Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency
International Journal of Accounting & Information Management
ISSN: 1834-7649
Article publication date: 8 February 2023
Issue publication date: 31 March 2023
Abstract
Purpose
The purpose of this study is to empirically examine how the voluntary formation of a specialised investment committee (IC) and IC characteristics affect financial distress risk (FDR) and whether such impact is influenced by the level of investment inefficiency.
Design/methodology/approach
The authors use a large sample of Gulf Cooperation Council (GCC) non-financial companies during 2006–2016. A principal component analysis is done to aggregate and derive a factor score for IC characteristics (i.e. independence, size and meeting) as a proxy for the effectiveness of IC. This study also uses three measurements of FDR to corroborate the findings and partitions sample firms into overinvesting and underinvesting companies to examine the potential impact of investment inefficiency on the IC–FDR nexus.
Findings
Using feasible generalised least square estimation method, the authors document that the likelihood of financial distress occurrence decreases for firms with separate ICs. The authors also find that firms with effective ICs enjoy lower FDR. In other words, the probability of financial distress minimises if the IC is large, meets frequently and has a high number of independent directors. However, the authors find neither any moderation nor any mediation effect of investment inefficiency for the impact of IC and IC attributes on FDR. The additional analysis indicates the expected benefits of an actively performing IC are amplified for firms with risk of both over- and underinvestment. These findings are robust to alternative measures of FDR and investment inefficiency, sub-sample analysis and endogeneity concerns.
Originality/value
This study, to the best of researchers’ knowledge, is the first to provide evidence in GCC firms’ perspective, suggesting that the existence of an effective IC is associated with a lower risk of financial distress, and to some extent, the economic benefits of IC are aggrandised for companies with a high probability of over- and underinvestment problems. These results are unique and contribute to a small but growing body of literature documenting the need for effective ICs and their economic consequences on investment efficiency in the FDR environment. The findings of this study carry valuable practical implications for regulatory bodies, policymakers, investors and other interested parties in the GCC region.
Keywords
Acknowledgements
The authors gratefully acknowledged the insightful comments and suggestions of Professor Maggie Liu (the Co-Editor of IJAIM) and anonymous reviewers. The authors also thank the participants at The 23rd Annual Conference on Finance and Accounting (ACFA 2022) for the excellent and constructive comments. All usual disclaimers apply.
Data availability statement: The data that support the findings of this study are available on request from the corresponding author. The data are not publicly available because of ethical restrictions.
Conflict of interest: On behalf of all authors, the corresponding author states that there is no conflict of interest with respect to the research, authorship and/or publication of the paper.
Funding: This research work is financially supported by Al Ain University with grant ID EX-R-075/2021.
Citation
Al-Dhamari, R., Al-Wesabi, H., Farooque, O.A., Tabash, M.I. and El Refae, G.A. (2023), "Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency", International Journal of Accounting & Information Management, Vol. 31 No. 2, pp. 321-354. https://doi.org/10.1108/IJAIM-08-2022-0180
Publisher
:Emerald Publishing Limited
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