The effect of characteristics of audit committee and board on corporate profitability in Iran

Abstract

PurposeThe purpose of this paper is to evaluate the relationship between the characteristics of the audit committee and the board and profitability among the companies listed on the Tehran Stock Exchange (TSE) in Iran.Design/methodology/approachIn this study, the companies listed on the TSE during the period from 2010 to 2015 are investigated. The Linear panel regression method is employed for this purpose. The independent variables of the study are composed of some corporate governance mechanisms including audit committee size, audit committee expertise, board size, board independence, chief executive officer (CEO) duality, and institutional ownership.FindingsIn spite of the fact that there does not exist any significant association between audit committee size and corporate financial performance, the results indicate that there is a positive and significant relationship between audit committee financial expertise and profitability. The authors found that the number of board members cannot affect corporate performance; moreover, duality of CEO role in Iranian companies does not affect company performance. However, the outcomes showed a positive and significant association between the proportion of outside directors on the board (board independence) and profitability at 99 percent confidence level. This implies that the role of non-executive directors in Iran is inconsistent with the stewardship theory. This is due to the fact that independent directors understand the status of business and market better than the board’s executive members. Finally, the results indicated that there is no significant association between institutional owners and Iranian companies’ performance.Practical implicationsThe findings of this study will reveal more than ever the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation.Originality/valueThis is one of the most important studies that simultaneously examine the impacts of characteristics of the audit committee and the board on profitability in an emerging market, and the results of the study may give strength to Iranian as well other developing countries.