The Effect of the Characteristics of the Board of Directors and the Audit Committee on Financial Performance: Evidence from Palestine

Abstract

The objective of this study is to explore the relationship between the board of directors’ characteristics, audit committee characteristics, and financial performance of companies listed on the Palestine Exchange (PEX). Return on assets (ROA) and return on equity (ROE) were used to proxy financial performance. The characteristics of the board were indicated by the proportion of non-executive directors and the board’s size, whereas the characteristics of the audit committee were depicted by the number of non-executive members in the audit committee, the financial expertise of the audit committee, the frequency of audit committee meetings, and the size of the audit committee. To meet the purpose of the study, all companies listed on the exchange that published annual reports between 2011 and 2015 were analyzed. The analysis revealed that board size is negatively significantly related to ROE; audit committee meetings are significantly associated with ROE; firm size is negatively associated with ROA; a positive relationship between leverage and ROE is observed, but only at the 10% significance level; and other relationships with financial performance are statistically insignificant. This implies that the results are in most of its parts inconsistent with agency theory and resource dependence theory. This might be because corporate governance mechanisms in Palestine are still cosmetic mechanisms.