Board of Directors, Audit Quality and Firm Performance: Evidence from Malaysia

Abstract

From the agency theory perspective, the importance of Corporate Governance (CG) is to mitigate the agency conflicts between managers and shareholders. In other words, CG as a mechanism aims to align management's goals with those of the stakeholders, which are to increase firm performance. Since, the value creation of CG can be measured through the firm performance; the aim of this study is to answer this question: ''is there any relationship between CG and firm performance?'' Therefore, three board characteristics that are of interest in this study include board independency, CEO duality, and board size. In addition, audit quality is considered as an external CG characteristic affecting firm performance. Based on a randomly selected sample of companies listed on Bursa Malaysia and applying the linear multiple regression as the underlying statistical tests, it is found that audit quality has a significantly positive relationship with firm performance as measured by Return on Asset (ROA) and Tobin’s Q (TQ). In addition, we find that board independency and CEO duality have respectively positive and negative relationship with TQ. However, there is no significant relationship between board characteristics and ROA. We conclude that market participants considers board independency as an effective monitoring mechanism while in reality, it does not have any significant effect on return on assets invested in a firm.

Keywords: Corporate Governance, Board of Directors, Audit Quality, Firm Performance

JEL Classification: G30