Board, shareholder and auditor monitoring and its substitution for complementary nature: effects on the performance of Australian listed companies

The purpose of this thesis is to investigate the effects of corporate monitoring mechanisms on firm performance and their substitution and complementary effects under different conditions of agency conflict. Following the much-reported collapses of publicly listed companies, corporate monitoring is an issue that has emerged at the forefront of the debate on corporate responsibility. There has been considerable prior research on corporate monitoring and firm performance. However, most studies have used single monitoring mechanisms to determine the effect of monitoring on firm performance. Attention has not been given to the combined effect of monitoring mechanisms and the possibility of these mechanisms having a substitution or complementary effect. This has implications for endogeneity and multicollinearity issues that are common concerns in corporate governance research. Again, much of the corporate governance research concerned with monitoring mechanisms has been undertaken in the USA and the UK. However, findings from those countries are not fully transposable to the Australian context because of different capital markets and regulatory mechanisms. This paper examines the following questions in Australian context: to what extent do monitoring processes of key players---shareholders, board of directors and auditors---affect corporate financial performance; and do the various monitoring mechanisms associated with the three categories of players have substitution or complementary effects between each other? To test these two questions, a conceptual model is developed to better understand the complex governance processes and interrelationships among monitoring variables. The sample for this study is taken from the top 500 listed companies on the Australian Securities Exchange for the period 2001-2003. Structural equation models are used to identify the complex relationships among the corporate governance variables: shareholders (insiders and blockholders); board of directors (composition and structure, board properties and operations, and board committees); and external auditors (quality and quantity). This paper finds inconsistent results in the simultaneous effect of monitoring on firm performance. However, there was evidence of substitution or complementary effects among the three broad categories of mechanisms, i.e. shareholder monitoring can be a substitute for board and auditor monitoring and vice versa, and there is a complementary relationship between board monitoring and external auditor monitoring. This paper also finds both positive and negative interrelationships among the monitoring variables. The presence of substitution or complementary effects makes it difficult to explain which monitoring mechanisms are more effective compared to others. This paper contributes to the refinement of evidence about the joint and separate effects of corporate governance practices on performance. Such practices are considered an integral part of developing and maintaining overall capital market confidence, attracting long-term investments, and increasing sustainable economic growth