Impact of Audit Committee Dynamics on Institutional Investors’ Behaviour: Evidence from India

Abstract

Using quarterly data from 347 Indian companies spanning 11 years, this study investigates how audit committee structures and firm performance affect institutional investors and also examines whether institutional investors influence firm performance. More specifically, it delves into whether top auditors, audit committee size and percentage of independent directors influence both institutional investors (domestic institutional investor (DII) and foreign institutional investor (FII), respectively). Through the application of a vector autoregression (VAR) model, it comes to light that the percentage of independent directors on audit committees has a large impact on FII, suggesting that improved governance procedures draw in foreign investment. Conversely, DII is driven by audit committee size, suggesting larger audit committees may be regarded as having broader supervision powers, giving a stronger sense of confidence. Moreover, the analysis demonstrates that firm performance, as measured by Tobin’s Q, is significantly impacted by FII but not by DII. These results emphasise the critical role of independent directors in attracting foreign investments and enhancing firm performance, highlighting the complex preferences of foreign and domestic institutional investors. Therefore, firms should optimise audit committee composition to match global governance norms and cost efficiency, and also simultaneously address FIIs’ concerns. Policymakers should revise governance standards to strike a balance between global norms and operational efficiency, ensuring that FIIs and DIIs are not discouraged. Practitioners should monitor FII activities to align their influence with national objectives, reducing volatility and enhancing long-term market stability.