Nexus between audit committee and corporate risk: evidence from Pakistan

Abstract

Purpose The purpose of this study is to investigate the impact of audit committee (AC) characteristics, such as AC size, AC independence and gender diversity on firm risk in the context of an emerging market. Design/methodology/approach The sample data includes 102 nonfinancial Pakistan Stock Exchange listed firms from 2004 to 2018. Firm risk is measured through three proxies, namely, idiosyncratic risk, total risk and capital expenditure. Along with this, profitability, leverage, market-to-book ratio, firm age, net property plant and equipment (NPPE) and surplus cash are used as control variables. The Housman test is used to select the best model from the fixed-effect model and the random effect model to conclude the findings. Findings According to the study's findings, AC characteristics have a negative and significant relationship with idiosyncratic risk. In addition, a gender-diverse AC has a significant negative relationship with capital expenditure. In connection with total risk, AC characteristics fail to shows any significant relationship. Among the control variables, the results show that profitability stand for return on asset (ROA) and NPPE have a significant negative relationship, whereas market-to-book value has a significant positive relationship with both idiosyncratic and total risk. Practical implications The study's findings offer policymakers, managers and investors guidance. This study will provide new insights to the Pakistani Government, stock market, companies and accounting and auditing regulators in terms of understanding the determinants influencing risk management activities. Furthermore, this study will assist financial institutions in making credit decisions. In addition, this study provides policymakers, such as the stand for Securities and Exchange Commission of Pakistan (SECP), with guidelines for developing policies that strengthen the board governance mechanism. Originality/value This study investigates the impact of AC characteristics on corporate risk, which is rarely discussed in emerging economies.