Revisiting the role of audit and compensation 'committees' characteristics in the financial performance of the non-financial sector through the lens of the difference generalised method of moments

Rahman, Habib Ur; Ali, Asif Article Revisiting the role of audit and compensation 'committees' characteristics in the financial performance of the non-financial sector through the lens of the difference generalised method of moments Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Rahman, Habib Ur; Ali, Asif (2022) : Revisiting the role of audit and compensation 'committees' characteristics in the financial performance of the non-financial sector through the lens of the difference generalised method of moments, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 9, Iss. 1, pp. 1-20, https://doi.org/10.1080/23311975.2022.2085365 This Version is available at: https://hdl.handle.net/10419/288903 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 08 Jun 2022. Submit your article to this journal Article views: 2261 View related articles View Crossmark data Citing articles: 6 View citing articles ACCOUNTING, CORPORATE GOVERNANCE & BUSINESS ETHICS | RESEARCH ARTICLE Revisiting the role of audit and compensation ‘committees’ characteristics in the financial performance of the non-financial sector through the lens of the difference generalised method of moments Habib Ur Rahman 1 and Asif Ali 2 * Abstract: This study aims to analyse the role of audit and compensation committees’ characteristics in the financial performance of the non-financial sector of Pakistan. For this purpose, we collect data from 2009 to 2020 for 70 non-financial firms selected through stratified random sampling. Theoretically, the committees’ characteristics and financial performance are jointly determined, creating some estimation issues in the panel setting. Therefore, the issue of endogeneity, the dynamic data-generating process and autocorrelation between the residuals needs attention to arrive at consistent and unbiased estimates. To overcome these estimation issues, we estimate the dynamic panel models using difference GMM under the Arellano-Bond framework to arrive at unbiased and consistent estimates. The estimates of this study reveal that the characteristics of the audit and compensation committees improve the overall financial performance of the non-financial sector of Pakistan. The specific estimates of the committee’s characteristics reveal that the audit and compensation committee independence, audit and compensation committee meetings, and audit committee size enhance the financial performance of the non-financial sector of Pakistan. These findings strengthen the idea that the audit and compensation committee should be independent, which helps develop strong internal controls. Therefore, a key policy priority should be to plan for implementing some parts of the Sarbanes Oxley Act in Pakistan. Surprisingly, the audit committee’s existence and the compensation committee head’s independence deteriorate the financial performance of the non-financial sector of Pakistan. This study has raised important questions about the compensation committee chairman’s independence that need further investigation. Subjects: Auditing; Financial Accounting; Corporate Governance Keywords: Audit committee; compensation committee; committee Independence; financial performance; non-financial sector 1. Introduction Over the last three decades, several major corporate scandals, such as Enron and Carillion, influenced the organisation’s performance and compelled the regulatory authorities to pay greater Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 1 of 20 Received: 26 April 2022 Accepted: 30 May 2022 *Corresponding author: Asif Ali Pakistan Institute of Development Economics, Islamabad 44000, Pakistan E-mail: [email protected] Reviewing editor: Collins G. Ntim, Accounting, University of Southampton, Southampton, United Kingdom Additional information is available at the end of the article © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. attention to corporate governance practices in order to increase investors’ and shareholder’s confidence with a greater focus on audit and compensation committee structure (Armstrong, Moustafa, and Elamer, 2021). The audit and compensation committee’s structure and characteristics have received considerable critical attention in the recent past since corporate fraud can be avoided through devising effective monitoring and controlling processes for the management. 1 Recently, a substantial literature has grown up around the theme of audit and compensation committees. For instance, Khalid et al. (2020) recently revealed that the audit and compensation committees are critical to monitoring and controlling management’s overall performance. Further, a better-governed organisation with low agency costs performs better because organisation committees build the mechanisms to achieve higher performance (Zhou et al., 2018). The Pakistan Code of Corporate Governance (PCCG) 2012 emphasises that the listed firms in the equity market must have at least audit and compensation committees. 2 Further, PCGG 2012 provides guidelines on the composition and characteristics of the audit and compensation committees. It might be essential to note that these guidelines are consistent with many financial regulations, including The Sarbanes–Oxley Act of 2002. In particular, PCCG 2012 requires that the audit committee have three members. This code of conduct further reveals that at least one member must be an independent director, and the other comprises non-executive directors. Similarly, the compensation committee also has at least three members and constitutes a nonexecutive director and preferably an independent director. These characteristics of audit and compensation committees are expected to affect a firm’s financial performance through various transmission mechanisms. Contemporaneously, the agency and stewardship theories provide contradictory theoretical mechanisms for a firm’s financial performance. The theoretical implications of the audit and compensation committees in the presence of agency and stewardship theories are unclear. Therefore, the impact of audit and compensation committees on financial performance needs empirical investigation. This study attempts to provide empirical evidence of the effects of audit and compensation committees on the financial performance of a non-financial sector firm in Pakistan. Existing research recognises the critical role played by the audit committee in improving the financial health of a sector. In particular, this strand of the literature reveals that monitoring financial reporting through an audit committee helps the organisation control manager’s practices, which mitigates the agency problem (Alqatamin, 2018; Forker, 1992). This transmission mechanism enables the audit committee to improve the financial reporting system. However, this performance improvement depends upon the effectiveness of an audit committee. The existence of an audit committee cannot guarantee the efficacy of an audit committee, and there must be specific characteristics for an audit committee to be influential. Recent developments in a nexus between the audit committee and financial performance have renewed interest in audit committee characteristics (Kallamu & Saat, 2015). Studies over the past two decades have provided important information on the audit committee characteristics. The key attributes of an audit committee can be listed as follows: the independence of board members, size of the committee, and committee meetings. These audit committee characteristics are expected to enhance the audit committee’s effectiveness. One of these lines, James A. Hall (2019) reveals that the independent, diversified and competitive audit committee improves the internal controls. In a similar vein, Kallamu et al. (2015) demonstrate that audit committee effectiveness plays a more significant role in supervising the management to protect the interest of shareholders. Similarly, more recent attention of researchers, professionals, and regulators has focused on the role of compensation committee characteristics on financial performance. There are several possible explanations for this attention. Existing literature, along with the industry practitioners and regulators, are more concerned about the effectiveness of compensation committees since these committees play a significant role in identifying and controlling the executive pay and setting standards for the appropriate remuneration (Sun et al., 2009). It might be essential to note that sub-committees handle specific board roles in this context. The compensation Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 2 of 20 committee is a crucial sub-committee of the board concerning the nature of the executive pay scheme (Main & Johnston, 2012). The absence of a compensation committee in a firm is an indicator of weak internal controls that provides an opportunity for the high-ups of the firms to award higher compensation to themselves. These higher compensations ultimately deteriorate the shareholder’s wealth that different stakeholders do not favour. Therefore, an adequate compensation committee improves financial performance by developing better remuneration for executives and motivating managers to make value maximisation decisions (Catuogno et al., 2016). As mentioned above, in the context of an audit committee, the existence of a compensation committee cannot guarantee its effectiveness, and there must be specific characteristics of a compensation committee to be effective. The characteristics of a compensation committee can be best investigated as the committee meeting and its level of independence. The above discussion reveals that the audit committee and compensation committee characteristics are expected to affect the financial performance of a sector. Despite the importance of this nexus, there remains a lack of empirical evidence on the role of these committee’s characteristics in financial performance. In particular, we could not find any substantial evidence on the topic from Pakistan. A cross-sectional study was conducted using the data for the year 2016. Due to the comprehensive data and empirical estimation constraints, existing empirical literature could not provide ample evidence on this topic (Chaudhry et al., 2020). Further, the existing empirical studies on the non-financial sector of Pakistan ignored the issue of endogeneity and the dynamic data-generating process (Al Farooque et al., 2020; Valenti et al., 2011; Wooldridge, 2002). In this setting, the estimates from the ordinary least square are biased (see, Aali-Bujari et al., 2017; Rahman et al., 2020a). Some studies used the fixed-effect models to estimate the impact of corporate governance practices on financial performance (Rahman et al., 2020a). Nonetheless, several published studies (Rahman et al., 2020b; Nickell, 1981) describe that the fixed effects in this setting are subject to Nickell bias, especially when N is larger than T. We overcome these estimation issues by estimating the dynamic panel models using difference GMM. And these estimation techniques enable us to arrive at unbiased and consistent estimates. In this setting, this paper analyses the impact of the audit and compensation committee’s characteristics on the financial performance of the non-financial sector of Pakistan. Using panel data of 70 non-financial firms from 2009 to 2020, we estimate the dynamic panel models under the Arellano-Bond framework. The findings of this investigation complement those of earlier studies. This study makes several contributions to the current literature: (1) this study overcomes the estimation issues in the relevant empirical strand of literature; (2) this study provides a refined empirical framework to investigate the role of committees’ characteristics on financial performance; and (3) this study provides valuable insights to the industry practitioners, researchers and regulators on the role of audit and compensation committees on the financial performance of a firm. The generalisability of these results is subject to certain limitations. The rest of the paper is organised as follows. The next section of this paper synthesises the relevant literature and presents the testable hypothesis. The methodological approach is elaborated in the third section. We discuss the empirical results in the fourth section. This paper is concluded in the last section. 2. Relevant literature and hypotheses development 2.1. Background and theoretical literature Various studies have assessed the efficacy of stewardship theory in the financial performance of companies since the stewardship theory states that agents (managers) are concerned about the shareholder’s wealth and the company’s overall performance. These theoretical foundations are in contrast to the agency theory, which reveals that managers are individualistic and self-centred (Kallamu & Saat, 2015). Several authors (Davis, Schoorman, & Donaldson, 1997; Hamdan, Sarea, & Reyad, 2013) have considered that the structure of the organising committee highly affects the firm performance. However, the efficacy of this nexus depends upon the fact that executives have Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 3 of 20 the authority to decide. This view is supported by Kallamu and Saat (2015), who write that the audit committee assists the board of directors in performing its role concerning accounting and finance functions. In terms of a concept, the audit committee concept varies according to the roles, goals, and duties. Further on this interaction, there is a large number of published studies 3 that focus on the linkage between the audit committee characteristics, including (1) audit committee existence, (2) audit committee independence, (3) audit committee size, and (4) audit committee meeting and the organisational performance. Section 2.1 synthesises the relevant literature on the nexus between these audit committee characteristics and a firm’s financial performance. Different theories exist in the literature regarding corporate governance and firm performance. Most recent attention has focused on the agency theory and stewardship theory to explain the association between the organisational committees and the organisation’s performance. Firstly, the agency theory plays a vital role in defining the roles of the principal and the agents. Several studies reveal that principals and agents mainly focus on their personal interests and ignore each other’s interests. 4 Due to the separation of ownership, managers have the liberty to accomplish their interests, which neglects the purpose of maximising the principal’s resources (Davis, 1991; Muth and Donaldson, 1998)Several lines of evidence suggest that efficient and effective audit committees are needed to resolve the agency problem. Several authors have considered the effects of an audit committee on the financial performance if this committee help in resolving the agency’s problems. Along these lines, Rahmat et al. (2009) reveal that these committees improve the firm performance. 2.2. Empirical literature and hypotheses development Section 2.2.1 and 2.2.2 synthesise the relevant literature on the nexus between these audit committee characteristics, compensation committee characteristics and a firm’s financial performance. 2.2.1. The audit committee characteristics and financial performance A broader perspective has been adopted by Fama and Jensen (1983). They argue that the effective and independent audit committee enables the higher management to protect the interest of shareholders to maximise wealth. The literature on the independent audit committees has highlighted several related transmission mechanisms through which the audit committees affect the performance of a business (also see, M. M. Rahman et al., 2019). We classify these transmission mechanisms into three types: (1) enhancing the compliance mechanism (Mangena et al., 2011), (2) performing the monitoring role effectively (Yatim, 2009), and strengthening the informativeness (Woidtke & Yeh, 2013). Another significant aspect is that the independence of the audit committee affects the company’s share price and share performance (also see, Kyere & Ausloos, 2021). To better understand the mechanisms of the independence of the audit committee and its effects, Rahmat et al. (2009) reveal that the composition of the audit committee matters in determining the independence of the audit committee. In particular, Rahmat et al. (2009) argue that a committee with a more executive director is considered less independent than a committee with a more non-executive director. In a similar vein, Klein (2002) reveals that audit committee independence enhances the liberty of management and committee size. The study by Ali and Meah (2021) stated that audit committee independence is enhanced when the corporate board is larger, and a higher number of independent directors are served on the corporate board. It is now well established from a variety of studies that the independent audit committee enhances financial performance by improving the audit quality Kallamu and Saat (2015) and reducing agency problems (Yeh et al., 2011; Chan & Li, 2008; Alqatamin, 2018). There is some evidence to suggest that the audit committee size is associated with the effective monitoring of the top management activities (Kallamu & Saat, 2015). Several authors have reported the effect of audit committee size on a business’s financial performance (Alqatamin, 2018; Mohammed, 2018; Dakhlallh et al.,2020; Chan & Li, 2008). It is now well Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 4 of 20 established from various studies that the audit committee size is irrelevant in the absence of activeness of the committee. However, more recent attention has focused on the gauges of the audit committee’s activeness. Along these lines, Syofyan, Septiari, Dwita, and Rahmi (2021) illustrate that activeness of the audit committees depends on the frequency of audit committee meetings. Along these lines, a large and growing body of literature (Collier, 1993; McMullen & Raghunandan, 1996; Menon & Williams, 1994) has focused on meeting frequency. This strand of the literature suggests that frequent audit committee meetings (1) effectively monitor the financial activities of a firm; (2) examine the effectiveness of various committees, and (3) get insights into the financial performance (Al-Matari Al-Swidi , Fadzil, and Al-Matari 2013; Alqatamin, 2018). In view of all that has been mentioned so far, one may suppose that the audit committees’ characteristics, including the audit committee existence, the audit committee independence, the audit committee size, and the audit committee frequency of meetings, affect the financial performances of a firm. Taken together, this discussion leads us to construct the following testable hypotheses: Testable Hypothesis I: The audit committee’s existence has a significant effect on the financial performance of the non-financial sector. Testable Hypothesis II: The audit committee’s independence has a significant effect on the financial performance of the non-financial sector. Testable Hypothesis III: The audit committee size has a significant effect on the financial performance of the non-financial sector. Testable Hypothesis IV: The audit committee’s frequency of meetings has a significant effect on the financial performance of the non-financial sector. Turning now to the compensation committee, Section 2.2 synthesises the relevant literature on the nexus between the compensation committee characteristics and a firm’s financial performance. 2.2.2. The compensation committee characteristics and financial performance Several authors have recognised that the compensation committee can play a significant role in mitigating the differences between management and ownership, ultimately increasing firm performance (Tosi & Mejia, 1994; Kaplan, 1994)Therefore, Tao and Hutchinson (2013) stated that it is vital for the organisation to have a compensation committee with an independent director to reduce information asymmetry. Previous research has established that a high-quality independent compensation committee enhances the financial performance of a firm through (1) strengthening governance (Sun et al., 2009), (2) enhancing the board effectiveness (Liao & Hsu, 2012) and (3) compelling the board to become active (Vafeas, 1999). Many published studies (R. C. Anderson & Bizjak, 2003; Hsu & Petchsakulwong, 2010; Jackling & Johl, 2009; Nelson et al., 2010) focus on the frequency of compensation committee meetings. In particular, these studies suggest that the firm performance and success of the board depends on the frequency of compensation committee meetings. Given all that has been mentioned so far, one may further suppose that the compensation committees affect the financial performances. The studies presented thus far enable us to construct the following testable hypotheses. Taken together, this discussion leads us to construct the following testable hypotheses: Testable Hypothesis V: The compensation committee meetings have a significant effect on the financial performance of the non-financial sector. Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 5 of 20 Testable Hypothesis VI: The compensation committee chairperson’s independence has a significant effect on the financial performance of the non-financial sector. Testable Hypothesis VII: The ratio of non-executive directors to total directors available in the compensation committee has a significant effect on the financial performance of the non-financial sector. The evidence of these empirical conjectures makes several contributions to the current literature. The following section presents the methodological framework of this study. 3. Research design We present the methodological approach by categorising into (1) data and relevant discussion, (2) variable construction, (3) model, and (4) empirical strategy. 3.1. Data and relevant discussion Using a stratified random sampling technique, we selected 70 non-financial companies listed in the Pakistan equity market. Table 1 presents the details of stratified random sampling, which further reveals that the companies chosen represent the non-financial sector of Pakistan. 5 Due to a distinct capital structure, we excluded the financial sector from this empirical investigation and excluded those non-financial firms which did not provide complete information on variables used in this study. In other words, firms are selected based on the availability of financial data (Younas, UdDin, Awan, and Khan, 2021). The annual data from 2009 to 2020 were collected from these selected companies using four sources: (1) annual reports of the companies, (2) the Website of the Pakistan equity market, (3) business recorder, and (4) financial statement analysis report. In this setting, we use panel data that have several advantages over the pure time-series and cross-sectional data since the panel data contains (1) more information, (2) more variability, and (3) more efficiency. Section 3.2 presents the variable construction. 3.2. Variables construction In this investigation, the aim is to analyse the effect of audit and compensation committees’ characteristics on the financial performance of the non-financial sector of Pakistan. For this purpose, the dependent variable is financial performance. Existing empirical literature measuring financial performance has utilised three proxies: (1) Return on Asset (ROA), (2) Return on Equity (ROE), and (3) Earning per Share (EPS). 6 Following the existing empirical literature, we use these three proxies to analyse the effect of audit and compensation committees on the financial performance of the non-financial sector. Turning now to the explanatory variables, we use four characteristics of the audit committee and three characteristics of the compensation committee as the independent variables (see sections 2.1 and 2.2). All the audit committee characteristics used in this study are consistent with the previous studies (Muhammad et al., 2016; Al-Matar et al., 2013; Alzeban, 2019; Krishnan, 2005; Dakhlallh et al., 2020). The first audit committee characteristic is the existence of the audit committee, which is measured as one if an organisation has an audit committee; otherwise, zero. The second audit committee characteristic is audit committee independence which is the number of non-executive members serving on the audit committee. The third audit committee characteristic is the audit committee meeting, measured as the total number of meetings held in the financial year. The fourth characteristic of the audit committee is the audit committee size that is the total number of members constituting the audit committee Another significant aspect of the variable construction is the compensation committee characteristics. As mentioned above, we use three characteristics of the compensation committee. All the compensation committee characteristics used in this study are consistent with the previous studies (Usman, Akhter, & Akhtar, 2015; Kanapathippillai et al., 2019; Tao & Hutchinson, 2013). The first characteristic of the compensation committee is the compensation committee meeting which Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 6 of 20 is measured as the total number of compensation committee meetings held during a financial year. The second characteristic of the compensation committee is the compensation committee chairperson’s independence which is used as a dummy variable. This variable is measured as one when the compensation committee chairman is an independent director and zero otherwise. The third compensation characteristic is the independence of the compensation committee, which is used as the ratio of non-executive directors to total members of the compensation committee members. What follows is the discussion of the control variables. Following existing empirical literature (Buallay et al., 2017; Sheikh et al., 2013), we use three control variables, including (1) the size of the firm, (2) the age of the firm, and (3) leverage. These control variables are measured as follows: (1) the size of a firm is calculated as the natural log of total assets, (2) firm age is calculated as the number of years since the company is established, and (3) leverage is the ratio of total debt to equity. Table 1. Sample section from non-financial sector using stratified random sampling technique Sector Population SRS Size SW Size SW Cement 18.00 0.12 11.00 0.15 Textile Composite 15.00 0.10 9.00 0.13 Textile Spinning 15.00 0.10 8.00 0.11 Chemical 12.00 0.08 6.00 0.08 Pharmaceuticals 12.00 0.08 5.00 0.07 Food and Personal Care Products 8.00 0.05 5.00 0.07 Sugar and Allied Industries 8.00 0.05 3.00 0.04 Cable and Electrical Goods 7.00 0.05 2.00 0.03 Fertilizer 6.00 0.04 2.00 0.03 Automobile Assembler 5.00 0.03 2.00 0.03 Technology and Communication 5.00 0.03 2.00 0.03 Transport 5.00 0.03 2.00 0.03 Engineering 4.00 0.03 2.00 0.03 Glass and Ceramics 4.00 0.03 2.00 0.03 Oil and Gas Exploration Companies 4.00 0.03 3.00 0.04 Oil and Gas Marketing Companies 4.00 0.03 1.00 0.01 Paper and Board 4.00 0.03 1.00 0.01 Power Generation and Distribution 4.00 0.03 1.00 0.01 Refinery 4.00 0.03 2.00 0.03 Automobile Parts and Accessories 3.00 0.02 2.00 0.03 Total 147.00 1.00 71.00 1.00 SRS and SW indicate the stratified random sampling and stratum weight, respectively. The sectors are sorted based on their size. Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 7 of 20 The last section of Tables 2 and 3 presents the estimates of the diagnostic tests. J-statistic reported above is the Sargan statistics, and it can be seen from the last section of Table 2 that the instrument rank of 61 is greater than the estimated coefficients in all cases. Further, the estimates for the Arellano-Bond test for zero autocorrelation in the first differenced errors are reported at the end of Tables 2 and 3. These estimates reveal that the null hypothesis is rejected at the first level but not at the higher level. These results reveal that the errors in Equations 3.3.1 to 3.3.6 are serially uncorrelated. 5. Summary and conclusion The purpose of the current study was to determine the role of audit and compensation committees’ characteristics in the financial performance of the non-financial sector of Pakistan. We use stratified random sampling to select 70 firms from the non-financial sector and collect panel data from 2009 to 2020. The estimates of the dynamic panel models under the Arellano-Bond framework reveal that the characteristics of the audit and compensation committees improve the overall financial performance of the non-financial sector of Pakistan. More specifically, the results of this investigation show that the audit and compensation committee independence, audit and compensation committee meetings, and audit committee size enhances the financial performance of the non-financial sector of Pakistan. One of the more significant findings to emerge from this study is that the audit committee’s existence and the compensation committee head’s independence deteriorates the financial performance of the nonfinancial sector of Pakistan. These findings raise intriguing questions regarding the nature and extent of the existing composition of the committees. These findings further emphasise the restructuring of committees, enhancing their effectiveness and contributing to overall performance. Overall, this study strengthens the idea that the audit and compensation committee should be independent, which helps develop strong internal controls. Therefore, a key policy priority should be to plan for implementing some parts of the Sarbanes Oxley Act in Pakistan to strengthen the corporate governance mechanism and stock exchange practices. The findings of this investigation complement those of earlier studies. In particular, the regulatory bodies should ensure the implementation of the Pakistani Code of Corporate Governance (PCCG) to (1) improve corporate governance practices and (2) reduce the trust deficit among different stakeholders, including shareholders, employees and the business community. Further, the member’s role with accounting and finance expertise should be precisely defined to execute the remuneration plan. Specifically, the designed remuneration plan should be in the best interest of all stakeholders. This study has raised important questions about the nature of the compensation committee chairman’s independence, and this aspect needs further investigation. Acknowledgements We are grateful to Mr Muhammad Hanif for his assistance in the data collection. Funding The authors received no direct funding for this research. Author details Habib Ur Rahman 1 E-mail: [email protected] Asif Ali 2 E-mail: [email protected] 1 Faculty of Higher Education (Accounting and Finance), Holmes Institute, Gold Coast, Australia. 2 Pakistan Institute of Development Economics, Islamabad, Pakistan. Disclosure statement No potential competing interest was reported by the authors. Citation information Cite this article as: Revisiting the role of audit and compensation ‘committees’ characteristics in the financial performance of the non-financial sector through the lens of the difference generalised method of moments, Habib Ur Rahman & Asif Ali, Cogent Business & Management (2022), 9: 2085365. Notes 1. See Chapter 3: Ethics, Frauds and Internal Controls of Hall (2019). 2. In 1970, the board was subdivided into a separate board of director committees such as audit committee and compensation committee (Lee et al., 2015). Conceptually, the audit committee consists of the members of a board of directors and the duty of these members is to assist auditors to ensure that these auditors stay independent of management (Arens et al., 2014). 3. See, Agrawal and Knoeber (1996), Almarayeh et al. (2022), Dalton et al. (1998), and Haddad et al. (2021), and Rahmat et al. (2009). 4. See, Waterman and Meier (1998) for the relevant discussion on the information advantage of the agents over principals. 5. The total population of the Pakistan equity market is 422 as of 23 March 2022. 6. ROA is the ratio of profit before tax to total asset, ROE is the ratio of net income to total equity and EPS is the ratio of net income to total outstanding shares. Further, see section 3.7 Financial Indicators of Rahman et al. (2021). 7. For further details on these variables, see Section 2.2 Variable Construction. Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 14 of 20 References Aali-Bujari, A., Venegas-Martínez, F., & Palafox-Roca, A. O. (2017). Impact of energy consumption on economic growth in major OECD economies (1977-2014): A panel data approach. International Journal of Energy Economics and Policy, 7(2), 18–25. http://hdl. handle.net/11159/1165. Agrawal, A., & Knoeber, C. R. (1996). 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Min Max Observations ROA Overall 6.7248 0.2402 0.0000 7.3900 N = 840 Between 0.0660 6.2150 6.7808 n = 70 Within 0.2311 0.5098 7.4598 T = 12 ROE Overall 3.6760 0.3228 0.0000 4.4200 N = 840 Between 0.2293 2.6800 4.1625 n = 70 Within 0.2287 0.6252 4.3860 T = 12 EPS Overall 5.9034 0.2350 0.0000 6.9200 N = 840 Between 0.1114 5.3958 6.5550 n = 70 Within 0.2073 0.5075 6.4275 T = 12 ACX Overall 0.9988 0.0345 0.0000 1.0000 N = 840 Between 0.0100 0.9167 1.0000 n = 70 Within 0.0331 0.0821 1.0821 T = 12 ACI Overall 0.6202 0.5857 0.0000 4.0000 N = 840 Between 0.2829 0.0000 1.5833 n = 70 Within 0.5139 −0.9631 3.2869 T = 12 ACS Overall 1.2508 0.2220 0.6900 2.0800 N = 840 Between 0.1922 1.0658 1.7633 n = 70 Within 0.1133 0.7417 1.7317 T = 12 ACM Overall 4.2893 0.7998 0.0000 12.0000 N = 840 Between 0.4993 3.8333 7.1667 n = 70 Within 0.6274 0.2893 9.1226 T = 12 CCM Overall 1.2083 1.5580 0.0000 14.0000 N = 840 Between 0.9905 0.2500 5.6667 n = 70 Within 1.2080 −4.4583 9.5417 T = 12 CCI_1 Overall 0.2536 0.4353 0.0000 1.0000 N = 840 Between 0.1780 0.0000 0.7500 n = 70 Within 0.3978 −0.4964 1.0869 T = 12 CCI_2 Overall 2.0655 1.4588 0.0000 6.0000 N = 840 Between 0.6945 1.1667 4.4167 n = 70 Within 1.2853 −2.3512 4.9821 T = 12 FSZ Overall 16.2830 1.5024 11.8100 20.4600 N = 840 Between 1.4423 13.1858 19.9108 n = 70 Within 0.4520 14.9072 18.7880 T = 12 FAG Overall 3.5512 0.6068 −1.2200 4.6500 N = 840 Between 0.5205 1.6742 4.5975 n = 70 Within 0.3175 0.6570 6.0370 T = 12 LVG Overall 1.1148 9.2232 −203.7600 80.0600 N = 840 Between 2.0045 −7.6042 10.6100 n = 70 Within 9.0057 −200.0202 70.5648 T = 12 We use the natural log of ROA, ROE, EPS, FAG, FSZ and LVE. Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 18 of 20 Table A2. Panel unit root tests At Level At First Difference LLC BRT IMS ADF PPS LLC BRT IMS ADF PPS ROE −9.12 2.78 −2.79 210.05 295.27 −23.32 −1.26 −5.48 301.40 565.11 0.00 1.00 0.00 0.00 0.00 0.00 0.10 0.00 0.00 0.00 ROA −2.72 1.19 −2.13 196.26 342.84 −22.67 −2.13 −6.60 343.61 692.02 0.00 0.88 0.02 0.00 0.00 0.00 0.02 0.00 0.00 0.00 EPS −6.00 4.76 −0.83 192.82 259.67 −13.30 3.14 −3.10 264.92 501.25 0.00 1.00 0.20 0.00 0.00 0.00 1.00 0.00 0.00 0.00 ACI −4.85 −5.18 3.22 53.87 56.83 −16.17 −8.61 −1.72 170.64 461.23 0.00 0.00 1.00 1.00 1.00 0.00 0.00 0.04 0.01 0.00 ACM −8.74 −1.33 −1.87 110.45 219.16 −11.73 −1.82 −3.20 128.33 323.43 0.00 0.09 0.03 0.03 0.00 0.00 0.03 0.00 0.00 0.00 ACS −11.66 −1.48 −1.34 91.44 120.25 −8.64 −2.90 −1.71 108.13 309.82 0.00 0.07 0.09 0.11 0.00 0.00 0.00 0.04 0.00 0.00 CCM −7.20 −2.61 2.12 87.63 129.84 −13.96 −6.22 −3.26 239.19 701.49 0.00 0.00 0.98 1.00 0.68 0.00 0.00 0.00 0.00 0.00 CCI_1 −6.43 −1.58 3.20 40.09 56.66 −8.17 3.77 −2.35 155.48 436.63 0.00 0.06 1.00 1.00 1.00 0.00 1.00 0.01 0.00 0.00 CCI_2 −10.07 −2.53 2.77 75.02 61.42 −28.56 −11.58 −7.06 369.50 678.54 0.00 0.01 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 FAG −36.75 12.60 −572.77 1253.79 1254.00 −34.17 11.88 −367.89 1256.12 1256.35 0.00 1.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 FSZ −8.51 0.53 −0.21 140.03 150.62 −11.24 0.08 −0.57 167.71 359.48 0.00 0.70 0.42 0.48 0.26 0.00 0.53 0.28 0.06 0.00 LVG −30.31 0.37 −4.63 203.84 399.48 −11.12 −5.05 −3.75 260.16 888.53 0.00 0.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 LLC [1], BRT [2], IMS [3], ADF [4], PPS [5], ROA [6], ROE [7], EPS [8], ACI [9], ACM [10], ACS [11], CCM [12], CCI_1 [13], CCI_2 [14], FAG [15], FSZ [15] and LVG [16] indicate (1) Levin, Lin & Chu, (2) Breitung t-stat, Im, (3) Pesaran and Shin W-stat, (4) augmented Dickey–Fuller Fisher Chi-square, (5) Phillips–Perron Fisher Chi-square, (6) return on assets, (7) return on equity, (8) earnings per share, (9) audit committee independence, (10) audit committee frequency of meetings, (11) audit committee size, (12) compensation committee meetings, (13) compensation committee independence one, (14) compensation committee independence two, (15) firm age, (16) firm size and (17) leverage. We use natural logs of ROA, ROE, EPS, FAG and FSZ. We use the first difference for the case of ACI and FSZ. *** reveals the level of significance at one per cent. Rahman & Ali, Cogent Business & Management (2022), 9: 2085365 https://doi.org/10.1080/23311975.2022.2085365 Page 19 of 20 © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. You are free to: Share — copy and redistribute the material in any medium or format. Adapt — remix, transform, and build upon the material for any purpose, even commercially. The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. 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