Effect of the board of directors and the audit committee on firm performance: a panel data analysis
This research examines the relationship between independent directors, the audit committee (AC), and firm performance, taking into account the impact of the chief executive officer’s powers and block shareholders. We use the maximum likelihood estimator, based on agency theory assumptions and cylindered panel data, to examine three models of firm performance. The results show that the independence of the board is reflected clearly by increased economic and equity performance of the firm. However, an AC that is fully independent or meets frequently is associated with lower firm performance. Unlike pension funds, institutional shareholders can be considered an effective control mechanism in the context of France. Our results development includes advanced explanations for market liquidity and shareholders’ portfolios. The study period ends before the European regulation on ACs came into effect in 2008. This allows for an appreciation of soft law in French corporate governance. It also lets us compare the data with the way firms operate their boards one decade later. The evidence provides useful guidelines on the supremacy of soft law in corporate governance and suggests that the composition and functioning of the board of directors should be moderated based on the firms’ context. The specificity of the cylindered panel data helps to better examine the impact of the board and AC’s independence and functioning in French corporate governance structure.
KeywordsIndependent directors Audit committee External shareholders CEO power
- AFEP-CNPF, Viénot corporate governance report. (1995). http://www.ecgi.org/codes/documents/vienot1_fr.pdf.
- AFEP-Medef. (2002). Bouton corporate governance report, http://www.paris-europlace.net/files/a_09-23-02_rapport-bouton.pdf.
- AFEPMEDEF, Viénot corporate governance report. (1999).http://www.ecgi.org/codes/documents/vienot2_fr.pdf.
- Ben Barka, H. (2012). L’indépendance des administrateurs les risques du métier face à la mondialisation de la finance. Revue Française de Comptabilité, 451, 36–39.Google Scholar
- Berle, A. A., & Means, G. C. (1932). The modern corporation and private proprety. London: The MacMillan corporation.Google Scholar
- Broye, G., & Moulin, Y. (2012). Les déterminants de la rémunération des administrateurs externes dans les sociétés françaises du SBF 120. Finance Contrôle Stratégie, 15, 53–78.Google Scholar
- Cavaco, S., Challe, E., Crifo, P., & Reberioux, A. (2012). Conseils d’administration et performance des sociétés cotées, Report for CDC Research Institute, http://www.tresor.economie.gouv.fr/File/381034.
- Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy Management Review, 22(1), 20–47.Google Scholar
- Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Public Economics, 88(2), 288–307.Google Scholar
- Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88(1), 96–118.Google Scholar
- Hermalin, B. E., & Weisbach, M. S. (2003). Boards of directors as an endogenously determined institution : A survey of the economic literature. Federal Reserve Bank of New York Economic Policy Review, 9(1), 7–26.Google Scholar
- Khondkar, K., Ashok, R., & Sanghyun, S. (2015). Board structure & AC monitoring: Effects of AC monitoring incentives & board entrenchment on audit fees. Journal of Accounting, Auditing & Finance, 31(2), 17–31.Google Scholar
- Komarev, I., C. & Prat Dit Hauret, C. (2011). Le comité d’audit dans la gouvernance des sociétés cotées, Revue Française de Comptabilité, no 441.Google Scholar
- KPMG, Practice audit committees, in France and in the world. (2015). http://www.kpmg.com/fr/fr/issuesandinsights/articlespublications/pages/pratique-des-comites-audit-2015.aspx.
- Murphy, K. J., & Van Nuys, K. (1994). Governance, Behavior, and Performance of State and Corporate Pension Funds. Working Paper: Harvard University.Google Scholar
- Park, Y. W., & Shin, H. H. (2003). Board composition and earning management in Canada. Journal of Corporate Finance, 185, 1–27.Google Scholar
- Short, H., & Keasey, K. (1997). Institutional shareholders and corporate goverance in the United Kingdom. In K. S. Keasey, S. Thompson & M. Wright (Eds.), Corporate Goverance: Economic, Management, Financial Issues (pp. 18-53). Oxford: Oxford University Press.Google Scholar