Audit Committee Characteristics and Sustainable Firms' Performance: Evidence From the Financial Sector in Bangladesh
Funding: The authors received no specific funding for this work.
ABSTRACT
This study examines how audit committee characteristics influence sustainable firms' performance within Bangladeshi commercial banks. Using data from 26 publicly traded banks over 13 years (2011–2023), this research investigates the impact of audit committee size, independence, and meeting frequency on both financial and market-based performance metrics. Specifically, the findings reveal that larger audit committees (ACs) are associated with higher market valuation, indicating that committee size contributes to strategic oversight and governance effectiveness. Independent audit committee members also enhance both financial (Return on Assets) and market-based (Tobin's Q) performance, underscoring their role in promoting transparency, accountability, and alignment with sustainable goals. However, frequent audit committee meetings correlate with diminished performance, suggesting that overly frequent sessions may lead to inefficiencies rather than improved oversight. These results indicate that structuring ACs with balanced size and independence and avoiding excessive meetings, is essential to support sustainable growth, particularly in emerging economies such as Bangladesh. The study contributes to corporate governance and sustainability literature by providing empirical insights into audit committee practices that align governance structures with long-term corporate strategy and sustainable growth. Practical implications include the potential for regulatory reforms that enhance corporate governance, focusing on committee composition and meeting practices to foster sustainable firm performance in the financial sector.
1 Introduction
In the complex realm of corporate governance, audit committees (ACs) serve as vital guardians of financial integrity and accountability. The characteristics of ACs, such as the independence and proficiency of their members, as well as the frequency of their meetings, play a critical role in determining a firm's overall performance. In developing countries such as Bangladesh, where the financial sector plays a key role in economic progress but faces significant governance challenges (Alkebsee et al. 2022), it is essential to understand how the characteristics of ACs impact firm performance (Kalita and Tiwari 2023; Singhania and Panda 2024). The audit committee, as a key component of corporate governance, is tasked with overseeing financial reporting, internal control systems, and audit processes. The effectiveness of ACs is often evaluated based on factors such as their size, independence, meeting frequency, and the financial expertise of their members (Fariha, Hossain, and Ghosh 2022; Rahman 2024).
Bangladesh's rapidly growing economy, coupled with its expanding financial sector, offers a unique opportunity to explore the impact of ACs on corporate governance. Despite significant growth in the financial sector, the country continues to face challenges related to financial transparency and corporate governance (Kabir and Chowdhury 2023; Rashid et al. 2020). ACs have gained global attention, especially in the aftermath of corporate scandals and financial crises, as they are integral to ensuring accountability and transparency. Understanding how ACs' function and evolve can provide valuable insights into improving governance structures (Hammond et al. 2023). For instance, recent studies suggest that longer audit committee tenure enhances sustainability disclosures, highlighting the evolving role of governance committees in promoting environmental and social transparency (Alodat, Al Amosh, et al. 2023; Alodat, Nobanee, et al. 2023; Paolone et al. 2023).
While existing research has extensively examined the role of ACs in developed economies, there is limited empirical evidence on how these committees influence sustainable firm performance in emerging economies like Bangladesh. Most prior studies have narrowly focused on financial performance, often neglecting critical sustainability aspects such as Environmental, Social, and Governance (ESG) factors, which are increasingly integral to modern corporate governance (Gull et al. 2023; Wu et al. 2024). Furthermore, there is a lack of research on the post-COVID-19 corporate governance challenges that have reshaped the financial sector in emerging markets. Addressing these gaps is crucial for understanding how ACs can support both financial and non-financial performance in the context of Bangladesh's financial institutions.
This study bridges these gaps by examining the intersection of audit committee characteristics and corporate sustainability. Specifically, it explores how audit committee size, independence, and meeting frequency influence sustainable firm performance in the financial sector of Bangladesh. In doing so, it contributes to the growing body of literature that highlights the transformative role of corporate governance structures in advancing ESG initiatives (Mohy-ud-Din, Shahbaz, and Du 2024; Diwan and Amarayil Sreeraman 2024). Moreover, it builds on recent findings that underscore the importance of integrating stakeholder interests and sustainability criteria into audit committee oversight (de Souza Barbosa et al. 2023; Luo et al. 2024).
The current study contributes to the literature by focusing on the financial sector of Bangladesh in the post-COVID-19 era, a period that has brought significant changes in corporate governance and financial performance. By incorporating a broader set of variables related to ACs, including control variables such as firm size, age, and leverage, this study seeks to provide a more comprehensive understanding of the factors influencing sustainable performance. Additionally, unlike previous studies that have relied on ordinary least squares (OLS) estimation techniques, this study employs the Generalized Method of Moments (GMM), a well-recognized econometric method that offers advantages in addressing endogeneity in panel data (Karim, Hasan, et al. 2024; Rahman, Yousaf, and Tabassum 2020; Sarkar and Rakshit 2023).
This research, which covers 26 commercial banks listed on the Dhaka Stock Exchange over a 13-year period (2011–2023), provides empirical insights into how audit committee characteristics influence sustainable firm performance in an emerging economy. By addressing critical research gaps, such as the role of audit committee tenure, green audits, and digital governance innovations in sustainability, this study offers novel contributions to both academic and practical discourses (Paolone et al. 2023; Singhania and Panda 2024; Altin 2024). From an academic perspective, this study fills a crucial gap in the literature by providing empirical evidence from an emerging market, where corporate governance challenges differ significantly from those in developed economies. Practically, the results can guide policymakers and regulators in Bangladesh as they seek to improve corporate governance frameworks, which are critical for attracting international investment and ensuring the long-term sustainability of the financial sector.
The remainder of this paper is organized as follows: Section 2 presents a comprehensive literature review and develops the study's hypotheses. Section 3 outlines the research methodology, including data collection and econometric modeling. Section 4 discusses the empirical results. Section 5 delves into the implications of the findings, comparing them with previous studies. Section 6 offers concluding remarks, while Section 7 discusses the study's limitations and provides recommendations for future research.
2 Literature Review Development of Hypotheses
2.1 Theoretical Framework
The role of ACs in corporate governance has been extensively discussed in the literature, drawing on theories such as agency theory and stakeholder theory. Agency theory, proposed by Jensen and Meckling (1976), underscores the audit committee's role in reducing agency conflicts by fostering accountability between management and shareholders. In the context of this study, agency theory highlights the importance of audit committee characteristics, such as size, independence, and meeting frequency, in mitigating potential conflicts between stakeholders. For instance, larger and more independent ACs are better equipped to address discrepancies in financial reporting and governance practices, reducing the likelihood of opportunistic behavior by management. This directly ties to the research hypotheses, which examine how these characteristics influence sustainable firm performance by ensuring greater oversight and alignment with organizational goals.
As part of this responsibility, ACs not only oversee financial disclosures but also address broader governance concerns that are increasingly tied to sustainable performance. The incorporation of sustainability within the agency framework extends beyond financial governance to include Environmental, Social, and Governance (ESG) oversight, where ACs act as agents to ensure that the firm's strategic objectives align with global sustainability standards. For example, independent ACs are critical for safeguarding long-term sustainability initiatives that may conflict with short-term financial pressures from management. This study leverages agency theory to argue that ACs with appropriate structures can play a pivotal role in advancing corporate sustainability goals.
Stakeholder theory, proposed by Freeman (2015), extends this perspective by arguing that ACs should also account for the interests of broader stakeholders, including creditors, employees, and the environment (Freeman and Phillips 2002). This theory aligns closely with modern sustainability goals by emphasizing that ACs must address the environmental and social concerns of a diverse set of stakeholders. Within the research framework, stakeholder theory provides the rationale for exploring how audit committee characteristics contribute to sustainable firm performance. For example, frequent audit committee meetings can facilitate the integration of stakeholder concerns into governance processes, ensuring that ESG risks and opportunities are adequately monitored. This study builds on stakeholder theory to examine how ACs balance the demands of multiple stakeholders, such as shareholders and regulators, while advancing sustainability objectives.
This perspective aligns closely with modern sustainability goals, suggesting that ACs are crucial not only for financial oversight but also for integrating ESG considerations into corporate strategy. These roles are particularly relevant in emerging markets like Bangladesh, where firms must navigate economic challenges while aligning their practices with global sustainability standards (Lozano and Barreiro-Gen 2023; Bhat, Makkar, and Gupta 2024; Diwan and Amarayil Sreeraman 2024). In the context of Bangladesh, stakeholder theory helps elucidate how ACs respond to both local and global pressures for sustainable practices, such as aligning with international ESG benchmarks while addressing the socio-economic challenges unique to emerging markets.
Corporate governance frameworks in emerging economies often face significant regulatory and operational challenges, yet they also present opportunities for advancing sustainability goals. The integration of ESG criteria within governance mechanisms is increasingly recognized as critical for achieving corporate sustainability performance (Barbosa et al. 2023; Lee, Shin, and Lee 2023). A firm committed to strong ESG practices often demonstrates better long-term value creation, which is a key aspect of sustainable firm performance (Alareeni and Hamdan 2020; Fatemi, Glaum, and Kaiser 2017). ACs play a crucial role in overseeing the implementation and reporting of these ESG initiatives. They ensure the reliability and transparency of ESG disclosures, fostering trust among investors. For instance, larger ACs can bring diverse expertise to ESG decision-making, while independent committees can minimize conflicts of interest, both of which are critical for enhancing sustainable firm performance. Similarly, frequent meetings provide an opportunity for ACs to review and address emerging ESG risks, ensuring that the firm remains aligned with long-term sustainability objectives. These theoretical insights directly inform the hypotheses proposed in this study, which explore the relationship between audit committee characteristics and sustainable firm performance.
Moreover, firms with strong digital capabilities and innovative business models are better positioned to address environmental responsibilities, as evidenced by high-performing enterprises in emerging markets (Luo et al. 2024). These insights are supported by findings on the role of green audits and sustainability committees in climate change mitigation (Mohy-ud-Din, Shahbaz, and Du 2024). This underscores the need for ACs to play a pivotal role in driving corporate sustainability by ensuring transparency, ethical governance, and strategic alignment with long-term sustainability goals. This study bridges the theoretical perspectives of agency and stakeholder theories to argue that well-structured ACs are instrumental in fostering sustainable firm performance. By ensuring robust ESG oversight and integrating stakeholder concerns into governance frameworks, ACs can serve as catalysts for corporate sustainability, particularly in the emerging market context of Bangladesh.
2.2 Audit Committee Size and Sustainable Firm Performance
The size of an audit committee has been recognized as a crucial determinant of its effectiveness. Larger ACs are often thought to provide better oversight by bringing diverse perspectives and a wider range of expertise to the table. Studies from both developed and emerging markets highlight that larger ACs tend to offer more comprehensive supervision of financial reporting processes and internal controls (Rouf and Akhtaruddin 2020). Recent findings suggest that longer audit committee chair tenure and board tenure contribute to sustainability disclosure and environmental performance, highlighting the importance of experienced governance structures in promoting sustainability (Alodat, Al Amosh, et al. 2023; Alodat, Nobanee, et al. 2023; Paolone et al. 2023). In Bangladesh, where the financial sector faces challenges related to governance and transparency, a larger audit committee may be better equipped to handle these complexities, providing greater financial oversight and enhancing corporate governance (Meah 2019).
However, the effectiveness of larger ACs is not without limitations. Research indicates that excessively large committees may encounter coordination problems, leading to inefficiencies in decision-making. Studies in other South Asian countries, such as Sri Lanka and Nepal, have shown that larger ACs may suffer from communication barriers and slower decision-making processes (Danoshana and Ravivathani 2019). This is supported by findings that excessively large committees may dilute their impact on corporate social responsibility and environmental goals, potentially creating governance inefficiencies (Gull et al. 2023). In the context of sustainability, larger ACs can facilitate a more holistic approach to governance, integrating ESG considerations into their oversight functions. This is particularly important in emerging economies like Bangladesh, where firms are increasingly expected to align their business practices with global sustainability standards. Thus, we hypothesize:
H1.Audit committee size is positively associated with sustainable firm performance.
2.3 Audit Committee Independence and Sustainable Firm Performance
Audit committee independence is considered a critical factor for enhancing the quality of financial reporting and overall corporate governance. Independent audit committee members are perceived as being more objective and less susceptible to management influence, which can improve transparency and accountability in financial reporting (Alkebsee et al. 2022). Numerous studies have found that ACs with a higher proportion of independent members are associated with better financial performance, fewer instances of earnings management, and higher levels of corporate governance (Al-ahdal and Hashim 2022; Almaqtari et al. 2020). Recent literature further suggests that independent governance structures, such as sustainability committees, are essential for mitigating climate change and aligning corporate strategies with sustainability goals (Mohy-ud-Din, Shahbaz, and Du 2024). In Bangladesh, regulatory frameworks like the Bangladesh Securities and Exchange Commission's (BSEC) Corporate Governance Code mandate the independence of ACs, emphasizing their role in enhancing financial transparency (Rashid et al. 2020).
While the benefits of audit committee independence are well-documented, some studies suggest that independence alone may not guarantee effectiveness. In certain cases, independent members may lack the necessary insights into the company's day-to-day operations, leading to less informed decision-making (Ahmad et al. 2024; Alabi, Sanni, and Abdulrasaq 2022; Almomani et al. 2023). Additionally, the effectiveness of independent ACs depends on the financial expertise and knowledge of their members, as well as the broader corporate governance environment (Singhania and Panda 2024). Moreover, evidence from European firms suggests that longer audit committee tenures positively influence environmental performance, showcasing how stability in governance can enhance sustainability outcomes (Paolone et al. 2023).
In the context of sustainability, independent ACs are better positioned to ensure that a firm's governance practices align with long-term sustainability goals, as they are less likely to be influenced by short-term financial objectives. As firms in emerging markets like Bangladesh increasingly adopt sustainability practices, independent ACs play a crucial role in integrating ESG factors into their oversight responsibilities. Therefore, we propose:
H2.Audit committee independence is positively associated with sustainable firm performance.
2.4 Audit Committee Meeting Frequency and Sustainable Firm Performance
Meeting frequency is another important factor influencing the effectiveness of ACs. Regular meetings enable ACs to stay updated on the firm's financial activities, ensuring that internal controls and financial reporting practices are continuously monitored. Studies in developed economies have shown that frequent audit committee meetings are associated with better financial reporting quality and fewer financial misstatements (Alabdullah et al. 2023; Al-Jalahma 2022). Additionally, frequent meetings have been linked to timely sustainability disclosures and improved ESG performance, particularly in firms with strong governance structures (Wu et al. 2024). In Bangladesh and other South Asian countries, regular meetings are essential for improving corporate governance, particularly in the financial sector (Onmonya and Ebire 2023).
However, too many meetings may also indicate underlying governance issues, such as ongoing financial difficulties or ineffective management. Some studies have found that excessively frequent meetings may lead to “meeting fatigue,” where audit committee members become less effective due to the repetitive nature of discussions (Habtoor 2022; Kamaludin, Sundarasen, and Ibrahim 2023). This aligns with research suggesting that while frequent meetings improve monitoring, their impact diminishes when meetings lack a strategic focus on sustainability challenges (Altin 2024). From a sustainability perspective, frequent audit committee meetings allow for more consistent monitoring of ESG risks and opportunities. Accordingly, we hypothesize:
H3.Audit committee meeting frequency is positively associated with sustainable firm performance.
3 Methods
3.1 Sample Firms and Data
The population for this research comprises all listed banks in Bangladesh. Of the 33 listed banks on the Dhaka Stock Exchange (DSE), we selected 26 commercial banks for this study. The panel data were compiled from the banks' financial statements, which were sourced from their respective websites and the DSE library. The study covers a period of 13 fiscal years, from 2011 to 2023, resulting in a total of 338 firm-year observations. The selection criteria for these banks were based on data availability, capitalization, and their economic significance within Bangladesh. These factors ensure the representativeness of the sample, providing insights into how audit committee characteristics affect firm performance in Bangladesh's financial sector. Missing data for institutions were excluded during the study period to ensure the robustness of the analysis.
3.2 Variables
In line with prior research, several key variables were used to measure audit committee characteristics and their impact on firm performance. This study focuses on critical aspects widely associated with ACs in emerging markets across various sectors, especially financial institutions. The variables are classified into dependent, independent, and control variables.
3.2.1 Dependent Variables
3.2.1.1 Return on Assets (ROA)
This metric, defined as earnings before interest and taxes divided by total assets, measures a firm's financial performance and its ability to generate profit from its assets (Afreen 2020; Karim, Roshid, and Waaje 2024; Karim, Roshid, et al. 2023).
3.2.1.2 Tobin's Q (TQ)
This is a market-based performance measure that captures the total market value of equity plus the book value of liabilities, divided by the book value of total assets. Tobin's Q is widely used in corporate governance studies to gauge a firm's market valuation relative to its assets (Abdel and Al-Slehat 2019; Karim, Mamun, et al. 2024; Karim, Rani Khatun, et al. 2023; Karim, Kamruzzaman, and Kamruzzaman 2023).
3.2.2 Independent Variables
3.2.2.1 Audit Committee Size (ACSIZE)
The number of members on the audit committee. Larger committees may offer a broader range of expertise, which could improve oversight and governance practices (Boshnak, Alsharif, and Alharthi 2023; Dawood et al. 2023).
3.2.2.2 Audit Committee Independence (ACIND)
A dummy variable, coded 1 if the audit committee chairman is independent and 0 otherwise. Independent committees are expected to provide more objective oversight (Dawood et al. 2023; Tarighi et al. 2023).
3.2.2.3 Audit Committee Meeting Frequency (ACMEET)
The number of meetings held by the audit committee during the year. Regular meetings are associated with more effective oversight of financial reporting and governance processes (Aljaaidi, Sharma, and Bagais 2021; Alodat, Al Amosh, et al. 2023; Alodat, Nobanee, et al. 2023).
3.2.3 Control Variables
3.2.3.1 Firm Age (FA)
The number of years since the firm was incorporated. Older firms tend to have more established governance practices, which may influence their performance (Karim, Md Kamruzzaman, and Kamruzzaman 2022).
3.2.3.2 Firm Size (FS)
Measured as the natural logarithm of total assets, firm size is a widely used control variable that accounts for scale-related advantages in financial performance (Karim, Md Kamruzzaman, and Kamruzzaman 2022).
3.2.3.3 Firm Leverage (LEV)
The debt-to-equity ratio, which is used to control the impact of a firm's capital structure on its performance. Higher leverage can increase financial risk, potentially affecting firm performance (Kanoujiya et al. 2023).
The inclusion of control variables such as firm size, age, and leverage is essential, as they account for firm-specific factors that could influence financial performance independently of audit committee characteristics. These variables are well-established in corporate governance literature and have been shown to significantly affect financial outcomes (Mishra and Mohanty 2014; Karim, Mamun, and Kamruzzaman 2024; Saini and Singhania 2018).
3.3 Econometric Model
This study employs the GMM technique to assess the impact of audit committee characteristics on firm performance. GMM is particularly suited for this analysis due to its ability to address endogeneity issues, which can arise from the potential correlation between explanatory variables and unobserved firm-specific effects. In the context of audit committee studies, endogeneity is a common concern, as audit committee characteristics may be influenced by unobserved factors that also affect firm performance. GMM allows for the inclusion of lagged variables as instruments, providing robust estimations even in the presence of endogeneity.
The decision to use GMM rather than traditional econometric models such as Ordinary Least Squares (OLS) or Fixed Effects (FE) models is driven by the unique challenges posed by the data. First, OLS estimates may be biased and inconsistent when endogeneity is present, particularly in dynamic panel data settings. FE models, while controlling for unobserved heterogeneity, do not adequately address the potential endogeneity between audit committee characteristics and firm performance. GMM, by contrast, offers several advantages: it not only controls for endogeneity but also addresses heteroscedasticity and autocorrelation in the data. Additionally, GMM is well-suited for panel data with a relatively short time dimension and a larger cross-sectional dimension, as is the case in this study (Yilmaz et al. 2023).
By using the GMM technique, this study improves the precision and reliability of the results, offering insights into the relationship between audit committee characteristics and firm performance that would be difficult to capture with more conventional econometric methods (Al-Jaifi 2020; Wooldridge 2019).
3.4 Econometric Specification
3.5 Diagnostic Tests
To ensure the reliability of the results, several diagnostic tests were conducted. These include unit root tests (Levin, Lin & Chu, Im-Pesaran-Shin, and ADF-Fisher) to check for stationarity, which confirmed that the data is stationary at the given level of significance (1%). Multicollinearity was tested using correlation analysis, variance inflation factors (VIF), and tolerance values, with all VIF values below the threshold of 5.00, indicating no significant multicollinearity issues (Gujarati and Porter 2010). Heteroscedasticity was assessed using White's and Breusch–Pagan/Cook–Weisberg tests, while autocorrelation was examined through the Wooldridge test.
Since heteroscedasticity and autocorrelation were detected, the GMM model was employed, as it is well-equipped to handle these issues. This approach strengthens the validity of the estimates and ensures that the results provide a reliable understanding of how audit committee characteristics influence firm performance.
4 Results
4.1 Descriptive Statistics
The descriptive statistics for all the study variables are presented in Table 1.
| Variable | Mean | Std. Dev. | Min | Max | VIF | 1/VIF |
|---|---|---|---|---|---|---|
| ROA | 0.233 | 0.210 | 0.000 | 2.631 | ||
| TQ | 5.014 | 7.490 | 0.881 | 32.077 | ||
| ACSIZE | 4.207 | 0.924 | 3.000 | 7.000 | 1.057 | 0.946 |
| ACIND | 0.900 | 0.311 | 0.000 | 2.000 | 1.100 | 0.909 |
| ACMEET | 11.357 | 5.282 | 3.000 | 32.000 | 1.168 | 0.856 |
| FA | 23.58 | 10.478 | 9.000 | 62.000 | 1.326 | 0.754 |
| FS | 25.986 | 0.816 | 23.134 | 28.124 | 1.489 | 0.672 |
| LEV | 11.728 | 6.840 | −4.211 | 68.912 | 1.207 | 0.828 |
| Mean VIF | 1.225 |
- Note: The number of observations = 338.
Table 1 summarizes key insights about the dependent variables (firm performance), independent variables (audit committee characteristics), and control variables (firm-specific characteristics). The mean Return on Assets (ROA) is 0.233 with a standard deviation of 0.210, indicating variability in the profitability of the sample banks. Tobin's Q, a market-based measure of the firm's performance, shows a mean of 5.014 with a high standard deviation of 7.490, reflecting significant variations in the market valuation of firms. This means that the market-based financial performance is more volatile than the accounting measures of the performance.
Audit committee characteristics show interesting patterns. The average audit committee size (ACSIZE) is 4.207 members, with a standard deviation of 0.924. Audit committee independence (ACIND) has a mean of 0.900, indicating that most firms (90% of the sample firms) have an independent audit committee chairman. The ACs meet frequently, with an average of 11.357 meetings per year, though there is considerable variation (SD = 5.282) across firms, which means the audit committee sits once a month to make their significant decisions and discussions about their course of action.
Regarding control variables, firm age (FA) has a mean of 23.58 years, which indicates that the studied firms are represented mostly by the older enough, while firm size (FS), measured by the natural logarithm of total assets, shows an average of 25.986. Firm leverage (LEV), the debt-equity ratio, has a mean value of 11.728 with a standard deviation of 6.840, indicating variation in how banks manage debt capital volume.
4.2 Pairwise Correlations and Multicollinearity
The pairwise correlations between the variables are presented in Table 2.
| Variables | ROA | Tobin's Q | ACSIZE | ACIND | ACMEET | FA | FS | LEV |
|---|---|---|---|---|---|---|---|---|
| ROA | 1.000 | |||||||
| Tobin's Q | 0.004 | 1.000 | ||||||
| ACSIZE | −0.058 | −0.029 | 1.000 | |||||
| ACIND | 0.007*** | 0.111** | −0.021 | 1.000 | ||||
| ACMEET | −0.029 | 0.047 | 0.055 | 0.117* | 1.000 | |||
| FA | −0.128** | −0.143** | 0.155*** | 0.014 | 0.300*** | 1.000 | ||
| FS | −0.084 | −0.030 | 0.048 | −0.159*** | −0.221*** | 0.285*** | 1.000 | |
| LEV | 0.494*** | 0.036 | −0.148** | 0.036 | −0.163*** | −0.112* | 0.399*** | 1.000 |
- *** p < 0.01.
- ** p < 0.05.
- * p < 0.10.
The results reveal several significant correlations between the dependent variables (ROA and Tobin's Q) and both the independent and control variables. Notably, ROA correlates strongly with audit committee independence (ACIND), firm age (FA), and leverage (LEV). In contrast, Tobin's Q is more significantly correlated with audit committee independence and firm age.
The correlation coefficients between the independent variables are all below 0.80, indicating no multicollinearity problems in the dataset (Salmerón-Gómez, Rodríguez-Sánchez, and García-García 2020; Tamura et al. 2019). This finding is further supported by the variance inflation factor (VIF) values, which are all below the critical threshold of 5.00. The mean VIF of 1.225 further confirms that multicollinearity is not an issue in this study.
4.3 Cross-Sectional Independence
To check for cross-sectional dependence, we performed several tests, including Pesaran's Cross-Sectional Dependence (CSD) test, the Breusch–Pagan LM test, and Friedman's test. The results, presented in Table 3, show that all tests yield significant p values below 0.05, providing strong evidence against the null hypothesis of cross-sectional independence. These findings indicate that there is substantial cross-sectional dependence in the panel data, suggesting that the financial performance of the sample banks is influenced by common external factors. This cross-sectional dependence highlights the interconnectedness of the financial institutions in Bangladesh, which is important for interpreting the results.
| Pesaran CSD | Breusch–Pagan LM | Friedman's test | ||||
|---|---|---|---|---|---|---|
| Test statistic | p | Chi2 (66) | Prob > chi2 | Test statistic | p | |
| Model 1 (ROA) | 10.250 | 0.0000 | 164.234 | 0.0000 | 93.092 | 0.0000 |
| Model 2 (Tobin's Q) | 5.560 | 0.0000 | 122.169 | 0.0000 | 72.443 | 0.0000 |
4.4 Unit Root Test
Unit root tests were conducted to ensure that the variables used in the regression analysis are stationary. The results of the Levin–Lin–Chu (LLC), Augmented Dickey–Fuller Fisher (ADF-Fisher), and Im–Pesaran–Shin (IPS) tests, presented in Table 4, confirm that all variables are stationary at the 1% significance level. This indicates that the data are suitable for further econometric analysis, as non-stationarity does not pose a problem.
| LLC | ADF-Fisher | IPS | ||||
|---|---|---|---|---|---|---|
| Statistic | p | Statistic | p | Statistic | p | |
| ROA | −7.9002 | 0.000*** | 11.231 | 0.000*** | −18.756 | 0.000*** |
| TQ | −4.354 | 0.000*** | 17.312 | 0.000*** | −14.675 | 0.000*** |
| ACSIZE | −3.0704 | 0.0011*** | −2.667 | 0.046*** | −4.854 | 0.021** |
| ACIND | −11.142 | 0.000*** | −4.545 | 0.000*** | −2.756 | 0.000*** |
| ACMEET | −7.876 | 0.000*** | −8.567 | 0.000*** | −9.576 | 0.000*** |
| FA | −2.649 | 0.000*** | −5.647 | 0.000*** | −8.476 | 0.000*** |
| FS | −7.867 | 0.000*** | 8.243 | 0.000*** | −12.756 | 0.000*** |
| LEV | −5.986 | 0.000*** | 9.653 | 0.000*** | −6.758 | 0.000***s |
- Note: The symbol *** indicates significance at the 1% level. Both the Levin–Lin–Chu and Augmented Dickey–Fuller–Fisher tests are conducted at the level.
4.5 Heteroscedasticity
Heteroscedasticity was tested using White's test, the Breusch–Pagan/Cook–Weisberg test, and the Modified Wald test. The results, presented in Table 5, indicate that the data suffer from heteroscedasticity, as the p values for the chi-square statistics are less than 0.05 for most tests. This confirms that the variance of the error terms is not constant across observations, which justifies the use of robust estimation techniques, such as GMM, to address this issue and obtain reliable results.
| White test | Breusch–Pagan/Cook–Weisberg test | Modified Wald test | ||||
|---|---|---|---|---|---|---|
| Chi2 | Prob > chi2 | Chi2 | Prob > chi2 | Chi2 | Prob > chi2 | |
| Model 1 (ROA) | 44.60 | 0.0179 | 381.12 | 0.0000 | 10729.77 | 0.0000 |
| Model 2 (Tobin's Q) | 36.30 | 0.1089 | 28.13 | 0.000 | 20782.16 | 0.0000 |
4.6 Autocorrelation
Autocorrelation was tested using the Breusch-Godfrey LM test, the Durbin-Watson statistic, and the Wooldridge test. The results in Table 6 suggest the presence of first-order autocorrelation in the data. This autocorrelation indicates that residuals from one time period are correlated with residuals from previous periods, which necessitates the use of GMM to correct autocorrelation and obtain unbiased estimates.
| Breusch–Godfrey LM | Durbin–Watson test | Wooldridge test | |||
|---|---|---|---|---|---|
| Chi2 | Prob > chi2 | D-W Statistic | F (1, 11) | Prob > chi2 | |
| Model 1 (ROA) | 4.925 | 0.0853 | 1.701966 | 4.865 | 0.0496 |
| Model 2 (Tobin's Q) | 0.404 | 0.5248 | 2.071996 | 0.057 | 0.8164 |
4.7 Model Selection and GMM Estimation Results
The Hausman specification test was used to compare fixed-effects and random-effects models. The results, presented in Table 7, show that the fixed-effects model is more appropriate, as the null hypothesis of random effects being consistent is rejected for both the ROA and Tobin's Q models (p < 0.05). However, given the presence of heteroscedasticity, autocorrelation, and potential endogeneity, the two-step system GMM approach was ultimately employed to provide consistent and efficient estimates and results to satisfy the research objectives of this particular research.
| Model 1 (ROA) | Coef. | Model 2 (Tobin's Q) | Coef. |
|---|---|---|---|
| Chi-square test value | 66.054 | Chi-square test value | 13.661 |
| p | 0.000 | p | 0.034 |
The results of the GMM regression are presented in Table 8. The lagged dependent variable (L.DEP) has a significant positive effect on both ROA and Tobin's Q, suggesting that the financial performance of the previous year strongly influences current firm's current year's performance. Audit committee size (ACSIZE) positively impacts Tobin's Q but has no significant effect on ROA. Audit committee independence (ACIND) has a significant positive effect on both performance measures, highlighting the role of independent oversight in improving financial outcomes. However, audit committee meeting frequency (ACMEET) negatively affects both ROA and Tobin's Q, suggesting that more frequent meetings do not necessarily improve firm performance and may even hinder it.
| Variables | ROA | Tobin's Q | ||
|---|---|---|---|---|
| Coef. | p | Coef. | p | |
| L.DEP | 0.026 | 0.000*** | 0.074 | 0.000*** |
| ACSIZE | 0.012 | 0.391 | 0.002 | 0.004*** |
| ACIND | 0.134 | 0.000*** | 0.013 | 0.016** |
| ACMEET | −0.244 | 0.000*** | −0.234 | 0.000*** |
| FA | −0.034 | 0.000*** | −0.310 | 0.000*** |
| FS | −0.033 | 0.020** | −0.088 | 0.000*** |
| LEV | 0.234 | 0.000*** | 0.034 | 0.023** |
| Constant | 1.205 | 0.000*** | 2.095 | 0.000*** |
| AR (1) | 0.000 | 0.000 | ||
| z = −4.854 | z = −8.085 | |||
| AR (2) | 0.335 | 0.453 | ||
| z = 3.465 | z = 7.867 | |||
| Hansen | 0.003 | 0.000 | ||
| Sargen | 0.231 | 0.187 | ||
| Number of obs. | 265 | 270 | ||
- *** p < 0.01.
- ** p < 0.05.
- *p < 0.10.
The control variables provide further insights into firm performance. Firm age (FA) and firm size (FS) negatively impact both ROA and Tobin's Q, indicating that older and larger firms may face challenges in maintaining high-performance levels. In contrast, firm leverage (LEV) positively impacts both performance indicators, suggesting that higher levels of debt may be associated with better financial outcomes.
The results of the post-estimation tests, including the Arellano-Bond tests for autocorrelation and the Hansen and Sargan tests for overidentifying restrictions, confirm the validity of the GMM estimates. The AR(2) test results show no second-order serial correlation, and the Hansen and Sargan tests confirm that the instruments used in the GMM estimation are valid.
5 Discussion and Practical Implication
The findings of this study have significant implications for corporate governance (CG) practices in the financial institutions of developing countries like Bangladesh. ACs are crucial for promoting not only financial transparency and accountability but also sustainable firm performance by aligning oversight practices with long-term strategic goals. The study extends existing research by incorporating Environmental, Social, and Governance (ESG) considerations into the evaluation of ACs, highlighting their role in advancing sustainable governance in emerging markets (Alodat, Al Amosh, et al. 2023; Alodat, Nobanee, et al. 2023; Paolone et al. 2023). To improve sustainability in determining financial performance, ACs must be structured with the right balance of independent members, financial expertise, and efficient meeting practices. This study's results shed new light on the relationship between AC characteristics and firm performance, particularly in the banking and financial sectors of emerging markets.
The study shows that audit committee size and its independence are positively associated with firm performance, aligning with theoretical frameworks such as agency theory and stakeholder theory. A larger audit committee and a higher degree of independence not only enhance financial monitoring but also promote a culture of transparency and accountability that supports sustainable governance. These findings are consistent with recent evidence suggesting that longer audit committee tenures and greater independence significantly contribute to improved sustainability disclosures and environmental performance (Alodat, Al Amosh, et al. 2023; Alodat, Nobanee, et al. 2023; Paolone et al. 2023). This aligns with prior studies (Alabdullah et al. 2023; Almomani et al. 2023; Roshid et al. 2024) that emphasize the importance of independent oversight in improving financial outcomes. The findings suggest that banks in Bangladesh with independent audit committee members perform better in terms of both profitability indicators—ROA and market valuation (Tobin's Q). This result underscores the theoretical proposition that CG mechanisms can reduce agency problems by aligning the interests of shareholders and management, contributing to long-term sustainability. Additionally, the role of ACs in promoting ESG integration further strengthens the alignment between stakeholder expectations and corporate performance, especially in emerging markets where sustainability challenges are more pronounced (Mohy-ud-Din, Shahbaz, and Du 2024).
Interestingly, our results reveal a negative relationship between audit committee meeting frequency and firm performance, suggesting that more frequent meetings may not necessarily improve financial outcomes for the firms. This challenges traditional assumptions and suggests that the effectiveness of ACs may depend more on the quality of discussions than on frequency. This contradicts prior research (Alabdullah et al. 2023) that found a positive link between frequent AC meetings and financial performance. The adverse effect of AC meetings could indicate inefficiencies in decision-making when meetings are held too often, potentially leading to less effective monitoring and guidance to the firms toward effective financial control and sustainable firms' performance. These findings emphasize that while frequent meetings are essential for the timely monitoring of ESG risks and financial concerns, they should be strategically focused to avoid “meeting fatigue” and inefficiencies in governance practices (Altin 2024). Policymakers and regulators could consider implementing guidelines that prioritize quality discussions and strategic focus in AC meetings over mere frequency, ensuring that meetings are purpose-driven and concentrate on critical issues.
The results also show that firm age, size, and leverage significantly influence performance. Specifically, older and larger firms may face bureaucratic challenges that impact their agility and responsiveness to governance practices, while firms with higher leverage benefit from enhanced financial discipline that promotes accountability. This reinforces the idea that CG mechanisms must be tailored to the specific needs of the firm, with a particular focus on the firm's size and age. Moreover, firms with strong ESG practices, such as those facilitated by green audits or sustainability committees, may overcome some of these challenges by aligning governance structures with long-term environmental and social goals (Barbosa et al. 2023; Mohy-ud-Din, Shahbaz, and Du 2024).
From a policy perspective, these findings emphasize the need for regulatory bodies to support sustainable governance through structured audit committee requirements. Financial institutions should prioritize the appointment of independent and qualified audit committee members to enhance financial oversight and governance practices. Emerging markets like Bangladesh can benefit from adopting ESG-oriented audit committee frameworks, as they provide a dual advantage of improving financial performance and advancing sustainable practices (Diwan and Amarayil Sreeraman 2024; Luo et al. 2024). For emerging markets, regulators could benefit from establishing stricter rules that define optimal audit committee composition, independence, and meeting practices, with a clear focus on sustainability-oriented goals. This would ensure that ACs contribute more effectively to sustainable corporate governance and ultimately to sustainable firms' performance. Finally, by aligning governance practices with international ESG standards, Bangladesh's financial sector can attract global investments and build a more resilient and sustainable economy (Gull et al. 2023; Wu et al. 2024).
6 Conclusion
This study underscores the strategic importance of audit committee characteristics in fostering sustainable performance in Bangladesh's financial sector. Larger ACs correlate with higher market valuation, suggesting that robust governance oversight enhances investor confidence and supports sustainable growth. Independent audit committee members are essential for reinforcing financial transparency and accountability while aligning governance practices with long-term business strategies and sustainability goals, benefiting both financial and market outcomes. The emphasis on independent members also highlights the necessity of objective decision-making that safeguards against potential conflicts of interest, ensuring that governance practices are not only effective but also equitable.
The observed negative relationship between frequent audit committee meetings and firm performance indicates that while oversight is fundamental, excessive meetings may detract from strategic focus. This finding suggests that the effectiveness of ACs depends not just on activity levels but on the purposeful engagement of members in discussions that add strategic value. Balancing oversight with strategic deliberation is essential for ensuring that committees address critical governance challenges without overwhelming resources or duplicating efforts. Committees should prioritize the quality and relevance of meetings over frequency, optimizing resources to support effective governance and strategic oversight.
For regulators and practitioners, these findings offer valuable insights, especially for emerging markets where governance frameworks are evolving. Policymakers may benefit from fostering balanced audit committee structures, emphasizing independence, strategic alignment, and an optimized meeting frequency that enhances governance quality. Such initiatives can be pivotal in developing corporate governance ecosystems that are not only efficient but also adaptive to the unique challenges of emerging markets, such as regulatory inconsistencies and resource limitations. By implementing such guidelines, regulatory bodies can promote a corporate governance environment that supports sustainable performance and builds investor trust. Additionally, by fostering governance practices that prioritize sustainability, regulators can help bridge the gap between corporate financial objectives and broader societal goals.
The study advances corporate governance and sustainability literature by demonstrating how audit committee characteristics contribute to sustainable performance. It addresses critical gaps by extending the discussion of audit committee roles beyond traditional financial outcomes to include sustainability dimensions, offering a more holistic view of governance effectiveness. The insights inform both regulatory frameworks and business strategies, offering a roadmap for resilient and strategically aligned governance practices that prioritize long-term growth and sustainability. These findings also encourage a shift in governance priorities, urging firms to view ACs as integral drivers of sustainable development rather than merely compliance mechanisms. By bridging the gap between governance practices and sustainability outcomes, this study contributes to a more nuanced understanding of how emerging markets can achieve sustainable corporate growth in the face of evolving global challenges.
7 Limitations and Future Guidelines
Corporate governance continues to attract increasing attention, particularly in the financial sectors of developing economies such as Bangladesh. While this study provides valuable insights into the role of ACs in promoting firm performance, several limitations must be acknowledged. First, the study focuses exclusively on listed commercial banks, limiting the generalizability of the findings to other sectors of the financial industry—non-bank financial institutions. Future research should consider expanding the scope to include non-bank financial sectors, which may have different governance challenges and requirements.
Second, while the study explores key audit committee characteristics, it does not account for the broader governance framework, including the roles of the board of directors, their prior experience, ownership in the firms, risk management committees, and so on. Future research should examine how these governance mechanisms interact to influence firm performance. Further, the negative impact of audit committee meetings on performance calls for a deeper investigation into how meeting frequency and content contribute to or detract from effective governance. Exploring the qualitative aspects of AC meetings, such as the topics discussed and the decision-making processes employed, could provide a more nuanced understanding of the relationship between AC meetings and firm performance.
Third, the study is limited to Bangladesh, an emerging economy. Future research should explore the role of ACs in other emerging markets to compare CG practices and their role in determining financial performance across different economic contexts. Understanding the influence of local market conditions, regulatory environments, and cultural factors on audit committee effectiveness will be critical for developing more tailored governance frameworks.
Finally, the study highlights the importance of sustainability in corporate governance. As global sustainability standards continue to evolve, future research should investigate how ACs can integrate environmental, social, and governance (ESG) factors into their oversight responsibilities. This would provide valuable insights into the role of ACs in promoting long-term sustainability and financial performance in a rapidly changing business environment.
Author Contributions
Rejaul Karim, Md. Mustaqim Roshid, Md. Nahiduzzaman, and Bapon Chandra Kuri: contributed to the conceptualization, methodology, validation, and resource acquisition. They also compiled the data and drafted specific sections of the manuscript, including the preparation of tables and figures. Bablu Kumar Dhar: conducted the literature search, contributed to writing – review and editing, and handled visualization, project supervision, and administration.
Conflicts of Interest
The authors declare no conflicts of interest.
