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Evidence from
Effects of board characteristics, Palestinian
audit committee and risk listed
companies
management on corporate
performance: evidence from
Palestinian listed companies Received 28 December 2017
Revised 5 March 2018
7 June 2018
Sami R.M. Musallam 23 August 2019
18 April 2020
Faculty of Business and Administration, Accepted 6 May 2020
International University of Sarajevo (IUS), Ilidža, Bosnia and Herzegovina

Abstract
Purpose – This paper aims to investigate the effects of board characteristics, audit committee and risk
management on corporate performance.
Design/methodology/approach – Using a sample of 31 Palestinian non-financial listed companies from
2010 to 2016, this study uses a generalized least square method.
Findings – The results show that the effects of board ownership, board independence, audit committee
meeting, audit committee size, audit committee financial expertise and risk management are positive and
significant on corporate performance while the effects of chief executive officer duality and audit committee
size are negative and significant on corporate performance.
Practical implications – The results of this paper are important to policymakers, shareholders and
directors of companies to make appropriate choices about the board, audit committee characteristics and risk
management to protect the interest of different stakeholders, increase the flow of capital and foreign
investment into non-financial companies.
Social implications – This paper fills a gap in the corporate governance literature by investigating the
effects of board characteristics, audit committee and risk management on corporate performance in Palestine
as one of the youngest stock exchanges in a region that assists in testing the validity of agency theory in a
young and small emerging market context.
Originality/value – This paper is the first to investigate the effects of board characteristics, audit
committee and risk management collectively on corporate performance in Palestine as prior research on these
topics has been investigated separately.
Keywords Risk management, Board characteristics, Audit committee, Corporate performance, Palestine
Paper type Research paper

1. Introduction
Corporate governance is one of the key issues discussed around the world and represents a
critical part that improves the success of corporations and their performances (Akbar, 2015).
The financial scandals i.e. the collapse of Enron, Tyco, Adelphia and Northern Rock, have
increased the attention for good corporate governance practises that are useful information
for shareholders, investors, managers and other beneficiary parties with an end goal to
enhance corporate performance. However, many countries have issued guidelines and International Journal of Islamic
recommendations for the best corporate governance practises including the board of and Middle Eastern Finance and
Management
directors and its committees’ duties and responsibilities in effecting corporate performance © Emerald Publishing Limited
1753-8394
i.e. to make sure the company’s internal control system is adequate, practicing integrity and DOI 10.1108/IMEFM-12-2017-0347
IMEFM to review and adopt a strategic plan for the firm (Cadbury, 1992; the Sarbanes-Oxley Act of
2002; Palestinian Code on Corporate Governance (PCCG) (PCGC, 2009)).
Liu and Fong (2010) argue that the board of directors is the most important mechanism
of corporate governance and a governance structure safeguards a company and its
shareholders. Amran et al. (2010) argue that the responsibility of the board of directors is to
perform various monitoring tasks i.e. overseeing management practises to eliminate agency
costs, align the interests of shareholders and management and appointing and firing
management staffs and monitoring the chief executive officer (CEO) behaviour. The board
of directors will be able to perform significant economic roles in enhancing corporate
performance and act a vital role in a firm’s strategic decision-making (Fama and Jensen,
1983). According to the PCCG in 2009, the aim of corporate governance rules is to especially
enhance the quality performance of the board of directors and raise the firm capability for
competitions. In addition, the board shapes an examination of the audit committee to ensure
the transparency of the firm’s account and advise the shareholders and other stakeholders of
the level of risks that face the firm. The audit committee is the most critical board
subcommittee because of its particular role in protecting the interests of shareholders in
relation to financial control and oversight. The audit committee improves the integrity of the
firm’s financial statements and reduces the audit risks and enhances the quality of reporting
(Contessotto and Moroney, 2013). Despite the fact that firms consent to the regulatory
requirements to avoid sanctions, not all of such committees are successful in improving the
firm’s performance (Beasley, 1996).
The board of directors and its committee often need to identify chances for the company
to advance further, while also considering risks that might impact corporate performance.
Companies that still practise the traditional risk management approach often fail, as they
are unable to maintain their performance because of the complex and quick-changing
business environment (Nocco and Stulz, 2006). Risk management idea is produced in the
mid-1990s in organizations, with a managerial core interest. The Committee of Sponsoring
Organizations of Treadway Commission established in 2004 is an organization for leading
accounting standards that focusses on identifying boards’ supervision, evaluating and
managing all major firm risks in an integrated structure. According to the PCCG in 2009, the
board bears the obligation of risk management, which is reliable with the firm’s activities
and its size and its market. Furthermore, it is desirable over a system or strategy to
characterize the risks the firm might face and how to manage them and present them to the
public assembly in a simple and clear way. Hence, agency theory underlines terms that
could help the corporation to achieve it is objective and finally raise corporate performance
(Nocco and Stulz, 2006). A few firms, which have the programme of risk–base or the
management of shareholder’s value would increase the corporate performance. Allayannis
and Weston (1998) argue that active risk management is referred to the corporate
performance.
Previous studies have been found that board characteristics (Shukeri et al., 2012; Johl
et al., 2015), audit committee (Puasa et al., 2014) and risk management (Agustina and
Baroroh, 2016) have a significant influence on corporate performance. The effects of board
characteristics, audit committee and risk management have already been examined
separately. Therefore, there is a gap in the body of knowledge that this effect has not been
examined collectively. This paper combines the three to identify the significant variables
amongst them. Thus, this paper is the first research of its kind that investigates the effects
of board characteristics, audit committee and risk management on corporate performance in
Palestine.
 Palestine has one of the youngest stock exchanges in the region with 48 listed companies Evidence from
and a market capitalization of about US$2.9bn (Hassan et al., 2016). Investigating the effects Palestinian
of board characteristics, audit committee and risk management on corporate performance
assists in testing the validity of agency theory in a young and small emerging market
listed
context. Therefore, this also fills a gap in the corporate governance literature related to the companies
Arab countries and in particular Palestinian Territories. Moreover, Palestine shares similar
social, political, cultural and economic characteristics that can offer interesting and unique
institutional features to justify this relationship. Finally, Palestine’s security and economic
conditions have been enhanced especially after the Oslo Accords in 1993, resulting in
significant progress in the Palestinian economy and making Palestine an attractive
destination for domestic and foreign investments.

2. Literature reviews and hypotheses

Board ownership helps to reduce agency problems and raise corporate performance by
reducing private perquisite consumptions (Jensen and Meckling, 1976). Directors’ ownership
gives them the impetus to ensure that the company is run efficiently and managers are
monitored effectively (Brickley et al., 1997). Hence, directors’ ownership is likely to be less
significant in large-sized companies than small-sized companies. Booth et al. (2002) indicate
that when directors holding ownership in a company either direct or indirect, their decisions
will be more impact on their wealth. The lower level of board ownership is a positive
influence on firm performance, which supports a curvilinear relationship of board
ownership share with corporate performance. Piesse et al. (2005) find a positive relationship
of directors’ ownership with corporate performance. However, Hermalin and Weisbach
(1988) find that corporate performance initially increases and then decreases with an
increased level of board ownership. Bhabra (2007) also finds that the effect of the
performance is non-linearly related to board ownership. Im and Chung (2017) find a
negative relationship between board ownership with corporate performance. Basically, it is
hypothesized that:

H1. Board ownership is significantly related to corporate performance.

Florackis and Ozkan (2004) argue that seven or eight members on the board have a tendency
to be ineffective. They also claim that large boards could not be well-coordinated, have poor
communication and are slower in decision-making and are more under the control of the
CEO. Based on agency theory, Jensen (1993) claim that small boards play a more efficient
role in controlling managers because they may encounter fewer communication difficulties,
easily coordinate their activities and bureaucracy and experience lower free-rider problems
amongst directors than those of larger boards. Kutum (2015) find a positive relationship
between board size and corporate performance in Palestine. Furthermore, Bansal and
Sharma (2016) and Herdjionob and Sari (2017) also find a positive association. However,
Husaini (2017) and Palaniappan (2017) report that board size is negatively related to
corporate performance. In contrast, Hassan et al. (2016) find that performance is not related
to board size. Thus, it is hypothesized that:

H2. Board size is significantly related to corporate performance.

Stewardship theory and agency theory lead to two different views on CEO duality.
Distinguishing between the two roles of a CEO is mainly grounded in agency theory as the
role of directors is to control management and to protect shareholder’s interests (Fama and
Jensen, 1983). However, combining the two roles may result in a dominant CEO, which leads
IMEFM to ineffective monitoring of the management by the board (Lam and Lee, 2008). Davis et al.
(1997) argue that CEO duality may reduce agency costs and improve corporate performance
when they exert full authority over the corporation. On the other hand, advocates of
stewardship theory argue that managers are inherently trustworthy and are good stewards
of firm resources and work to attain better performance (Donaldson and Davis, 1991). The
existing literature suggests that performance is positively related to the separation of roles
between CEO and chairman (Husaini, 2017). Abdullah (2004) indicates that no evidence that
CEO duality influences corporate performance. Other research finds that CEO duality is
negatively related to corporate performance (Kalsie and Shrivastav, 2016; Robert et al.,
2016). Thus, it is hypothesized that:

H3. CEO duality is significantly related to corporate performance.

Herly (2011) argues that tenure-CEO is considered as the main extend of research in the field of
corporations, associations and leaderships. They also indicate that tenure-CEO has usually
been associated with leadership quality and power. The tenure-CEO position has been figured
in many research studies because of the number of working years the CEO spent in this
position (Ozkan, 2011). Herly (2011) argues that new CEOs often disclose additional
information to direct clear of the doubt that they are seeking their own interests. However,
CEOs could be more slanted to reveal information contrasted with their long-tenured partners,
especially during low firm performance. Some scholars have investigated the relationship of
tenure-CEO with corporate performance and report a positive and significant association (Al-
Matari et al., 2012). However, others find a negative and significant association (Herly, 2011;
Jackling and Johl, 2009). These are in line with the agreement of the agency theory view that
tenure-CEO has a negative relationship with firm performance. However, Bhagat and Bolton
(2008) and Kyereboah-Coleman (2007) report an insignificant relationship of tenure-CEO with
corporate performance. However, it is hypothesized that:

H4. Tenure-CEO is significantly related to corporate performance.

Jensen and Meckling (1976) argue that independent directors play a more efficient role in
monitoring managers and improving corporate performance. Consequently, firms with more
independent directors can reduce agency costs between managers and stakeholders and
positively influence corporate performance (Ang et al., 2000; McKnight and Mira, 2003).
Baysinger and Butler (1985) argue that firms appoint independent directors to oversee
management on behalf of shareholders. Bhagat and Black (1999) find that firms with low
profitability increase board independence and firms with board independence appear to
underperform other firms. They also suggest that the supermajority independent board
might be imperfect and that an ideal board contains a mix of independent, inside or affiliated
directors, who bring various skills and knowledge to the boards. Abidin et al. (2009) indicate
that a higher percentage of boards of independences improve corporate performance
because they can possess a diverse background, characteristics, attributes and expertise
that can enhance board process and decision-making. Research shows that board
independence has a positive influence on corporate performance (Robert et al., 2016), while,
other research shows that board independence has a negative influence on corporate
performance (Cheng, 2008). However, Abdullah (2004), Bansal and Sharma (2016) and
Kutum (2015) find that board independence has an insignificant influence on corporate
performance. Hence, it is hypothesized that:

H5. Board independence is significantly related to corporate performance.

Hsu and Petchsakulwong (2010) and Obiyo and Lenee (2011) argue that the size of an audit Evidence from
committee is gauged through the number of existing audit committee members. According Palestinian
to the Cadbury Committee in 1992, the size of the audit committee is more relevant to the
listed
successful release of its duties. Braiotta (2000) and Kalbers and Fogarty (1993) indicate that
a larger size of the audit committee leads to greater organizational status and authority. companies
Pearce and Zahra (1992) argue that the ideal size of the audit committee enables directors to
use experiences and expertise to fill the shareholder’s interests. Several studies find a
positive relationship between audit committee size and corporate performance (Husaini,
2017; Swamy, 2011; Kipkoech and Rono, 2016; Obiyo and Lenee, 2011). However, other
studies find a negative relationship between audit committee size and corporate
performance (Bozec, 2005). Therefore, it is hypothesized that:

H6. Audit committee size is significantly related to corporate performance.

Swamy (2011) argues that audit committee independence often plays an important role to
ensure the practises of governance in the auditing process. Mohd et al. (2009) contend that an
audit committee group that involves more non-executive directors is considered more
independent than one that has more official executives. Abdullah et al. (2008) argue that
audit committee composition is defined as the percentage of non-executive directors
(independent directors) in the committee compared to the executive ones. It is argued that
independent directors can eliminate agency problems and an independent audit committee
can also eliminate agency problems (Erickson et al., 2005). According to resource
dependence theory and agency theory, autonomy can help in making the right decisions
without barriers and the determination of errors because of the independence of reviewers.
Abdullah et al. (2008) indicate that a company with the most executive directors and absent
audit committee independence is more expected to play a role in committing financial fraud
compared to its controlled counterparts in the same industries and with the same size. Prior
research finds that audit committee independence has a positive impact on corporate
performance (Abdullah et al., 2008; Robert et al., 2016; Nuryanah and Islam, 2011).
Meanwhile, other research finds that the audit committee has a negative impact on corporate
performance (Al-Matari et al., 2012; Ghabayen, 2012; Mohd et al., 2009; Palaniappan, 2017).
However, the audit committee is not associated with corporate performance (Herdjionob and
Sari, 2017). Therefore, it is hypothesized that:

H7. Audit committee independence is significantly related to corporate performance.

Lin et al. (2006) argue that the frequent meeting of an audit committee in a company is
important for monitoring its effectiveness. Furthermore, the frequent meeting of an audit
committee leads to improved processes of financial accounting that, in turn, lead to better
performance (Abbott et al., 2004). Pearce and Zahra (1992) argue that audit committee meetings
may help the board to evaluate the business from time to time and solve any issues experienced
by employees. However, Jensen (1993) supports the agency theory view and states that the
board should be relatively relaxed as evidence of higher board activities is a sign of poor
performance. Jackling and Johl (2009) find that meeting frequency enhanced the monitoring of a
company and can, therefore, enhance its performance. Abdul and Haneem (2006) argue that the
number of audit committee meetings enhance the corporate performance of the company as it
decreased the costs that are incurred with each meeting. Kyereboah-Coleman (2007) find that
audit committee meeting has a positive and significant relationship with corporate
performance, while Bansal and Sharma (2016) and Mohd et al. (2009) find that audit committee
IMEFM meeting has an insignificant relationship with corporate performance. Therefore, it is
hypothesized that:

H8. The audit committee meeting is significantly related to corporate performance.

Krishnan and Visvanathan (2008) confirm that financial expertise is considered by
governance contributes to better monitoring by the audit committee and leads to improve
conservatism. Knowledge of finance and accounting provides a good basis for the directors
of the audit committee to test financial information. The background and qualification in the
finance and accounting profession become one of the significant characteristics that ensure
the performance of ensuring audit committee. Giacomino et al. (2009) argue that experience
alone might not be efficient to establish financial expertise and claim that both education
and experience are necessary to become a financial expert. Research on the relationship of
audit committee financial expertise with corporate performance is very limited because of
low incentives to reveal information about directors prior to the post-Enron governance
regulatory boom. Kipkoech and Rono (2016) find that the effect of audit committee financial
expertise is positive and significant on corporate performance. Meanwhile, Nickmanesh
et al. (2013) find that the effect of audit committee financial expertise is insignificant on
corporate performance. Therefore, it is hypothesized that:

H9. The audit committee financial expertise is significantly related to corporate

performance.
Typically, not only can risk management create value for a corporation but also it may
additionally cover the overall economic growths by lowering the capital costs and activities
related to industrial uncertainty. Shenkir and Walker (2006) argue that company executives
tend to make a commitment to risk management as they have the duty regarding value
creation, general support and growth of shareholder’s value. Lang and Lundholm (1993)
indicate that the firm’s annual report is a tried and true medium for shareholders and
investors to assess information on risk management with respect to the firm. According to
the view of agency theory, one of the best ways to improve corporate governance is to
reduce conflict of interests amongst different shareholders (Shleifer and Vishny, 1997).
Hence, as directors are in superior positions to get information on the company’s future
desires than their investors, improving the stream of information amongst investor and
investee, the company may help to cushion for asymmetry information and upgrade
investor relations and practise of corporate governance (Solomon et al., 2000).
Hoyt and Liebenberg (2006) find a positive relationship between risk management and
corporate performance. Nahar et al. (2016) show that a significant relationship of risk
management disclosure, number of risk committees and the existence of risk management
committees with corporate performance in Australia. Nickmanesh et al. (2013) find that the
size of the risk management committee is positively and significantly related to corporate
performance, while the existence of the risk management committee is negatively and
significantly related to corporate performance. Kipkoech and Rono (2016) review the
relationship between risk management and corporate performance and find a positive
relationship between two variables. Husaini (2017) investigates the relationship between
risk management and corporate performance and finds a positive relationship, indicating
that risk management enhances corporate performance. Agustina and Baroroh (2016) test
the effect of risk management on firm value mediated through its financial performance as
an intervening variable. They find that risk management has an insignificant influence on
firm value and profitability, while profitability has a positive and significant influence on Evidence from
firm value. However, it is hypothesized that: Palestinian
H10. Risk Management is significantly related to corporate performance. listed
companies
3. Research methodology
The sample used in this study comprises data for 31 non-financial companies out of a total
population of 48 listed on the Palestine stock exchange over the period from 2010 and 2016, which
is the period after the issuance of PCCG in 2009. The non-financial companies are used in this
study because they have major contributors to the value of the nation’s economy in Palestine.
Furthermore, they also have similar statutory requirements. Therefore, a panel data of 217
company-years constructed. Data of the companies is obtained from their annual reports
compiled in the Palestine Stock Exchange website (2017). The corporate performance is measured
by return on assets, which is the actual determinant of the corporate performance of a company.
To find the influence over the corporate performance, the 10 independent variables, namely,
board characteristics [board ownership (BO), board size (BS), CEO duality (CEOD), tenure-CEO
(TCEO) and board independence (BIND)], audit committee characteristics (audit committee size
(ACSIZE), audit committee independence (ACIND), audit committee meeting (ACM) and audit
committee financial expertise (ACFE)) and risk management (RM) are studied. Furthermore, to
control the effects of board characteristics, audit committee and risk management on corporate
performance, three control variables, namely, firm age (FAGE), firm size (FSIZE) and debt ratio
(DEBT) are used as these are more closely related to board characteristics, audit committee and
risk management and have been shown in previous research to be significant in effecting
corporate performance (Al-Matari et al., 2012; Kipkoech and Rono, 2016). Table 1 shows the
measurement of variables.

Dependent variable Measurements

ROAit Net income before tax and interests divided by total assets
Independent variables
BOit Percentage of shares owned by directors in company i in year t
BSit Number of directors in company i in year t
CEODit Dummy variable, taking a value of 1 for companies with the CEO as Chairman and 0
otherwise in company i in year t
TCEOit Number of years the CEO has been in post at the end of each financial year in company
i in year t
BINDit Number of independence directors divided by total directors in company i in year t
ACSIZEit Number of directors on audit committee in company i in year t
ACINDit Number of independence directors divided by total Audit committee size in company
i in year t
ACMit Number of meetings during a year for the audit committee in company i in year t
ACFEit Number of financial expertise directors divided by total audit committee size in
company i in year t
RMit Dummy variable, taking a value of 1 for companies, which report risk management in
their annual report either a special risk committee or included in audit committee and
0 otherwise in company i in year t
FSIZEit The natural logarithm of total assets in company i in year t
FAGEit The natural logarithm of company age, as firms are listed on Palestine stock exchange Table 1.
in company i in year t Measurement of
DEBTit Long term debt divided by total assets in company i in year t variables
IMEFM To examine the effects of board characteristics, audit committee and risk management on
corporate performance, a panel generalized least squares (GLS) method is used to estimate
the regression models. It is used as an alternative of ordinary least squares (OLS) because
OLS suffers from two different problems, which are autocorrelation and heteroskedasticity
problems. However, to tackle these problems, a panel GLS estimated equation is analyzed by
using Eview statistical programme. Thus, the estimated model as followed:
ROAit ¼ B0 þ B1 BOit þ B2 BSit þ B3 CEODit þ B4 TCEOit þ B5 BINDit
þ B6 ACSIZEit þ B7 ACINDit þ B8 ACMit þ B9 ACFEit þ B10 RMit
þ B11 FAGEit þ B12 FSIZEit þ B13 DEBTit þ eit

where: The measurement of variables are described in Table 1.

4. Results and discussions

The results of the descriptive statistics on all variables used in this study are given in
Table 2. It is obvious that the average value of return on assets as a measure for the
corporate performance of Palestinian listed companies is 12.369%, which is higher than the
average estimation of 9.00 reported for a sample of Indian companies by Bansal and Sharma
(2016) while it is lower than the average value of 23.67 reported for a sample of Nigerian
listed companies by Nuhu et al. (2017). However, the range is from 70.260% to 75.830%
with a standard deviation of 18.793%. It is also obvious from the Table 2 regarding board
characteristics variables that the highest mean value is 7.248% reported for board size with
median (standard deviation) values of 7.000% (2.201%), while the lowest mean value is
0.046% reported for CEO duality with maximum (standard deviation) values of 1.000%
(0.210%). In terms of audit committee variables, the audit committee meeting reports the
highest mean value of 8.935% with maximum (standard deviation) values of 29.000%
(5.221%). However, the audit committee’s financial expertise reports the lowest mean value
of 0.372% with maximum (standard deviation) values of 0.666% (0.156%). Furthermore,
risk management has a mean value of 0.082%, ranging from 0.000% to 1.000% with a
standard deviation value of 0.2764%.

Variables Minimum Median Maximum Mean SD

ROA 70.260 11.640 75.830 12.369 18.793

BO 0.000 0.027 24.099 0.194 1.635
BS 3.000 7.000 12.000 7.248 2.201
CEOD 0.000 0.000 1.000 0.046 0.210
TCEO 0.000 0.000 1.000 0.105 0.308
BIND 0.333 0.500 0.666 0.492 0.105
ACSIZE 3.000 4.000 6.000 4.382 0.965
ACIND 0.166 0.666 0.800 0.620 0.162
ACM 1.000 7.000 29.000 8.935 5.221
ACFE 0.166 0.333 0.666 0.372 0.156
RM 0.000 0.000 1.000 0.082 0.2764
FSIZE 7.474 12.627 17.756 12.721 1.406
FAGE 0.000 1.945 3.3673 1.957 0.659
Table 2. DEBT 0.000 0.261 0.707 0.257 0.214
Descriptive analysis
of variables Note: For the definition of variables refer to Table 1
The results of OLS and GLS regression models are summarized in Table 3. The results of Evidence from
the OLS model in Columns 2 and 3 of Table 3 show that the model of OLS suffers from Palestinian
autocorrelation problems based on the Durbin Watson (DW) test that gives value (1.719)
with F-critical of 1.895. Furthermore, the model of OLS also suffers a heteroscedasticity
listed
problem based on the White Test (WT) test that gives value (86.433) with a p-value of 0.074. companies
As OLS suffers from these problems, GLS is used to tackle these problems.
The results of the GLS model in Columns 4 and 5 of Table 3 show that the value of R-
squared is 2.55%. This indicates that only 2.55% of the return of assets variations is
determined by the board characteristics, audit committee and risk management used in the
regression. However, even the value of R-squared is low but the predictors are statistically
significant, as it can be shown from the results, it is still possible to draw important
conclusions about how changes in the predictive value are associated with the response
value. The model is also considered to be overall statistically significant, reporting
F-statistics value (5.358) with a p-value of 0.000, and hence, rejecting the null hypothesis of
insignificance. It implies that the variables are used in the regression can jointly predict the
performance of Palestinian non-financial companies.
Meanwhile, the results show that board ownership is positively and significantly related
to corporate performance. Thus, the hypothesis (H1) is supported. The result indicates that
higher board ownership can reduce agency costs and leads to arise corporate performance
because of the divergence of interests between directors and shareholders (Jensen and
Meckling, 1976) and it is also supporting the finding of Mahmud et al. (2010), Piesse et al.
(2005), while the result is inconsistent with the finding of Im and Chung (2017).

OLS GLS
Variables Coefficient values p-value Coefficient values p-value

Const 23.702 0.096* 14.170 0.002***

BO 0.612 0.000*** 0.668 0.000***
BS 1.104 0.386 0.755 0.470
CEOD 18.604 0.009*** 13.541 0.000***
TCEO 6.198 0.160 2.376 0.371
BIND 14.078 0.153 11.258 0.086*
ACSIZE 4.026 0.381 3.922 0.016**
ACIND 16.455 0.030** 10.427 0.048**
ACM 0.813 0.000*** 0.954 0.000***
ACFE 6.852 0.346 6.641 0.027**
RM 12.583 0.026** 8.756 0.015**
FSIZE 2.022 0.005*** 1.737 0.000***
FAGE 3.105 0.095* 2.002 0.179
DEBT 3.173 0.604 1.584 0.686
R2 0.121 0.255
Adjusted R2 0.064 0.207
F-statistic 2.154 5.358
p-value(F) 0.012 0.000
DWT 1.588 2.026
F-critical (dL ) (1.665)
WT 86.433
Table 3.
(0.074)
Regression analyzes
Notes: *Significant at the 0.1 level; **significant at the 0.05 level; ***significant at 0.01 level; for the results for ROA
definition of variables refer to Table 1 using GLS and OLS
IMEFM Board independence has a positive and significant impact on corporate performance, thus
hypothesis (H5) is supported. This result shows that the independent board could monitor
managers effectively. Furthermore, as managers, families, or institutions own a lot of shares,
board independence could be used to reduce the agency problem between majority and
minority shareholders (Robert et al., 2016; Shleifer and Vishny, 1997). Board independence
could make sure that majority of shareholders do not take actions that hurt minority
shareholders. However, this result is not in line with Abdullah (2004), Bansal and Sharma
(2016) and Kutum (2015), where they find an insignificant relationship between board
independence and corporate performance.
Audit committee size is significantly related to corporate performance; therefore,
hypothesis (H6) is supported. This is in line with the prior research that has shown audit
committee size to be a positive associated with corporate performance (Husaini, 2017;
Swamy, 2011; Kipkoech and Rono, 2016; Obiyo and Lenee, 2011). The result implies that
audit committee size plays a significant role in enhancing corporate performance to reduce
asymmetry information associated with agency problems.
The hypothesis (H8) predicts that the audit committee meeting is significantly related to
corporate performance is confirmed by the regression. The result obtained is consistent with
the findings of Kang and Kim (2011) and Petchsakulwong (2010), while it is inconsistent with
the findings of Al-Matari et al. (2012) and Mohd et al. (2009). Moreover, the hypothesis (H9)
predicts that audit committee financial expertise significantly related to corporate performance
is also confirmed by the regression. This result indicates that more directors with relevant and
recent financial experience sitting in audit committees could bring the better corporate
performance of Palestinian companies. Furthermore, the regression also confirms the
hypothesis (H10) that predicts that risk management is significantly related to corporate
performance, meaning that risk management enhances corporate performance, which is
supported the results of Hoyt and Liebenberg (2006), Husaini (2017), Nahar et al. (2016) and
Kipkoech and Rono (2016) while it is not supported the finding of Agustina and Baroroh (2016).
On the other hand, the results show that CEO duality is significantly related to firm
performance, thus hypothesis (H3) is supported. This result is in line with the suggestion of
agency theory that CEO duality would make a CEO more powerful, and thus could
take actions that are not in the best interests of the company, which leads to lower firm
value. However, the result of this study suggests that CEO duality leads to decreased
corporate performance. In addition, audit committee independence is significantly related to
corporate performance. Therefore, the hypothesis (H7) is supported. The result is in line
with the notion that audit committee independence improves audit committee effectiveness
and leads to better performance and it is supported the findings of Chen et al. (2005). In
contrast, board size and tenure-CEO have an insignificant impact on corporate performance,
thus hypothesis (H2) and hypothesis (H4) are not supported. These results indicate that
board size and tenure-CEO are not associated with corporate performance. Regarding
control variables, firm size shows a negative and significant association with corporate
performance, while firm age and debt ratio show insignificant association with corporate
performance.

5. Robust analysis
An outlier is a case with such an extreme value that it distorts statistics (Tabachnick and
Fidell, 2007). Outliers lead to errors, which consequently will deny the generalizability of the
results to other samples. Therefore, robust analysis is done in this paper to remedy the
outliers or extreme observations using a truncated variable method where the data of
extreme observations are truncated if the above variables are more than three standard
deviations away from the mean (Chena et al., 2002). The results of the GLS model after Evidence from
truncated variables are considered are summarized in Columns 2 and 3 of Table 4. The Palestinian
results show that there are some differences between the results reported in Columns 4 and 5
of Table 3. Specifically, the effect of audit committee financial expertise becomes
listed
insignificant on corporate performance (Nickmanesh et al., 2013), while, firm age becomes companies
negative and significant on corporate performance. However, all other variables record the
same relationships with corporate performance.
Previous studies argue that the relationship between board ownership and equity
holdings by directors with corporate performance may be nonlinear (Morck et al., 1988).
Thus, another robust analysis is done to re-estimate the linearity effect of board
ownership and the square of board ownership with corporate performance. The results
of the GLS model after re-estimation is considered are summarized in Columns 4 and 5
of Table 4. The results show that board ownership has a U-shaped relationship with
corporate performance. The U-shaped relationship indicates that at the lower level of
ownership, performance is better because of the monitoring by blockholders and at the
higher level of ownership, the directors’ wealth is tied up to the performance of a firm.
In this case, the directors will make sure that the firm is managed effectively and
efficiently. However, at the middle level of ownership, the entrenchment effects are
greater than the monitoring effects. This finding is consistent with that of Bhabra
(2007) and Park and Jang (2009). All other variables report similar results as shown in
Columns 4 and 5 of Table 3 except that the effects of tenure-CEO and firm age become
negative and significant on corporate performance while the effect of audit committee
size becomes insignificant on corporate performance. However, the effect of the debt
ratio becomes positive and significant in corporate performance.

GLS GLS
Variables Coefficient values p-value Coefficient values p-value

Const 20.906 0.000*** 14.250 0.052*

BO 0.724603 0.000*** 0.228 0.079*
BO2 – – 0.549 0.072*
BS 0.223149 0.650 0.573 0.369
CEOD 14.75375 0.002*** 11.202 0.005***
TCEO 2.110618 0.500 18.936 0.000***
BIND 7.204288 0.042** 12.016 0.004***
ACSIZE 1.438261 0.026** 1.618 0.105
ACIND 9.105700 0.081* 17.749 0.000***
ACM 0.725520 0.000*** 0.784 0.000***
ACFE 6.538948 0.268 8.963 0.053*
RM 8.307623 0.076* 69.650 0.018**
FSIZE 1.288701 0.057* 0.821 0.009***
FAGE 3.145607 0.017** 2.767 0.080*
DEBT 1.344181 0.652 0.722 0.000***
R2 0.176 0.262
Adjusted R2 0.123 0.211
F-statistic 3.344 5.126
p-value (F) 0.000 0.000
Table 4.
DWT 2.057 2.310
Regression analyzes
Notes: *Significant at the 0.1 level; **significant at the 0.05 level; ***significant at 0.01 level; for the results for ROA
definition of variables refer to Table 1 using GLS
IMEFM 6. Conclusion
This study investigated the effects of board characteristics, audit committee and risk
management on corporate performance after the issuance of PCCG in 2009 to determine,
which of the variables improves the performance of non-financial companies in Palestine.
The data used comprising 31 non-financial companies listed on Palestine’s Stock Exchange
during the year period (2010-2016). The results of this paper overall suggest that the features
of board characteristics, audit committee and risk management are relevant in terms of
corporate performance after the issuance of PCCG in 2009 in Palestine. The results also
suggest that board ownership, board independence, audit committee size, audit committee
meeting, audit committee financial expertise and risk management are positively associated
with corporate performance. However, CEO duality and audit committee size are negatively
associated with corporate performance.
From a theoretical perspective, this is the first study to investigate the effects of board
characteristics, audit committee and risk management collectively on corporate
performance in Palestine to identify the significant variables amongst them as pervious
research has been only examined them separately. The results of this study imply that the
issuance of PCCG impacted positively on the governance of the non-financial companies.
The practical implications are to policymakers, shareholders and directors of companies to
make appropriate choices about the board, audit committee characteristics and risk
management to protect the interest of different stakeholders and improve the flow of capital
and foreign investment into nonfinancial companies.
This paper has several recommendations for future research. Firstly, this paper
investigates the direct effects of board characteristics, audit committee and risk
management on corporate performance. However, there is a lack of previous research
investigating the mediating or moderating impact of other variables on the relationship
between board characteristics and audit committee with corporate performance such as, risk
management, CEO compensation, regulation, a culture that may lead to enhance corporate
performance. Secondly, this paper focusses only to investigate some variables related to
board characteristics, audit committee and risk management. Therefore, future research
could investigate other variables such as board diversity, internal process of the committee
and chief officer risk, respectively. Thirdly, this paper uses ROA only to measure corporate
performance. Thus, future research can use other variables such as return on equity,
economic value-added and stock market return to ensure the robustness of results. Finally,
the paper only examines the period after the issuance of PCCG. Hence, future research could
examine and compare the period before and after the issuance of PCCG.

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Corresponding author
Sami R.M. Musallam can be contacted at: [email protected]

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