Corporate governance, audit committee voting power, financial reporting quality and corporate performance: empirical evidence from an emerging economy

Abstract

This paper aims to examine the relationship between board attributes and firm performance. Financial reporting quality (FRQ) is tested as an intervening factor. Reporting quality is operationalized through accrual-based and real earnings management. The moderating factor is audit committee voting power. The present study extends corporate governance research in publicly listed companies. This analysis is based on data from 104 nonfinancial companies listed on the Pakistan Stock Exchange between 2010 and 2022. It uses a random effects model and the Baron Kenny approach to examine the associations among board characteristics, FRQ and firm performance. The nonfinancial sector is highly competitive, offering an ideal environment to evaluate differences in governance frameworks and financial management. The results indicate that board independence is significantly and positively associated with firm performance, whereas other proxies of corporate governance, including board meetings, size and board diversity, show no significant association with corporate performance. This paper confirms the moderating role of audit committee voting power in the relationship between board characteristics and firm performance. Importantly, this research also establishes that the indirect relationship between board traits and performance is mediated by FRQ. The findings have significant implications for policymakers and regulatory bodies responsible for setting corporate governance standards. Policymakers should revise governance regulations to ensure corporate boards are empowered. This paper addresses the call of prior studies to link board characteristics by embedding FRQ and audit committee voting powers in the board-performance relationship, thereby addressing the inconclusive and contextual nature of board characteristics and their impact on firm performance.