Impact of Board Composition on Investment Efficiency Mediating Role of the Audit Quality

Abstract

This study investigates the relationship between board composition and investment efficiency, with a specific focus on the mediating role of audit quality. Drawing on agency theory and resource dependence theory, we investigate how various board compositions, including independence, meeting frequency, and board size, impact firms' capital allocation decisions. The research relied on data from the Pakistan Stock Exchange listings of 56 non-financial companies from 2012 to 2023. Descriptive analysis revealed the characteristics of the data, and endogeneity issues were addressed using the generalized method of moments (GMM). Board independence, board meetings, and board size were all shown to have a statistically significant effect on investment efficiency. The results of the mediation analysis revealed that audit quality serves as a significant mediator between board independence, board meetings, and investment efficiency. These insights underscore the importance of aligning governance structures with high-quality assurance mechanisms to foster more efficient corporate investment behavior. The study contributes to the literature by integrating board governance and audit quality in the investment efficiency discourse, offering both theoretical implications and practical recommendations for regulators, investors, and corporate policymakers.