Manag Gov 21, 737–755 (2017). https://doi.org/10.1007/s10997-016-9356-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10997-016-9356-2

Keywords

Search

Navigation