Navigating Financial Distress: The Impact of Boardroom Effectiveness and Audit Committee Expertise Interplay

Abstract

Objective: To examine the impact of board of director (BOD) characteristics and audit committee expertise (ACE) on financial distress (DIS).   Theoretical Framework: In this topic, the main theories that underpin the research are agency theory, resource dependence theory, and groupthink theory.   Method: This study employs pooled OLS multiple regression verified with several robustness tests utilizing data collected from annual reports of basic material firms listed in TASI of Saudi Arabia.   Results and Discussion: The findings suggest an inverse relationship between board size (BDS) and the Altman Z-Score; larger boards correspond to higher DIS levels. Board independence (IND) is positively associated with DIS proxy, suggesting that greater independence improves financial health. Similarly, a higher frequency of board meetings (MTG) shows a positive relationship with the Altman Z-Score, implying better financial health. Audit committee (AC) with high composition of financial expertise (ACE) are shown to improve firms’ financial position. Additionally, the model incorporates an interaction term between ACE and IND, revealing a negative impact on mitigating financial distress.   Research Implications: These findings highlight the nuanced roles that the BOD and ACE play in managing DIS within a competitive and evolving market.   Originality/Value: This study attempts to offer a valuable contribution to existing literature of corporate governance and financial accounting by investigating the possible influence of board of director characteristics and audit ACE on DIS. Through robust analysis and counter-intuitive findings, it challenges conventional beliefs by revealing an inverse association between BDS and DIS, while underlining the positive effects of IND, MTG frequency, and ACE on financial health. The study's inclusion of an interaction term between ACE and IND further enhances our understanding of the nuanced roles played by these corporate governance attributes in managing financial distress within a a highly growing and evolving market.