Effects of Risk Committee on Agency Costs and Financial Performance

Abstract

This study aimed to explore the influence of risk committee characteristics on agency costs and financial performance as well as investigate whether the attributes of a risk committee moderate the association between the agency costs and financial performance of financial firms listed in the Saudi Stock Market (TASI). We primarily concentrate on six attributes of risk committees (risk committee existence, size, independence, meetings, financial expertise, and busyness) and their impact on agency costs and financial performance. This study employed the ordinary least squares (OLS) and generalized methods of moments (GMM) models to explore these relationships. Using a sample of 455 observations representing the financial corporations listed on the TASI for the period from 2010 to 2022, we found that risk committees’ existence, risk committee independence, and financial expertise have negative and significant associations with agency costs, but a positive influence on financial performance. However, risk committee size and busyness are positively related to agency costs and adversely associated with firms’ financial performance. Furthermore, we showed that agency costs influence banks’ financial performance negatively, yet risk committees oversee this risk and enhance banks’ financial performance. The findings of this study have implications for financial firms, policymakers, and regulators. Beyond making empirical contributions by investigating a relatively unexplored topic in a developing Middle Eastern economy, this analysis provides valuable insights into optimizing risk committee characteristics and structures to improve financial monitoring within the framework of Saudi Arabia. This area of research has been relatively limited compared to studies conducted in developed countries.