The Moderating Effect of Audit Quality on the Relationship between Corporate Governance and Investment Efficiency

Younes Parvareh; Amir Reza  Fathi; Ali  Tirandaz; Amir Reza  Heidarifar; Mehdi  Fathi

Authors

Younes Parvareh Department of Accounting, Ker.C., Islamic Azad University, Kermanshah, Iran https://orcid.org/0009-0000-7590-2509
Amir Reza Fathi Department of Accounting, Ker.C., Islamic Azad University, Kermanshah, Iran Author https://orcid.org/0009-0002-2532-811X
Ali Tirandaz Department of Accounting, Ker.C., Islamic Azad University, Kermanshah, Iran Author https://orcid.org/0009-0000-8676-7242
Amir Reza Heidarifar Department of Accounting, Ker.C., Islamic Azad University, Kermanshah, Iran Author https://orcid.org/0009-0003-6387-6317
Mehdi Fathi Department of Accounting, Ker.C., Islamic Azad University, Kermanshah, Iran Author https://orcid.org/0000-0003-3165-1466

Keywords:

Audit Quality, Corporate Governance, Investment Efficiency, Tehran Stock Exchange, Moderating Effect

Abstract

The present study investigates the moderating role of audit quality in the relationship between corporate governance and investment efficiency in companies listed on the Tehran Stock Exchange. The study is conducted on the basis of a descriptive-correlational design and panel data methods, analysing a sample of TSE-listed enterprises throughout a recent multi-year period. Investment efficiency is quantified using the Richardson (2006) model, corporate governance using a composite index of board independence, board size, ownership concentration, and institutional ownership, and audit quality using audit firm size and auditor industry specialisation. The hypotheses are tested using moderated multiple regression analysis with fixed effects estimation. The results show that corporate governance and audit quality improve investment efficiency separately. Importantly, the interaction term of corporate governance and audit quality is negative and significant, suggesting that audit quality improves the positive effect of corporate governance on investment efficiency. The moderating effect is resistant to alternative measurements, subsamples and estimate methods and is stronger for smaller enterprises. These are the first empirical results to extend agency theory by proving that internal and external monitoring mechanisms are complements rather than replacements. Practical implications include the need to improve the efficiency of capital allocation in emerging markets.

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