Does audit committee composition influence firm performance? Evidence from the top NSE-listed non-financial companies of India

Abhisheck Kumar Singhania and Nagari Mohan Panda

Asian Journal of Accounting Research, 2024, vol. 10, issue 1, 2-18

Abstract: Purpose - This study aims to examine the influence of Audit Committee (AC) composition on Firm Performance (FP) by measuring AC composition (ACC) with a composite score based on the varying effect of each composition-characteristic. Design/methodology/approach - Partial Least Squares- Structural Equation Modeling (PLS-SEM) technique is used to weigh ACC characteristics. Based on 133 companies and covering five years from 2016 to 2020, the study analyses data after controlling endogeneity through the Gaussian Copula approach. Findings - We find a significant positive influence of ACC on Firm Performance. Among the ACC characteristics, the absence of executive directors has the highest positive weight on ACC to influence FP, followed by AC size and Gender diversity. AC independence and members' accounting and financial expertise have no significant weight on its composition. Practical implications - Apart from the theoretical contribution, the study reveals that each ACC characteristic has a varying effect on AC effectiveness to influence the FP that needs to be considered by regulators while framing regulations on ACC and by BOD while constituting AC for a company. Originality/value - The study claims originality by being pioneering to reveal that AC composition, with a synergy of its disparate characteristics, positively impacts FP. It highlights that the absence of executive directors and gender diversity in AC (characteristics overlooked by the extant literature) significantly and positively influence FP. Methodologically, it introduces the use of the PLS-SEM algorithm to weigh the characteristics in governance studies. Further, these findings remain relevant amid recent Indian legal reforms, offering contemporary insights for policy consideration.

Keywords: Audit committee; Gender diversity; Non-executive directors; PLS-SEM; SmartPLS4; Gaussian copula; M4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajarpp:ajar-10-2023-0333

DOI: 10.1108/AJAR-10-2023-0333

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