Impact of Corporate Governance on Investment Efficiency Through Audit Quality in Firms of Pakistan

Abstract

This study investigates the impact of Corporate Governance (CG) on Investment Efficiency (IE) through Audit Quality (AQ) in Pakistani Firms from 2012 to 2022. Acknowledging the critical role that CG plays in organizational success, highlighting the importance of strong governance structures in improving audit quality and investment Efficiency. The data was gathered from 200 firms listed on the PSX. The study uses Principal Component Analysis (PCA) to develop a Corporate Governance Index (CGI). This study applies GMM (Generalized Method of Movement) to measure IE. The study uses a structural equational model to test the hypothesis. The research finds a significant and positive association between AQ and IE, explaining how a dedication to excellent audits correlates with greater investment success. The results indicate that AQ functions as a mediator, as demonstrated by the positive and extremely significant coefficient for AQ and the negative and significant coefficient for CG. Even if CG directly impacts IE, the presence of excellent audits made possible by efficient CG processes increases IE. The study contributes to a better knowledge of how these interrelated determinants influence company performance and investment outcomes in the Pakistani environment.

Key Words: Corporate Governance, Investment Efficiency, Audit Quality, Principal Component Analysis, Generalized Method of Movement