Audit Committee Influence on Firm Performance in Emerging Economy

How Country Risk Predict Stock Market Return: Evidence from Pakistan


In emerging economies such as in the developing countries, the roles undertaken by audit committee in firms and companies have been and still regarded as a negligible contributor to the general firm performance. While this is a phenomena in the developing economies, the western or developed economies are continuing to recognize the significance of audit committee in the western firms and companies, and this is reflected in the massive research in this area that have stressed on the inclusivity and essentiality of audit committee in a firm. As such, firms as well as companies in developing nations underperforms in certain critical segments of the firm such as resource management sectors, and since the importance of the audit committee is overlooked, it becomes challenging and difficult to identify the key genesis of problems such as end of businesses, corporate demise or fraudulent activities related to financial resources as well as any other resource. This study aims at revealing the importance of audit committee in developing economies, casing the research on Pakistan companies listed in the Pakistan Stock Exchange, by examining the general structures and components of audit committees and their roles in relation to performance of these companies. Tobin’s Q analysis technique was adopted in this study, whereby firm performance was used as the Tobin’s Q variable, and its relationship with 23 independent variables which are attributes of audit committee investigated by using the Ordinary Least-Square Model, and technique. Findings from the study indicated the functions and roles of a significant percentage of the audit committee attributes are positively correlated with firm performance which implies that audit committee generally contributes significantly to the general firm performance, and particularly in the financial sector of a firm. The study concludes that audit committee is essential and an important factor of success and development of firms and companies in developing economies.

Keywords: Audit Committee Characteristics, Firm performance, Audit Committee, Audit Committee Chairship, Audit Committee Ownership,


Shareholders entrust the managers and vest them with their investments aiming to add value on it with their expertise and skills. Whereas management’s actions revolve with self-interest enhancement (Jensen and Meckling, 1976). Therefore, regulators and policy makers set rules and practices in order to protect shareholders interest, in broader view stakeholders interest, widely known as corporate governance. Yet, corporate world witnessed, especially in previous decade, fraudalance, debatable accounting practices and demise of businesses many times starting with Enron scandale. Scholars posited that stakeholders including the capital holders are fierce wih monitoring service prodivded by independent directors and the audit committee (Chan & Li, 2008). In chasing the reason behind all these corporate demises, there have been numerous research conducted on corporate governance based on ‘Western’ context, while emerging economy research exposure on the issue both empirically and theoretically remains thin. Realizing this paucity recent research trend exhibits increasing interest in the context of emerging economies.

Among many one of the core mechanisms of corporate governance is audit committee presence and their activities. Even though, audit committee existence is expected to reduce agency cost in firms and enhance performance, ownership concentration in emerging economy views it as an ornament. In fact, firm owners state that the role played by the audit committee in emerging economy is invisible. Audit committee presence is there only because it is a regulatory requirement. Therefore, the question remains unexplored and unresolved is to what extent audit committee presence and activities influence firm performance and moderated by owernship concentration in emerging economy.  Therefore, in this paper we attempt to focus light on the question through reporting on a study which will examine audit committee activities arragenments regard to leadership structures influence on firm performance based on emerging economy

Conceptual Background

Audit committee is defined as one of the board sub-committees consists of non-executive members predominantly, who are mostly concerned with audit, internal control and financial reporting matters of the company (Spira, 1998; Al-Mamun et al., 2014; Amer et al., 2016; Zabojnikova, 2016). Majority of the corporate legistations around the world stipulate audit committee as a must go thing which is force motivating compliance by public listed firms. However, such a statutory requirement has been enforced due to number of reasons including concerns about the credibility of financial reporting, information asymmetry and transparency issues corporations have been facing in business. Orelse audit committees have been argued and proved to influence governance effectiveness through mechanisms of accuracy of information reporting, internal control assurance, and audit reliability (transparency/compliance) (Zabojnikova, 2016).

Managerial actions are largely unobservable to outside constituents (Jensen and Meckling, 1976) and stakeholders are by and large forced to rely on financial reports as their basis for evaluating a firm, and its managers’, performance. As such, managers may behave opportunistically and misappropriate shareholder resources if ineffective governance mechanisms are in place (Soliman & Ragab, 2014). Accordingly, audit committees have merged as an important governance mechanism aimed at safeguarding the rights of investors by reducing information asymmetry and getting true and fair information about the company (Hermanson & Rittenberg, 2003; Abdul Rahman & Ali, 2006; Metawee, 2013). As financial reporting is the predominant mode of communicating the financial performance of a company to stakeholders, audit committees may play a key role in reducing information asymmetry between corporate managers and providers of finance  (Fang & Issa, 2019; Al-Khaddash et al., 2013; Adeyemi, 2017, Muhammad, et al.,2016; Muhamed & Bii, 2018). Accordingly, the characteristics of audit committees that are associated with effective task execution emerge as an important factor to be considered in contemporary corporate governance research and practice.

The magnitude of independent and effective audit committees has been increased caused by the regulator’s demand of effective corporate accountability, but concerns about the quality of financial reporting related to the last decade financial collapses. Given information asymmetry, some managers seem to have engaged in opportunistic earnings management to appropriate maximum benefits from the stock market and executive benefits (Adeyemi, 2017). This behavior is undesirable to shareholders, as earnings management masks the factual financial results and position of businesses and doubtful particulars that the shareholders must know (Adeyemi, 2017). As such, providers of capital may be misled into believing that long-term value is being created on their behalf and fail to intervene (e.g., dismissal) in a timely fashion. Since audit committee functions are relied with overseeing the financial reporting quality prior to disclose it public, they are expected to reduce financial descripancies and tend to help in producing quality financial reporting.  

Managers in firms while acting upon the shareholders, they adopt strategies that will enhance their own interest at the expense of shareholders’ (Yeh, Chung & Liu, 2011). In order to prioritize, managers are seen to exercise discrepancies in company operations which symbol of weak internal control. In North American practices, nevertheless recent efforts to strengthen the audit committee’s role in reducing irregularities in firms, research findings show that executive managers are in a position to influence and/or manipulate internal functions in firms (Johansen & Pettersson, 2013). However, such trend that management influence on firm irregularities are shown to have been reducing with the presence of effective audit committee, that is made of mostly with non-executive members, resulting strong internal control assurance to the shareholders. Accordingly, uncertainty and lack of transparency in corporations are also common practice which is opted in order to avial specific group’s interest (e.g., manager or shareholder, ignoring the stakeholder in a brother view) (Johansen & Pettersen, 2013). Such uncertainty is prevalent when managers appoint external auditors on their own choice or through personal connections. Auditors in such instance give their opinion without even performing their duty properly. However, audit committee functions also include coordinate with external auditor ensuring audit reliability of firms. Hence, research has also evidenced effective audit committee in a firm enhance audit reliability leading to proper compliance with the legislation. Moreover, information asymmetry is prevelant in corporations. Manageres are entrusted with the capital from shareholders and appointed to make decisions on behalf of the shareholders. However, managers tend to exhibit hiding information or in other words, that the shareholders often do not have access to the internal information which they need in articulating investment decisions. Audit committee as part of their functions reduce information assemtry in firms giving greater exposure to shareholders on their investment and returns.

Aforementioned arguments are practice of the developed economies as mandated by the legislations (e.g., Spira, 1998). Emerging economies still view audit committee as an ornament (Khan et al., 2013). This is because, in juxtapose to dispersed ownership, small managerial shareholdings, the prevalence of standalone companies, and market-based transactions in developed economies, emerging economies observe concentrated ownership, pyramidal ownership structures, the dominance of business groups, and high levels of related-party transactions. In such highly concentrated ownership environment, effective monitoring of managers is incredibly demanded. Even though audit committee is formed to enhance the quality of financial reporting in consists of non-executive members mostly, question raises whether they are financially independent in emerging economies (where ownership concentration is high) or not. Extant research shows that effectiveness of audit committee in emerging economies is doubtful. In fact, presence of audit committee does not guarantee its effectiveness and reduced problematic financial reporting. This is due to the non-stricter regulations for effective audit committee. Digging further, this is the result of appointing members in audit committee who can be shareholders or associates of shareholder, whereas developed economies mendate requires strictly to have members of audit committee to be independent from shareholders and managers. This condition in emerging economies is not met, hence they are largely symbolic. So the corporate governance mechanism for audit committee is largely compromised.

Owners’ preferences on audit committee

Solicitors of agency theory suggests a conflict of interest exists between the principal and the agent in organizations (Zabojnikova, 2016). The consequence of such dispersal, according to them, was the usurpation, by default, of the power of the firm’s managers who were seen as having interests not necessarily in line with those of shareholders. Therefore, shareholders are needed to help monitor and give incentives to agents doing coordination, cooperative work. The non-executive members of the audit committee did not tie conflict of interest and work on the behalf of the principal for their best of interest (Muhammad, et al., 2016). The concentrated ownership structure in emerging economies, like Pakistan business structure, one principal, contracts are needed to define the obligations and incentives, especially those in the periphery of the organization (Muhammad, et al., 2016).

Agency theory, recognizing the costs of monitoring systems, stresses the need to design incentive systems that will induce all participants to contribute their fair share to the common enterprise (Scott, 1998). Temporarily, the audit committee has generally been taken steps as a monitoring mechanism for the good governance of scrutinizing and glance financial and accounting affairs (Islam et al., 2010). Besides, the shareholders expect too much from this committee to underlying accounting and auditing standards for management reporting purport, especially in emerging economies where agency conflict is severe. Stakeholders expect the professional help from audit committee members in terms accuracy of information reporting, internal control assurance, and audit reliability. In pursuate of achieving mentioned objectives, it is observed substantial ownership holder sits on audit committee, chair of the committee tend to have firm ownership and blockholders appoint their representative on the committee.

Audit committee ownership

The dawn of the tendency of managers as well as executive directors being evaluated and monitored by non-executive directors is traced from the detrimental performances of managers as well as executive directors of today especially in the developing and underdeveloped economies whereby in such performances, self-interest is served and prioritized more than the policies and missions of a firm while integrity is suppressed and overlooked. Such actions are harmful to the firm, and the shareholders especially in situations where a firm is deficient of strong governance structures.  Based on the findings of some prior studies, firm directors in non-executive positions often act as firm stewards since their performances are mostly aimed at augmenting the firm value and general performance. Moreover, as firm stewards, non-executive directors stimulates the importance of having directors in the audit committee that have ownership titles. A firm board members that have ownership titles are observed by the management proponents to negligibly serve the interest of the firm and shareholder as stewards of the firm

Audit committee members with the power of owners in company and legislation would have autonomy and authority to make swift and lucid decisions, and they would be enabled to use their full capacity in achieving the objectives of the committee, reducing manupulations and producing quality financial reporting. Moreover, from the trading perspective, the audit committee who own substantial share are expected to possess knowledge and awareness of organizational operations, and having healthier technical expertise and, therefore, they are assumed to be more dependable stance (Guizani, 2013). Demands of investors and regulators for greater accountability is expected to be assured by the audit committees is likely further enhance the quality financial reporting (Zraiq & Fadzil, 2018). Thus, reduced agency conflict and producing quality financial reporting help building the the shareholders’ trust and lead to better firm performance. Hence the  hypothesis:

H1: Audit committee ownership influences firm performance negatively in emerging economies.

Audit committee Chair ownership

Jesen and Meckling who are a section of the pioneers of theories related to Audit Commite Chair Ownership point out that board ownership enhances the opportunity to minimizing agency costs in particular when the board chair is holding stakes on firm. Holding shares by the board leader aligns the interest with all other shareholders (Mohammed, 2018). Board leaders (chairman) often sit on the chair of audit committee on gaining large experience, working exposure and skills. Thus, the board chair holding substantial owernship on firm has the privilege of benefiting directly from their professional experience and efforts. On the other hand, they are also in warrying condition because of any undesirable penalties may arise due to their devious acts which reflects negative or positive differentiations on the market value of firm shares (Mohammed, 2018). Board chair, siting on audit committee chair who owns large shares often leads the audit committee aiming to nurture effectiveness of the committee, since he/she is expected to prevail internal control system often due to their self-interest warryness.

Managers opt for selft-interest and expropriate shareholders’ wealth which is contradictory to shareholders’ interest. Managers with controlling power fortify their opportunistic behaviour through dettering establishing effective audit committee. In such instance, where board chair holding firm shares, will lessen the controlling power from managers’ sholder both for the market and internal control of firms. Board chair with large shares sitting on audit committee chair assure effective internal control in that firm based on developed economy perspective. However, the emerging economy exhibit different show which explicate that substantial shareholder chairman sitting on audit committee will prioritize self-interest at the expense of rest of the shareholders, putting the internal control at a vulnerable condition. Hence, the results of lessening the controlling power of opportunistc managers, creating simulteniously vulnerable internal control system will reflecte mostly lesser market transparency and un-healthy financial statements. Therefore, in exploring to what extent audit committee chair holding shares enhance firm performance, we hypothesis the following:

H2: Audit committee chair ownership negatively infleunces firm performance in emerging economies given the constituents they are operating in.  

Blockholders implication

With dispersed shareholdings, monitoring managers may not be the discussion of the board since managers possess power to incline decision making process as well as manipulating the financial reporting through their personal connection with internal and external auditors. Managers also set such a mechanisms (in-effective audit committee) that hinder their monitoring system. But, firms where there is blockholdering are less likely to let the managers vested with substantial power without effective monitoring mechanism. Blockholders in firms are shown to expect returns from their investments that outweigh the costs incurres in monitoring the opportunistic managers. Therefore, a positive impact of blockholders on establishing effective audit committee is desirable. In formation of effective monitoring system, blockholders most often appoint their preferred members on audit committee in order to ensure managers are unable to expropriate their wealth.

While selecting members to appoint in audit committee, blockholders prioritize personnel who will speak and act on behalf of them. However in the case of emerging economies while appointing the audit committee members by blockholders to speak on their behalf, audit committee members skills, knowledge and experience might be compromised. This is because audit committees appointed by blockholders are expected to work as puppet (Khan et al., 2013). As a result, formation of effective audit committee is expropriated which shows weak internal control assurity and lessened audit reliability. Moreover, appointing or forming such an audit committee may incur extra cost to small shareholders (Muhammad, et al., 2016). Therefore, blockholders also avail their interest at the expense of small shareholders . Empirical research evidences that appointing representative in audit committee to safeguard blockholders interest or prioritizing opportunistic behaviour benefits specific group of stakeholder in economies where large shareholdings is highly clustered (Zraiq & Fadzil, 2018). Emerging economies are observed to have large blockholders and their incentives is higher on their investments (Adeyemi, 2017). Hence the third hypothesis that this study wish to explore is:

H3: Blockholders representative on audit committee will negatively influence firm performance in emerging economies.     

Chairman Career Horizon

Board leaders are entrusted with investments by capital providers to make investments aiming to protect the continued well-being of organizations (Heyden et al., 2015). Chairman as board leader, since every decision has to be approved the chairman, is considered as protector of firms including information dissemination, strategy making and implementation using their expertise and other resources. However, chairman is also argued to engage in self-interest protection at certain contexts of their career. Career concerns potentially are expected to inflict agency conflict between board chair and shareholders (Brickley et al., 1999). There are investments which may benefit the firms however, not the board chair particularly, at the extent of their near retirement. Chairman at their late career tend to act more safely both because of reputation and personal benefit tension. Chairman who is at the stage of retirement or nearing to retirement can be expected to be caucious on their acts which may result any negative impact on their reputation. Such as, if their titening/lessening monitoring mechachisms influence the the share value of firms negatively, they will be ruining their intangible returns (e.g., reputation) gained all over their career horizon. Hence, they might simply avoid being stricter/liberal in monitoring the firm managers through putting effective audit committee mechanisms.

Investments made by firms often results return on the long-term. Humen being has the tendency to incline self-interest or being jealous to forfeit gains on their own efforts (Al-Mamun, et al., 2014). However, investments/resource allocations generate shorter horizons can still be the consideration of chairman as they, from agency theory arguments, focus on short-term accounting returns which will reinforce their pension entitlements and signals post-retirement financial safety (Heyden et al., 2015). Therefore, chariman who is at the stage of retirement is more likely to focus on short-term investments instead of concerning minimizing managerial opportunistic behaviour through setting up effective audit committee committee, since they can  become increasingly risk-averse. As such, chairman at their later stage of career, except few examples where board leader acted generously in terms of long-term resource allocations, behave and focus on risk minimizing to safeguard their reputation and legacy (Heyden et al., 2015).       

Board chair often sits on audit committee chair either being independent or executive. Chairs are disproportionately powerful even though they are not in the position to implement the decisions made but contributes in making decisions. According to the legislative power in emerging economies power distance (Pakistan is scored with 55 points compared to US with 40) is also relatively high, which entitles privilege to the chairman to execute their self-motivated decisions. Moreover, being elder (often chairman position is filled with a elderly experienced individual), board chair sitting on audit committee chair has influence internal control and board investment decisiongs. Therefore, being the board leader vested with statutory power of board and monitoring mechanisms of committees, we exptect board chair sitting on audit committee chair at their later stage of career will, accelerating the agency problem, moderate the monitoring mechanisms of firms in emerging economies. Hence we hypothesize:

H4: Board-chair sitting on audit committee chair at their later stage of career will moderate the relationship between audit committee members ownership and firm performance in emerging economies

H5: Board-chair sitting on audit committee chair at their later stage of career will moderate the relationship between audit committee chair ownership and firm performance in emerging economies

H6: Board-chair sitting on audit committee chair at their later stage of career will moderate the relationship between blockholders’ representative on audit committee and firm performance in emerging economies


Description of sample size and data collection procedure

Since this study employs a case study-based design to demonstrate the stated postulates, the key data involved in this study was secondarily collected. A population of 639 companies in 32 different industries and listed in the Pakistan Stock Exchange for a period of 5 years, and that is from 2012 to 2017 was targeted as the appropriate sample size for this study. However, due to lack of the essential data and information relevant to this study from the relevant and reliable sources, a sample size of 480 companies from different 32 industries in Pakistan were considered for the study. Analyzing the data garnered from these companies obtained 1981-year firm observations. Data collection was mainly concentrated on corporate governance of the companies, Internal mechanism of the companies whereby information concerning audit committee chair, audit committee ownership, and audit committee block-holders representatives were gathered, compliance with corporate governance code of report, profiles of directors, and directors’ reports to shareholders as well as financial associated data. The key sources of all these data was the companies’ corporate websites, and other published manuscript by the companies as well as other authors relevant to this study, for instance, financial annual reports. Table 1 below summarizes the sample structure adopted in this study.

   Table 1: Summary of the samples selection

Panel APanel B
Total Pakistan Stock Exchange Listed Companies Sample Categories 
639Financial Sector102
Auto Mobile and Engineering33
  Less:   Missing Data Sample   High Performers Low Performers      (159)Food & Household Products69
Chemical & Pharma43
Services Sector3
480   182 298Industrial Products13
Construction and Materials36

Description of the Variables

Dependent variables

The variables used in the modelled equation(1) below are statistically described in Table 3.

Performance Measures

The variable employed as firm performance is Q (Tobin’s Q). The study is considered unique in this way that we use market based measure (Tobin’s Q). Tobin’s Q is defined as the ratio of the market value of equity and market value debt to replacement costs of firm’s assets. In Pakistan, as some other emerging economies, there is no active market for debt. Khana & Palepu (1999) argue that using market-based indicator is inappropriate in emerging countries where illiquid and thin trading market dictates the absence of efficient form of the capital market.

Predictor Variables

In line with Mendez and Garcia (2007), we measured audit committee ownership as the audit committee members holding percentage of shares on that firm for the firm year in out sample. We gathered the data on this predictor variable from company annual report available Karachi Stock Exchange website, company website investor relation sections and the press releases company issued on their shareholding and board related informations. Similar sources have been used to gather data on audit committee chair ownership and blockholder representative on audit committee. Audit committee chair ownership is measured as the percentage of shares held by the committee chair, while blockholders resepresentative on audit committee is measured using dummy variable 1 if blockholding owners set their representative on the committee, otherwise 0. Code of Pakistan corporate governance (2002) stated that “… the information on audit committee members and chairman are to be disclosed on the annual report of firms corporate governance sections” (Section xxx, p. 21). More generally, board members and the committee members if related to each other, is disclosed on the annual reports and in investor relation section of company website. We further confirmed blockholder representative on audit committee through personally inquiring with each of the companies personnel sitting on board. We then determined the board chair sitting on audit committee chair career horizon by subtracting the chronological age of the chair from 60, which has been used in study conducted by Heyden et al., (2015). In the aspect of Pakistan, audit committee chair, in general, retires after the age of 60. Therefore, the chronological age used by Heyden et al., and general practice of our sample are in same line.

 Control Variables

CEO-chair duality, board independence and board gender diversity have operationalized as they are widely expected to have influence on firm performance. Where CEO and chair position are held by different individuals it has been measured as 1, otherwise zero. Board independence is measured following other academic studies, number of independent directors sitting on board divided by board size. Board gender diversity is measured as number of female directors held on board divided by board size. Following Heyden et al., (2015), the firm size has been operationalized in its natural logarithmic form. Chen & Jaggi (2000) and Hutchinson & Gul (2004) argued that a firm’s size may lead to increased external control because creditors would monitor its capital structure more intensively in order to protect their interests. As such, we followed the lead of Jaskiewicz, Gonzalez, Menendez, & Schiereck (2005) and Anderson & Reeb (2003) included firm age (AGE) as a control variable. Firm age was measured as a continuous variable beginning in the firm’s founding year and ending in 2013. We have also controlled for debt-to-equity ratio, audit committee size, non-executive parcentage on audit committee, audit committee meeting frequency, board chair on audit committee, female on audit committee, chartered accountant on audit committee, audit chair tenure and audit committee chair as non-executive.

Ordinary Least-Square Model and Analysis

We estimate the cross-sectional logit model, equation (1), to test the hypothesized relation between different form of owernship of audit committee and the firm performance variable and the moderation effect of board chair sitting on audit committee chair age. 

 representative on audit committee)*board chair sitting on audit committee chair age + ………………………………………………………………….……Eq(1)

Analytical Procedures

We analysed data, in order to examine our research question and above developed equation, using Pearson correlation matrix and OLS regression approach. Pearson correlation matrix is used to examine the multi-colinilarity among variables used in this study (Hill & Adkins, 2007). We have also examined the inflation variation factor of the variables used in the study. We then applied OLS regression approach in extending the linear model (Heyden et al., 2015). The results from OLS approach accounts for the unobserved effect of the predictor variables (audit committee shareholders, audit committee chair shareholdings, and blockcholarder representative on audit committee) on dependent variable (Tobin’s Q) and also the effect of moderating variable (board chair sitting on audit committee chair’s career horizon) on the association between predictor variables (audit committee shareholders, audit committee chair shareholdings, and blockcholarder representative on audit committee) and outcome variable (Tobin’s Q). We have also presented the adjusted R square statistic which reflects the model fit assumption.


Out of a population of 639 listed companies in the Pakistanis Stock Exchange, a sample size of 480 companies were chosen to be involved in the analysis of the gathered secondary data. The analysis focused on different aspects of audit committee ownership in relation with firm performance. Selection of the sample size was based on the accessibility and availability of the required data which implies that for the sampled companies, the required data were accessible and publicly available for use. 

Table 2 shows the results of the descriptive statistics. All the variables mean and standard deviation including correlation matrix are on shown on Table 2. We have standardized the results for this study. Our result shows that the average score of Tobin’s Q of firms in an emerging economy, Pakistan, is 1.03, suggesting that the average market value of firm is greater than the book value of total assets held by firm. In Pakistan average firm year is 36.91 years while the firm size is 7.35 log of total assets held by firm. It is also worth noting that audit committee meetings frequency averages at just 1.42 per year. Gender diversity among Pakistan companies is also low, averaging at just 0.22. The percentage of females in these audit committees is just 13%, implying that women are not getting enough representation on corporate board committees. Additionally, the results shows that the 54% of members are blockholders representatives, which is significantly high companies in emerging economies.  We have also performed a correlation analysis to determine possible correlation among independent variables.  A total of 23 variables categorized into dependent, independent, predictive, and controlled variables were examined and analyzed for their association with the firm performance as the performance measure variable which was Q-Tobin’s Q. Ordinary Least Square Model was employed in analyzing the hypothesized associations between firm performance(Tobin’s Q), and different types of audit committee ownership as well as the moderation variable  which is the board position being part of the audit committee. 

Table 2: Descriptive Statistics and Correlations   Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Tobin’s Q 1.03 1.09 1.00       CEO-Chair Duality 0.45 0.55 0.17 1.00                                     Board Independence 0.52 0.59 .430 .370 1.00                                   Gneder Diversity 0.22 0.31 .380 .280 .510 1.00                                 Firm Age (Years) 36.91 26.73 .001 .003 .053 .051 1.00       Firm Size (LN of Total Assets) 7.35 0.81 -.283 .092 .084 .094 .073 1.00       Debt-to-Equity Ratio 0.15 0.27 .208 -.163 -.009 -.084 -.074 .081 1.00       AC Size (LN) 1.24 0.21 -.042 .006 .190 -.020 .018 .019 .021 1.00       Non-Executive Percentage On AC 0.87 0.20 -.050 -.036 .246 -.068 .125 .142 .171 -.019 1.00       AC Meeting Frequency 1.41 0.16 -.062 .084 .242 -.039 -.032 .084 -.029 .070 .069 1.00       Board Chair on AC 0.15 0.35 .153 .143 -.123 -.081 .069 -.066 -.054 -.045 -.048 -.039 1.00       Female on AC 0.13 0.33 .038 -.064 -.348 -.055 -.049 -.174 -.057 .058 .021 -.162 -.163 1.00       Chartered Accountant on AC 0.39 0.49 -.052 -.026 .169 .089 -.118 .088 .126 -.038 -.145 -.152 -.137 .051 1.00       Audit Chair Tenure 11.30 7.08 .011 .082 -.068 -.087 -.050 .075 -.101 .285 -.028 -.209 -.103 -.110 .030 1.00       Chairperson Age 55.24 7.77 -.038 .180 .183 -.098 .090 .136 .028 -.021 -.316 -.012 .227 -.102 .071 .074 1.00       AC Chair Non-Executive 0.98 0.16 -.011 .064 .030 -.088 .017 .524 .024 .028 .061 -.010 .016 .079 .051 .041 .031 1.00       AC Chair Advanced Degree 0.34 0.47 .113 -.043 -.034 .041 .110 -.014 -.078 -.069 .025 -.221 -.090 .095 -.056 -.301 .067 .059 1.00     AC Ownership (%) 2.72 6.86 -.096 .100 -.127 .040 -.120 -.153 -.053 .163 .080 -.022 .445 .088 -.014 -.064 -.071 -.042 .034 1.00     AC Chair Ownership 1.03 3.28 -.050 .193 -.153 .026 -.121 -.140 -.035 .163 .080 -.067 .335 .060 -.037 -.060 .692 -.083 .059 .062 1.00 Blockholder Representative on AC 0.54 0.50 -.139 .018 .170 .014 .230 .068 -.054 .086 -.093 -.012 .014 .156 .039 .001 .003 -.028 -.028 -.0.38 -.076 1.00        Notes: Correlations, significant at p<.10; significant p<.05; significant at p<.01; and significant at p<.001 (two-tailed)  

For the analysis in this study, we designed in a stepwise procedure. At the first stage, we estimated the control variables only. At the second stage of analysis, we introduced our predictor variables which developed hypotheses 1, 2 and 3. As mentioned earlier, there is no multicollinearlity in our model and we have standardized our model, which produced us with stable estimations. Subsequently we added moderating variable in the model which produced hypotheses 4,5 and 6, which are interpreted through figure 1, 2 and 3.

Table 3: OLS Regression Results for Tobin’s Q

 Model 1Model 2Model 3
Constant .000*** .000*** .000***
CEO-Chair Duality.022.013**.043.021**.054.032**
Board Independence.084.074*.53.064*.122.085*
Gneder Diversity.777.115.842.132.462.174
Firm Age (Years).045.319.
Firm Size (LN of total assets)-.297.000***-.290.000***-.293.000***
Debt-to-equity Ratio.220.000***.241.000***.233.000***
Audit Committee Size (LN)-.017.708-.006.888-.007.882
Non-executive Percentage on Audit Committee-.050.357.010.849.012.820
Audit Committee Meeting Frequency (LN).022.625.014.752.013.773
Board Chair on Audit Committee (Dummy).155.001***.170.000***.157.001***
Female on Audit Committee (Dummy)-.052.283-.040.400-.042.386
Chartered Accountant on Audit Committee (Dummy)-.016.7260.001.977.001.989
Audit Chair Tenure (Years)-.038.433.046.385.032.560
Chair Person Age.010.827.032.495.010.845
Audit Committee Chair Non-Executive (Dummy)-.008.876.010.843.013.806
Audit Committee Chairman Advanced Degree.103.022**.099.025**.106.019***
Audit Committee Ownership (%)  -.163.009**-.141.029**
Audit Committee Chair Ownership (%)  -.036.540-.043.470
Blockholder Representative on Audit Committee (Dummy)  -.118.008***-.124.005***
Chairage*Audit Committee Ownership    -.123.072*
Chairage *Audit Committee Chair Ownership    .137.039**
Chairage*Blockholder Representative on Audit Committee    .021.661
Adjusted R Square.137 1.89.172 7.17.175 1.57
F Stat

Notes: Results are statistically significant at less than 0.10, 0.05 and 0.01 which are represented by *, ** and *** respectively; Tobin’s Q as dependent variable

Figure1: Interaction effect of audit committee ownership and firm performance

Figure2: Interaction effect of audit committee chair ownership and firm performance on board chair sitting on audit committee chair age                on board chair sitting on audit committee chair age

Figure3: Interaction effect of blockholders’ representative on audit committee and firm performance on board chair sitting on audit committee chair age

Based on Table 3, which displays the results on the analysis between Tobin’s Q variable, and the other variables concerning the hypothesized association between firm performance, and different components of audit committee ownership, the results revealed that there is a significantly considerable correlation between Tobin’s Q, and the rest of the variables componential to the audit committee. Theoretically, in Pearson’s correlation analyses, the extent of correlations or associations between variables are determined by the coefficient value-r which reveals the magnitude of the relationships between two or more variables. There is a similarity in both the magnitude and direction of the coefficients of the parametric and non‐parametric correlations appear, suggesting that no serious non‐normality problems remain. The coefficient value lies between -1, and 1, and can never be a lower than -1 as well as greater than 1. A correlation of -1 reveals that the relationship between two or more variables is negative while a correlation of 0 implies that analyzed variables are not linearly or proportionally related, but the possibility of some non-linear relationship existing between such variables is high. A correlation coefficient of 1 implies that analyzed variables are strongly and linearly associated. The results were carried at 10%, 5%, 1% and 0.1% (two-tailed). According to the coefficient values on Table 3, in all the models, most of the variables are positively correlated with the firm performance.  Table 3 also indicates that there is a significantly high correlations between audit committee chair career advancement and Tobin’s Q. however, there are some variables showing negative correlation with Tobin’s Q as well.

Our first hypothesis (H1) suggests that there is no statistically significant correlation between audit committee ownership and firm performance measured by Tobin’s Q. The coefficient estimate for the audit committee ownership variable is -.163 (model I) and is statistically significant at 0.10 level. Therefore, the hypothesis is not rejected. The results are robust to the audit committee ownership— ownership by the median committee member, ownership by the entire committee, and ownership by the committee chair. This indicates that audit committee ownership and Tobin’s Q have a strong negative correlation. The companies may be reluctant to have audit committee members with the power of owners in company and legislation. The second hypothesis (H2) suggests that there is no statistically significant correlation between audit committee chair ownership and firm performance measured by Tobin’s Q. The coefficient estimate for the audit committee chair ownership is -.036 (model II) and is not statistically significant. Thus, the results of the regression analysis are consistent with the hypothesis. This suggests that having a board chair with large shares sitting on the audit committee chair can result in poor performance of the firm. The third hypothesis (H3) suggests that there is no statistically significant correlation between blockholders representative on audit committee and firm performance measured by Tobin’s Q. The coefficient estimate for the blockholders representative on audit committee is -.118 and is statistically significant at 0.10 level. This indicates that the blockholders representative on audit committee and Tobin’s Q have a strong negative correlation. The hypothesis, therefore, is not rejected. It also implies that the companies may be reluctant to appoint blockholders to the audit committee.  This could also mean that there’s strong oversight by independent directors on the audit committees of Pakistani companies. 

Hypothesis H4-H6 focused on how the interaction between board-chair age and audit committee member ownership and blockholders representative may affect firm performance. Hypothesis (H4) suggested that board-chair sitting on audit committee chair will moderate the relationship between audit committee members ownership and firm performance. The coefficient estimate of interaction is -.123 (model III) and is statistically significant at 0.10.  Thus, we fail to support the hypothesis.  For hypothesis (H5), the coefficient estimate suggest that the moderating effect of board-chair sitting on audit committee chair on the relationship between audit committee chair ownership and firm performance is .137 and statistically significant at 0.05, thus confirming our conjecture of positive relationship. The hypothesis is therefore supported.  Lastly, the hypothesis (H6) suggests that there is a positive moderation effect of board-chair sitting on audit committee chair on the relationship between blockholders representative on audit committee and firm performance. The coefficient estimate for this moderating effect is .021 but it is insignificant.

Figure 1 graphically illustrates the moderating effect of board-chair sitting on audit committee chair. The graph shows that for low levels of chairman age, the relationship between audit committee ownership and firm performance is negative, and vice versa. Similarly, the graphic illustration (Figure 2) clearly depicts that the relationship between audit committee chair ownership and firm performance is positive (negative) for high (low) levels of chairman age. Finally, with regards to hypothesis (H6), the graphical illustration (Figure 3) shows that for higher levels of chairman age, the positive relationship between blockholders representative and firm performance is more pronounced compared to the slope attributed to low levels of chairman age.


This study investigates the relationship between audit committee characteristics and firm financial performance in emerging markets and economies. Based on the analysis of the results, a significant consistency with ther postulated  hypothesis were realized.  With attribution to the first hypothesis (H1),  a negative significant correlation between audit committee ownership and firm performance measured by Tobin’s Q was realized. This suggests that the firms may be reluctant to have audit committee members with the power of ownership in the company and legislation. Some executives particularly in top positions in affirm might sometimes have difficulties having audit committee as part of the owners of the firm or as shareholders since that could potentially have an adverse impact their self-interest and opportunistic performance. As Elfeky et al. 2019 mentions in their study on the impact of audit committee on the voluntary corporate disclocure, independent directors on audit committee have no associations of any kind with the executive management and directors, and as such, they work more independently, and are not easily influenced by executive manageres or directors acuion. As they work independently and in keenness on the performance of executive managers and directors, an unhealthy association can potentially develop between audit committee with the ownership titile and the excutives, and this can resultantly impact the overall firm performance adversely. While a firm can be perfoming excellently in the financial sector, and in utilization as well as protection of resources, unhealthy association between managers and audit committee owners can potentially lead to underperfomance of the executive management and extensively impact the general performance of the firm negatively.

According to Zabojnikova (2016), the universal performance of a fim is directly associated with the input of the executive management, and any intereference with that input adversely impacts the firms performance. On the contrary, firm perfomaance and audit committee ownership in the developed economies are  have a positive relation. Accordin to a study by Bolton (2014) done fortune 500 companies listed in the New York Stock Exchange, positive the association between audit committee stock ownership and firm performance measured by ROA (Return on Assets) of large US companies is extremely positive. This is possible in developed economies since executive management in such economies often work towards achieving a firm’s missions and goals, and are not mostly involved in fraudulent or self-interest activities.  Yasser et al . 2014 did a study in some companies based in developed economies and found a positive association between firm perfomance and auditi committee ownership. This explain the trend in massive employment of western expertise to occupy executive management and director positions in firms based in underdeveloped, and developing or emerging economies (Zabojnikova, 2016; Zraiq & Fadzil, 2018; Yameen, et al., 2019). Shareholders and board of directors in collaboration with human respources management office of most firms or organizations in emerging eceoniomies of today tend to look for management expertise from developed economies since local expertise have proven to merely commit to the firm’s mission and goals, but tend to serve their self-interest (Elfeky, 2017). The contradictory outcome can be explained by the fact that while a greater proportion of non-executive members improves the control and strategic decision-making process of audit committees, independent directors who have inadequate knowledge of the business that can lead to wrong decision making  and consequently to poorer financial performance.

The second hypothesis found a negative significant relationship between audit committee chair ownership and firm performance measured by Tobin’s Q.  This outcome is supporting the finding AM et al, (2013) who examined 100 companies in Jordan and also discovered that having a board chair with large shares sitting on audit committee chair resulted in unhealthy financial statements. According to a similar study to this study conducted in Egypt by Amer et al. 2016, audit committee chair ownership impacts a firm’s financial performance negatively due to the underperfomance of executive directors and managers facilated by the uncomfortability of the presence of audit committee owner. One possible reason for this negative correlation is that when the same individual holds both the executive and the audit committee chair positions, it results in concentration of power and decision-making. This may compromise internal monitoring and control mechanisms of the committee, with the interests of shareholders suffering as a result (Fang & Issa, 2019). It also suggests that firms in which the owner or CEO is also the chairperson of the audit committee tend to perform more poorly than those in which the owner is not leading the committee.

The third hypothesis showed a strong negative correlation between blockholders representative on audit committee and firm performance measured by Tobin’s Q. The result obtained is consistent with the findings of Singh, et al (2017) who examined the impact of blockholders representatives on the performance of companies in continental Europe and reported a negative relationship. The reason for this negative relationship is that ownership concentration is high in Pakistan which gives managers the opportunity to become involved in self-serving activities at the expense of shareholders. Thus, governance issues arise due to the risks of expropriation by firms’ dominant or controlling shareholders at the expense of minority shareholders. In addition, firms with a concentrated ownership structure have stockholders who act as the chairperson of the audit committee which in effect lowers the effectiveness of the board (Guizani, 2013). It is also worth noting that the result on this aspect is contradictory to a study conducted by  Rajput and Bharti (2015) which found that there is a  positive correlation between stockholders representative and financial performance of Indian firms. This could be possible since India is one of the largest and fastest growing econimes in the world, and while this does not imply such an outcome, executive management in most Indian firms are almost similar to the western executive companies, and this is extensive to other South Asian companies such as China, and Singapore. Moreover, Audit committees in developed nations are regulated by certain legislative bodies that monitors theitr monitoring and evaluative activities, and this ensures that audit committees deliver their commitments deligently. Theoretically, with concerns to board chair age moderation, it can be argued that board chair sitting on audit committee chair at their later stage of career will, accelerating the agency problem and moderate the monitoring mechanisms of firms in emerging economies (Fang & Issa, 2019). For instance, the audit chair is responsible for ensuring that the focus of the agenda is on the important issues such as quality financial accounting, corporate reporting and effective internal controls (Ali & Nasir, 2016). With regard to the first moderating effect, we found a negative moderating effect on the relationship between audit committee ownership and firm performance measured by Tobin’s Q.  The study failed to find support for this conjecture. One possible reason is that audit committee member ownership is not influenced as critically as others characteristics of the committee.

The second moderating effect found that the power that comes from board chair age positively influences the relationship between audit committee chair ownership and firm performance. Thus, it can be argued that having a board-chair sitting in audit committees at their later stage of career is beneficial since they positively control the relationship between audit committee members to enhance the performance of the firm. This implies that when the chairman age moderation level is low, this positively influences the relationship between audit committee chair ownership chair and firm performance. On the contrary, if the chairman age is moderation levels are high, it negatively influences the relationship between audit committee chair ownership and firm performance (Guizani, 2013).  Finally, with regard to the third moderating effect, we found a positive relationship between blockholders’ representative on audit committee and firm performance measured by Tobin’s Q. More specifically, it was found that found that at higher levels of chairman age, the positive relationship between blockholders representative and firm performance is more pronounced compared to the slope attributed to low levels of chairman age. This also suggests that when the chairman age moderation levels are high, this positivity influences the relationship between blockholders representatives and firm performance. Equally, when the chairman age moderation levels are low, it negatively influences this relationship.


This study aimed at investigating  the relationship between audit committee characteristics and firm performance among Pakistani companies. Based on the results of this study, it is evident that the main objective has been achieved. The study employed several hypotheses to determine the correlation between independent variables and dependent variables as discussed in the research methodology section. A total of 48 companies were examined, and according to the findings, a significant negative relationship exist between audit committee characteristics (member ownership, chair ownership and blockholders representative) and firm performance of Pakistani listed firms). In addition, the moderating effect of board-chair age on the relation between audit committee members ownership, audit committee chair ownership and blockholders representative and firm performance were also analyzed. The findings suggest that there is a moderating effect of chair age on the relation between audit committee ownership and firm performance as well the relation between blockholders representative and firm performance. The moderating effect of chair age on the relation between audit committee members ownership and firm performance could not be statistically determined.  The findings contribute to the literature and understanding of the influence audit committee characteristics such as member ownership, chair ownership and blockholders representative on the audit committee. Boards of companies may use the results of this study to make appropriate decisions to improve performance particularly with regards to audit committee ownership, audit committee chair ownership and blockholders representative on audit committee.


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