Exploring the relationship between corporate governance and firm's performance: Does political connection matter?

• Published date: 01 April 2023
• Author: Taha Almarayeh,Asem Tahtamouni,Radhi Al‐Hamadeen,Hamza Alaodat,Sliman Alsoboa
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22597

Received:  April  Revised:  September  Accepted:  October 

DOI: ./jcaf.

RESEARCH ARTICLE

Exploring the relationship between corporate governance

and firm’s performance: Does political connection matter?

Taha Almarayeh1Asem Tahtamouni2Radhi Al-Hamadeen3

Hamza Alaodat4Sliman Alsoboa4

Department of Accounting, American

University of Madaba, Madaba, Jordan

International Accounting and Finance

Department, American University of

Madaba, Madaba, Jordan

Department of Accounting, Princess

Sumaya University for Technology,

Amman, Jordan

Department of Accounting, Al-Hussein

Bin Talal University, Ma’an,Jordan

Correspondence

Taha Almarayeh,Department of

Accounting, American University of

Madaba, Madaba, Jordan.

Email: taha.marayeh@gmail.com

Abstract

The purpose of this research is to investigate the influence of corporate board

and audit committee characteristics on firm performance as measured by

accounting-based ratios (earnings per share, return on asset, and return on

equity) as well as the market-based measure (Tobin’s Q). In addition, this

research introduces political connections to examine whether it can moderate

the relationship between corporate board characteristics and firm performance.

The study reveals that a higher proportion of independent directors and CEO

duality positively affected firm performance. However,board meetings and board

financial experience have no affected firm performance. The study also shows

that audit committee independence, audit committee size, and audit commit-

tee expertise are positively related to firm performance. In contrast, it finds no

discernible impact of audit committee meetings on firm performance. Our find-

ings also suggest that the beneficial influences of the corporate board, in terms of

higher firm performance, are greater in firms with political connections. To the

best of the researchers’ knowledge, this is almost certainly the first analysis to

examine the relation between the corporate board, audit committee characteris-

tics, and firm performance, and the moderating effect of political connection of

this relationship.

KEYWORDS

audit committee, corporate governance, board of directors,f irm performance, Jordan,political

connections

1 INTRODUCTION

The structure of corporate boards of directors and audit

committees has gained growing attention from both

investors and shareholders (Wang, Yao, & Kang, ),

since weak corporate governance has been considered as

one of the main causes that led to the global financial

crisis (Kao et al., ). Corporate governance (hence-

forth CG) refers to the mechanisms, systems, methods, and

structures by which that firms are controlled and directed

(Aboagye & Otieku, ;Fama&Jensen,;Jensen&

Meckling, ).

Despite the fact that CG frameworks differ all through

the world, stakeholders accept that specific mechanisms

must be available so as to lessen the issues of unfortunate

behavior and corruption by guaranteeing corporate disclo-

sure and transparency. Thus, the boards of directors and

audit committees are seen as effective CG components that

guarantee the quality of financial reporting (Panel ;

NCFFR, ). They also provide shareholders with the

86 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

ALMARAYEH . 87

required information to hold management liable for their

decisions (Al-Malkawi et al., ).

According to (Fama & Jensen, ), the boardsof direc-

tors performs two types of functions for an organization,

namely decision management functions, such as setting

the firm’s long-term strategy and making investment and

finance decisions, and decision control functions, such as

hiring top-level managers, determining their compensa-

tion, firing them when necessary, and monitoring capital

allocation decisions. On the other hand, the audit commit-

tee represents the liaison between the board of directors

and the external auditor. It also aims to providing high

control systems and independent external auditing (Klein,

).

Therefore, this study therefore examines the degree

of the effectiveness of CG in enhancing firm perfor-

mance in the setting of emerging economies. Our focus

is on the board of directors and audit committee and

their effect on firm performance as measured by EPS,

ROA, ROE, and Tobin’s Q in Jordan, which provide a

rich empirical environment to link the characteristics of

the board (namely: board independence, board financial

expertise, board meeting, and CEO duality), audit com-

mittee (namely: size, independence, member’s experience,

and frequently meeting) and firm performance. The study

also investigates the extent to which politically connected

directors moderate the relationship between corporate

governance characteristics and firm performance. Wecon-

sider political connection in Jordan because the evidence

on the political connection from other developing markets

such as China and Indonesia afforded that politically con-

nected firms experienced high performance compared to

non-connected firms. (Ding et al., ; Joni et al., ).

Theoretically, the monitoring function of the board and

audit committee is derived from agency theory, which

highlights the possible conflicts of interest that may arise

from the separation of ownership and control in compa-

nies (Jensen & Meckling, ). According to the funda-

mental thoughts of the agency theory,the monitoring roles

of the board of directors and audit committee are used

as mechanisms that mitigate agency conflicts (Brennan

et al., ), besides protecting shareholders from manage-

rial self-interest (Daily et al., ). Furthermore, resource

dependence theory presents another perspective for cor-

porate governance mechanisms—especially the board of

directors—, it opines that the board of directors is a cru-

cial tie among the firm and the external resources that a

firm needs to maximize its performance (Pfeffer & Salan-

cik, ). This, in turn, reflects on increases investor’s

confidence in the firms.

There are voluminous researches in the relation

between CG and firm performance. However, the most

concentrated is on developed markets, especially Anglo-

Saxon and continental Europe equity markets. Little

attention is paid to the case of the Middle East and North

Africa countries (henceforth MENA), such as Jordan,

and CG investigation in this area remains undeveloped.

The Jordanian environment is an excellent laboratory for

our research for several reasons. First, as a result of the

Jordanian weak shareholder protection environment, we

assume the function played by the monitoring-related

characteristics of the board and audit committee to be

more critical compared to that in common-law system

countries. Further, in contrast to developed countries,

the Jordanian setting is characterized by concentrated

ownership; the poor role of financial markets, and the

prevalence of family-owned listed firms. In addition,

Jordan as one of the MENA countries, has unique cultural

characteristics e.g. strong hierarchical social structures

scholars (e.g., Al-Bassam et al., ; Md Zaini et al.,

). Therefore, with this scenario, it is important to

understand whether and how CG mechanisms affect

Jordanian listed firms’ performance. Second, our study

is also roused by the earlier calls of the OECD Corporate

Governance Principles , requiring member countries

(including Jordan) to take some initial steps to develop

an appropriate CG code. In this manner, Jordan issued

its first governance code in  (updated in ),

which sets a clear framework for listed Jordanian firms

regarding the composition of the board of directors and

audit committee and their duties and responsibilities.

Third, while the composition and characteristics of the

board of directors and audit committee are very much

researched in the advanced markets, such are inadequate

in developing markets, especially in MENA, the case of

Jordan. Thus, Jordan affords perfect conditions to justify

further study on whether the board and audit committee

characteristics have any observable relationship with firm

performance.

Our empirical analysis employing a hand-collected sam-

ple of  firm-year observations from Jordan over the

period – revealed that a higher proportion of

independent directors and CEO duality positively affected

firm performance. In contrast, board meetings and board

financial experience have no affected performance. These

results support earlier investigations in emerging mar-

kets that discovered a positive influence of independent

directors, CEO duality on firm performance (Al Farooque

et al., ; Pucheta-Martínez & Gallego-Álvarez, ).

Concerning the audit committee, in line with (Nuryanah

& Islam, ; Reddy et al., ; Tornyeva & Wereko,

), audit committee independence, audit committee

size, and audit committee expertise are positively related

to firm performance. In this light, our evidence presents