Authors: Stergios Tasios, Michael Bekiaris
Title: Factors affecting firm performance: the role of board diversity, auditing, and corporate characteristics.
Abstract
The outbreak of several corporate scandals in the early 2000 and the great financial crisis of 2008 brought into the center of attention the relationship between corporate governance, auditing, and firm performance. Agency theory suggests that better performance is expected for better governed firms due to lower agency costs (Azeez 2019). The board of directors in one of the most significant mechanisms for the mitigation of agency conflicts and the alignment of interests of shareholders and management. Moreover, the board of directors is responsible for the corporate strategy and accountable for the liabilities of the company, both to the public authorities, as well to other stakeholders.
The recent financial crisis revealed significant corporate governance weaknesses relating to the complexity of governance structures, lack of transparency, inability to handle the crisis and inadequacy to determine the chain of responsibility within the organizations (Martin and Herrero 2018). The role of the board, therefore, becomes even more important during periods of crisis where profitability is pressed, liabilities are increased and corporate strategy needs to be adjusted, as the financial crisis and the crisis of the covid-19 pandemic have showed. Auditing on the other hand, as an external corporate governance mechanism, can improve the value relevance of earnings and the book value of equity (Lee and Lee 2013) and is vital for financial reporting quality and the protection of the interests of all related to the company parties.
Even though the aspects of the board of directors have been studied by several researchers the results obtained in the literature are neither conclusive nor definitive (Martin and Herrero 2018). Therefore, new evidence can contribute to the understanding of the relationship between the governing role of the board of directors and firm performance. The purpose of this paper is to examine the relationship between firm performance, board diversity, auditing and corporate characteristics focusing on main aspects of the board of directors (size, independence, chief executive officer – CEO - duality, gender diversity); and auditing (audit committee and auditor type). For this purpose two accounting based measures of firm performance, return on assets (ROA) and return on equity (ROE) were regressed on board size, board independence, CEO duality, percentage of women on the board, presence of women on the audit committee and audit firm size; controlling for firm specific characteristics (firm size, leverage and liquidity).
The sample of study comprised all non-financial companies of the FTSE/Large Cap and FTSE/Mid Cap Indexes of the Athens Stock Exchange (ASE) for the period from 2014 to 2018. Descriptive statistics indicate that board gender diversity is low for the firms of the sample. Panel regression results show that ROA was significantly positively associated with the presence of women on the audit committee and significantly negatively associated with board independence. ROE was found to be significantly positively associated with CEO duality and with liquidity. The remaining variables were not found to be significant explanatory factors for the firm performance of listed companies on the ASE. The results of the study may be of interest to regulators, management and all parties involved in corporate governance, especially in the light of the adverse circumstances created by the coronavirus pandemic.
