Ownership Structure, Audit Quality, And The Governance–Performance Nexus: Dynamic Panel Evidence

Abstract

The study explores how corporate governance systems and quality of audit affect firm performance in an emerging market using a non-financial listed company in the Pakistan Stock Exchange (PSX). The article, based on the agency theory and complementary governance frameworks, investigates the impact of board properties, ownership structure, audit committee properties, and composite governance indices on firm performance in terms of Return on Assets (ROA), Return on Equity (ROE), and Tobin, Q (TQ). It uses an unbalanced panel sample over a series of years and uses a Fixed Effects (FE) regression and dynamic two-step System Generalized Method of Moments (System GMM) estimator to overcome the advantages of unobserved heterogeneity, endogeneity, and dynamic persistence of firm performance. Pre-estimation diagnostics verify the stationarity, absence of extreme multicollinearity and endogeneity thus justifying the use of System GMM. Empirical evidence has shown that the independent board, board diversity, ownership concentration, audit committee independence and expertise, audit quality, and the overall corporate governance quality has a positive and statistically significant effect on the performance of the firm. On the other hand, CEO duality is significantly and persistently negatively linked to all performance measures, indicating the negative impact of managerial concentration. The findings of dynamic GMM also support performance persistence and support the soundness of the findings with standard post-estimation tests, such as Arellano-Bond and Hansen tests. Moreover, interaction studies indicate that strong corporate governance enhances the performance advantages of ownership structure and audit quality.  The findings provide comprehensible evidence that good governance and good quality auditing are critical determinants of firm performance in Pakistan. The research, therefore, provides germane implications to regulators, policymakers, and corporate executives seeking to strengthen governance systems and increase the value of firms in emerging economies.