The effect of internal corporate governance mechanisms and external auditing on firm performance in Iraq

Despite the well-established relationship between corporate failure and corporate governance in the agency and resource dependency theories, there are still lack of studies on corporate governance mechanisms and firm performance and absence of code for corporate governance in Iraq. Therefore, this study aimed to examine the relationship between characteristics of board of directors, internal audit, ownership structure, external audit and firm performance of companies listed in the Iraqi Stock Exchange. This study used secondary data from the listed companies in Iraqi Stock Exchange from 2012 to 2015. This study employed agency theory and resource dependency theory to investigate the relationship between the variables. The agency theory is concerned with the agency problem between principals and agents while the resource dependency theory deals with the critical use of the internal resources within the firms. A sample of 48 different companies across 7 different sectors was selected. This study employed STATA in running Panel Corrected Standard Error multivariate regression to test the hypotheses. The empirical investigation found positive and significant relationships between board size, board meeting, internal audit existence, internal audit training, managerial ownership, local institutional ownership, foreign institutional ownership, audit quality and firm performance and Tobin’s Q as a measure of performance. However, the results showed insignificant relationship between CEO duality, non-executive directors, and individual block shareholder and Tobin’s Q. The acceptance of most of the hypotheses through the empirical analysis underscores their necessity during the formulation of policy of corporate governance. These findings can be used as inputs in the development of a code of corporate governance in Iraq. Future research can employ comparative studies among Middle East countries to provide more robust findings that may be generalized across countries.