Finance Research Letters xxx (xxxx) xxx

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Audit committee structure, institutional quality, and bank

stability: evidence from ASEAN countries
Quang Khai Nguyen
School of Banking, University of Economics Ho Chi Minh City, Vietnam

A R T I C L E I N F O A B S T R A C T

JEL classifications: We analyze the impact of audit committee effectiveness on bank stability. By focusing on audit
G01 committee structure, the study reveals that smaller audit committees with more independent
G18 members can enhance bank stability. This indicates that audit committee effectiveness is posi­
G21
tively related to bank stability. We further find that audit committee effectiveness principally
G33
G38
drives bank stability higher through the reallocation effect for profits and incentives to hold
higher capital ratios. Moreover, the relationship between bank stability and audit committee
Keywords:
effectiveness depends critically on the health of each bank and the institutional quality of each
Audit committee structure
Institutional quality country.
Bank stability

1. Introduction

As the “apex body” of a bank’s internal corporate governance (Fama and Jensen, 1983), boards of directors play an important role
in overseeing the bank risk-taking behavior and maintaining bank stability. Following the 2008 financial crisis, the Basel regulatory
reforms have pressured banks’ boards of directors to become involved in risk-management oversight and boards usually play this role
through the audit committee (Sun and Liu, 2014). However, more and more banks have established risk committees after the crisis, so
the question is whether audit committees still play a role in maintaining bank stability becomes a concern. Furthermore, ASEAN is an
active region and is expected to be the fifth-largest trading region in the world in the near future, and because of higher financial
openness, any adverse shock to the banking sector in these countries may have a contagious effect on other countries (Moudud-Ul-Huq
et al., 2018). Therefore, finding an appropriate bank governance structure becomes more important to maintain bank stability in this
region.
By focusing on the important role of banks’ audit committees in maintaining bank stability, this study differs from previous studies
in several ways. First, we find that audit committee effectiveness can maintain bank stability following the 2008 financial crisis
although more banks establish risk committees to oversee bank risk. Second, unlike previous studies focusing only on banks in a single
country (Nguyen and Dang, 2020) or only banks in developed countries (Sun and Liu, 2014), our study covers several banking markets
and investigates whether institutional quality enhances the role of internal corporate governance of banks. Moreover, by using
cross-country data, we can investigate such roles at the different levels of bank stability. Our results show that the relationship between
bank stability and audit committee effectiveness depends critically on the level of stability of each bank and on each country’s
institutional quality. Finally, we further explore the movement of various components of Z-score in response to increased audit

This research did not receive any specific grant directly from funding agencies in the public, commercial, or not-for-profit sectors.
E-mail address: nqkhai.sdh@gmail.com.

https://doi.org/10.1016/j.frl.2021.102369
Received 10 October 2020; Received in revised form 28 July 2021; Accepted 3 August 2021
Available online 4 August 2021
1544-6123/© 2021 Elsevier Inc. All rights reserved.

Please cite this article as: Quang Khai Nguyen, Finance Research Letters, https://doi.org/10.1016/j.frl.2021.102369
Q.K. Nguyen Finance Research Letters xxx (xxxx) xxx

committee effectiveness to examine the mechanism by which audit committee effectiveness affects bank stability (as measured by
Z-score). We find audit committee effectiveness affects bank stability through the bank’s performance and capitalization level.

2. Literature review and hypothesis development

2.1. Audit committee effectiveness and bank stability

As in any corporate firm, a moral hazard problem exists in banks because of asymmetric information. The major shareholders have
incentives to take excessive risk, and by pursuing riskier investments, they transfer wealth away from the deposit insurers. Share­
holders might also collude with managers against the interests of deposit holders by issuing high-risk loans that has the potential to
result in a higher level of bad loans and inadequacy of bank capital as well as to render banks unstable (Boyd and Smith, 1999). High
quality and a strong board should present shareholder interests well and may encourage managers to increase bank risk and thus make
it unstable. However, regulators and depositors require banks to be less risky and more stable, especially after the 2008 financial crisis.
Because of increased regulatory requirements on bank stability, boards of directors are under pressure to oversee risk-taking activities
and maintain bank stability.
As boards of directors may oversee bank risk-taking activities through their audit committees (Sun and Liu, 2014), audit committee
effectiveness can, therefore, reduce risks as well as enhance bank stability for regulatory compliance. Moreover, audit committees can
ensure high-quality information for the financial market by enhancing the quality of financial reporting (Pucheta-Martínez and De
Fuentes, 2007). Based on this discussion, we hypothesize that:
H1: Audit committee effectiveness is positively related to bank stability.

2.2. Effect of institutional quality on audit committee effectiveness–bank stability relationship

Institutional quality can either reduce or aggravate uncertainties that arise from incomplete information about the behavior of
economic agents in the process of human interaction and creates incentives that influence these agents’ socioeconomic opportunities
(North, 1990). Many studies agree that the lack of a solid legal system and good legislative administration in some countries might
result in weaker banks because of corruption or inadequate law enforcement as well as governmental ineffectiveness (La Porta et al.,
1998; Levine, 1998). Bermpei et al. (2018) find that banks can constrain risk activities in high-institutional-quality countries. Thus, the
corporate governance of banks under lower institutional quality may not work effectively.
Furthermore, higher institutional quality can reduce information asymmetries by channeling information about market conditions
and reduce risks as property rights are defined and contracts are well enforced (WTO, 2004). According to Demirgüç-Kunt and
Maksimovic (1998), an effective legal system is important because firms must be able to commit credibly to controlling the oppor­
tunistic behavior of corporate insiders. One of the functions of the audit committee is to control opportunistic risk-taking behavior. We
suppose that the audit committee may work more effectively given the high institutional quality. The second hypothesis to be
addressed in this study is as follows:
H2: Institutional quality is positively related to the audit committee effectiveness–bank stability relationship.

3. Model and data

First, to test the impact of audit committee effectiveness on bank stability (H1), we use the following panel regression:
∑
4 ∑
11 ∑
13
STABit = α0 + αγ ACSTit + αρ FCONit + ασ CCONt + αi + αt + αc + μit (1)
γ=1 ρ=5 σ=12

Second, to examine the impact of institutional quality on the audit committee effectiveness–bank stability relation (H2), we es­
timate panel regression as follows:
∑
4 ∑
8 ∑
15 ∑
17
STABit = β0 + βγ ACSTγit + βθ INSit ∗ ACSTθit + αρ FCONit + ασ CCONt + βi + βt + βc + μit (2)
γ=1 θ=5 ρ=9 σ=16

The dependent variable, STAB, is the bank stability that is measured by the Z-score (Because of the Z-score being highly skewed, we
use the natural logarithm of the Z-score but call it the Z-score here onward); NPLS (nonperforming loan ratio); and AZ-score (Altman’s
Z-score), which were commonly used in the literature (Dwumfour, 2017; Nguyen, 2020).
Among the independent variables, ACST is the four audit committee structure variables as a proxy of audit committee effectiveness,
which was generally applied in the literature. (1) Female audit committee members (FAC): Niederle and Vesterlund (2007) believe that
women are less overconfident and tend to be more risk averse than their male counterparts. This can make women more sensitive to
risk and lead them to oversee risk-taking and maintain bank stability better than their male counterparts. (2) Audit committee size
(ACS): Some previous studies have shown that smaller boards are more effective, as directors can communicate better among
themselves and are easier to manage (Yermack, 1996). Similar to board size, Musallam (2020) provides evidence that the large audit
committee reduces the firm performance. We might expect that smaller audit committees may have higher monitoring effectiveness to
constrain risk-taking and maintain bank stability. (3) Audit committee independence (ACI): Independent directors are essential tools to

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Q.K. Nguyen Finance Research Letters xxx (xxxx) xxx

Table 1
Descriptive statistics.
Variables Observations Mean Sdt.dev Min Q.25 Q.75 Max

Z-score 1,062 2.99 0.94 − 2.440 2.60 3.63 4.47

AZ-score 1,067 8.60 6.96 − 118.172 6.00 9.91 60.16
NPLS 1,067 0.04 0.05 0.00 0.14 0.04 0.53
FAC 1,067 0.27 0.27 0.00 0.00 0.40 1.00
ACS 1,067 3.65 1.44 0.00 3.00 4.00 11.00
ACI 1,067 0.39 0.38 0.00 0.00 0.75 1.00
FAE 1,067 0.47 0.26 0.00 0.33 0.67 1.00
BSIZE 1,067 9.77 0.77 7.45 9.23 10.35 11.61
DIV 1,067 0.37 1.40 − 29.188 0.30 0.69 1.00
ASQ 1,067 0.01 0.04 − 0.036 0.00 0.01 1.17
STO 1,067 0.21 0.34 0.00 0.00 0.29 1.00
FOR 1,067 0.16 0.27 0.00 0.00 0.23 1.00
NIM 1,067 0.03 0.03 − 0.029 0.02 0.04 0.28
CFR 1,067 0.85 0.36 0.00 1.00 1.00 1.00
GDP 1,067 3.47 0.41 2.53 3.24 3.74 4.81
CR3 1,067 0.59 0.14 0.29 0.50 0.67 0.92
INS 1,067 − 0.26 0.47 − 1.31 − 0.53 − 0.26 1.62

enhance the monitoring role of the board (Ringe, 2013). Therefore, the more independent directors on the audit committee can in­
crease the effectiveness of the audit committee. (4) Financial or accounting expertise (FAE): Xie et al. (2003) report that audit
committees have accounting experts who can reduce earnings management. Moreover, the audit committee of a company includes at
least one expert in accounting or finance to increase accrual quality (Dhaliwal et al., 2010). These findings indicate that financial or
accounting expertise may play an important role in overseeing the management. Therefore, we expect that accounting or financial
expertise makes audit committees more effective in overseeing managers’ risk-taking and maintaining bank stability.
Among the other variables, INS is the quality of governance index as a key proxy for institutional quality (Kaufmann et al., 2009).
FCON is a vector of control variables at the bank level including bank size (BSIZE), diversification (DIV), asset quality (ASQ), foreign
ownership (FOR), state ownership (STO), net interest margin (NIM), and cash flow rights (CFR). CCON is the vector of control variables
at the country level including economic growth (GDP) and bank competition (CR3). α1 − α13 and β1 − β17 are the parameters to be
estimated; α0 and β0 are constant term; αi and βi are bank fixed effect; αt and βt are time fixed effect; αc and βc are country fixed effect;
and μ is an error term.
We assembled a panel data set provided by Orbis Bank Focus for ASEAN commercial banks from 2002 to 2018. After excluding the
missing data, we have an unbalanced panel consisting of 96 banks in 10 ASEAN countries and 1,067 observations. We have excluded
all Islamic banks from our data because of the different corporate governance in the two kinds of banks (Mollah and Zaman, 2015).
Audit committee information was collected manually from annual reports or bank and country stock exchange websites. Data on
institutional quality were collected from the World Bank database.
We determine whether the fixed or random-effects model is more appropriate by performing the Hausman test (Wooldridge, 2002).
The results suggest the use of the fixed-effects model for both Eq. (1) and Eq. (2). Moreover, ASEAN countries have differences in
culture, financial openness, and degree of financial market development. Therefore, banks in these countries may have characteristics
specific to these locations. To control these differences, we perform bank fixed effect and country fixed effect.

4. Empirical analysis

4.1. Descriptive statistics and correlation matrix

Table 1 describes the descriptive statistics of the major variables. The mean (min, max) of the Z-score is 2.99 (–2.44, 4.47) indi­
cating that the level of bank stability in ASEAN countries is not high and differs greatly between banks.
Table 2 shows the Pearson correlations between the primary variables. We find that most correlations have a relatively small value.
This indicates that multi-collinearity is not a problem in our regression analysis.

4.2. The impact of audit committee effectiveness on bank stability

Table 3 presents the estimation results of Eq. (1). The coefficient on ACS is negative, and that on ACI is positive with the Z-score,
indicating that the size of the audit committee is correlated negatively with bank stability. This finding is consistent with Nguyen and
Dang (2020). However, the audit committee independence is correlated positively with bank stability. These coefficients are consistent
across all periods, indicating that the impact of audit committee effectiveness on bank stability does not change after the 2008 crisis.
The coefficients on FAC are not significant in most regressions. This may be because the degree of women’s risk aversion may disappear
when they adapt to a male-dominated culture in most ASEAN countries (Adams and Funk, 2012). Although not all of the four audit
committee structure variables significantly affect bank stability, these results are consistent with hypothesis H1 and indicate that an
appropriate audit committee structure can enhance bank stability. Moreover, Regressions (9) and (11) report that the coefficient on

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 Q.K. Nguyen
Table 2
Pearson correlations matrix of key variables.
Z-score AZ-score NPLS FAC ACS ACD FAE BSIZE DIV ASQ STO FOR NIM CTR GDP CR3 INS

Z-score 1.00
AZ-score 0.37 1.00
(0.00)
NPLS − 0.19 − 0.07 1.00
(0.00) (0.02)
FAC − 0.09 − 0.114 − 0.18 1.00
(0.00) (0.00) (0.00)
ACS 0.09 0.04 0.06 0.01 1.00
(0.01) (0.21) (0.06) (0.59)
ACD 0.17 0.08 − 0.03 − 0.35 0.15 1.00
(0.00) (0.01) (0.39) (0.00) (0.00)
FAE 0.04 0.06 − 0.19 0.06 0.13 0.16 1.00
(0.25) (0.06) (0.00) (0.07) (0.00) (0.00)
BSIZE 0.15 − 0.32 − 0.10 − 0.10 0.121 0.31 − 0.08 1.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01)
DIV 0.234 0.10 0.01 0.00 0.06 0.12 − 0.01 0.04 1.00
4

(0.00) (0.00) (0.66) (0.99) (0.04) (0.00) (0.71)

ASQ − 0.07 − 0.54 0.22 0.00 − 0.01 0.05 0.02 − 0.08 − 0.02 1.00
(0.02) (0.00) (0.00) (0.92) (0.66) (0.14) (0.57) (0.01) (0.62)
STO − 0.07 − 0.04 0.26 − 0.06 − 0.14 − 0.18 − 0.23 0.05 − 0.04 0.02 1.00
(0.02) (0.21) (0.00) (0.05) (0.00) (0.00) (0.00) (0.09) (0.20) (0.61)
FOR 0.01 − 0.026 − 0.00 − 0.03 0.11 0.24 0.02 0.18 0.03 − 0.02 − 0.25 1.00
(0.64) (0.39) (0.91) (0.29) (0.00) (0.00) (0.55) (0.00) (0.28) (0.59) (0.00)
NIM 0.08 0.31 − 0.08 − 0.09 0.11 0.03 0.18 − 0.33 0.07 − 0.03 − 0.04 − 0.01 1.00
(0.01) (0.00) (0.01) (0.00) (0.00) (0.33) (0.00) (0.00) (0.03) (0.32) (0.19) (0.84)
CTR 0.11 − 0.01 0.06 − 0.18 − 0.07 0.18 0.03 0.12 0.02 0.02 0.22 0.13 − 0.00 1.00
(0.00) (0.71) (0.06) (0.00) (0.03) (0.00) (0.38) (0.00) (0.60) (0.55) (0.00) (0.00) (0.96)
GDP 0.26 0.00 − 0.01 − 0.27 0.16 0.60 0.00 0.62 0.11 − 0.03 − 0.15 0.14 − 0.19 0.20 1.00
(0.00) (0.97) (0.67) (0.00) (0.00) (0.00) (0.94) (0.00) (0.00) (0.27) (0.00) (0.00) (0.00) (0.00)
CR3 − 0.05 0.10 0.09 − 0.21 − 0.05 0.05 0.08 − 0.29 0.03 0.05 0.07 0.03 0.24 0.12 − 0.17 1.00

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(0.09) (0.00) (0.01) (0.00) (0.12) (0.11) (0.01) (0.00) (0.37) (0.09) (0.02) (0.36) (0.00) (0.00) (0.00)
INS 0.27 − 0.00 − 0.02 − 0.23 0.11 0.46 0.03 0.56 0.10 − 0.04 − 0.15 0.05 − 0.16 0.14 0.88 0.01 1.00
(0.00) (0.92) (0.48) (0.00) (0.00) (0.00) (0.35) (0.00) (0.00) (0.18) (0.00) (0.13) (0.00) (0.00) (0.00) (0.79)

Note: Below each correlation estimate, we show p-values reported in parentheses.

 Q.K. Nguyen
Table 3
Fixed effects regression results of bank stability.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
Variables Full period Pre-crisis Crisis Post-crisis ROA δROA E/A

FAC -0.027 0.013 -0.301 0.199 -0.132 -0.002 -0.006* 0.007

ACS -0.031** -0.034** -0.017** -0.026* -0.008** -0.001** 0.000 -0.001**
ACI 0.181** 0.205** 0.582* 0.053* 0.041** 0.001*** -0.005 0.022*
FAE -0.015 -0.028 0.336 0.101** 0.032 -0.001 -0.003 -0.005
BSIZE -1.043*** -1.063*** -1.044*** -1.040*** -1.062*** -0.825*** -1.665*** -1.351*** -0.004* 0.008** -0.231***
DIV 0.088*** 0.087*** 0.088*** 0.088*** 0.087*** 0.170 0.100** 0.029*** 0.001*** 0.001*** 0.003**
ASQ -2.438* -2.517* -2.325* -2.422* -2.374* -2.813 -3.205 -7.893 -0.582*** 0.006 0.105**
STO 0.398 0.409 0.347 0.403 0.353 2.600*** 2.102** 0.554*** -0.004 0.007 0.062*
FOR 0.248* 0.240* 0.235* 0.243* 0.233 0.264 0.138 -0.132 0.005 0.006 0.040**
5

NIM 1.541* 1.886** 1.603* 1.546* 2.022** -1.642 3.512** 3.115*** 0.201*** 0.131*** -1.093
CFR 0.145 0.150 0.178* 0.149 0.190* 0.134 -0.310 0.216 0.002 -0.006 0.033**
GDP 0.665* 0.719** 0.686** 0.650* 0.755** 9.730*** 0.204 -0.434 -0.017* -0.011 0.286***
CR3 -0.080 -0.079 -0.116 -0.073 -0.119 -0.325 -0.303 0.451** 0.009* -0.004 -0.026
Constant 9.892*** 9.947*** 9.851*** 9.914*** 9.873*** -20.115*** 18.071*** 17.374*** 0.086*** 0.009*** 1.305***
Year fixed effect yes yes yes yes yes yes yes yes yes yes yes
Country fixed effect yes yes yes yes yes yes yes yes yes yes yes
Observations 1,062 1,062 1,062 1,062 1,062 172 289 601 1,067 1,067 1,067
Within R2 0.302 0.306 0.305 0.302 0.310 0.270 0.624 0.339 0.846 0.052 0.429

Note: This table presents the results of the estimates of Eq. (3). Regressions (1)–(11) involve panel data and are estimated with bank-specific fixed effects. Columns (1)–(4) present the results of four
separate regressions for each of the four proxies of audit committee structure (FAC, ACS, ACI, and FAE). We include these proxies in one model in Column (5). Columns (6)–(8) present the results of three
regressions for the pre-crisis, crisis, and post-crisis periods. We define the full period as 2002–2018, the pre-crisis period as 2002–2007, the crisis period as 2008–2011, and the post-crisis period as
2011–2018. Columns (9)–(11) present the results of three regressions for each component of the Z-score. *Significance at 10%, **significance at 5%, and ***significance at 1%.

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 Q.K. Nguyen
Table 4
Fixed effects regression results of audit committee effectiveness–bank stability relationship.
Dependent variable: Z-score
Institutional Quality COC GOE PSAV RQ RL VA

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
FAC -0.100 -0.090 -0.013 0.003 0.020 -0.042 − 0.092 -0.078
ACS -0.022* -0.017** -0.012 -0.033** -0.026* -0.034** − 0.025* -0.031**
ACI 0.145* 0.129** 0.063 0.236*** 0.231** 0.215** 0.197** 0.169*
FAE -0.032 -0.008 0.108 0.020 -0.026 -0.026 − 0.111 -0.077
FAC*INS -0.235 -0.310 -0.013 -0.105 -0.001 -0.180 − 0.341** -0.355*
ACS*INS 0.031* 0.056** 0.049*** 0.032* 0.037* 0.004* 0.016*** 0.021
ACI*INS 0.174** 0.252* 0.311** 0.274** 0.140 0.221* 0.045* -0.131
FAE*INS -0.047 -0.025 0.163 0.014 -0.016 -0.096 − 0.204 -0.187
BSIZE -1.047*** -1.070*** -1.040*** -1.038*** -1.079*** -1.076*** -1.079*** -1.097*** -1.069*** − 0.861*** -1.071***
DIV 0.088*** 0.087*** 0.088*** 0.088*** 0.087*** 0.087*** 0.087*** 0.087*** 0.087*** 0.088*** 0.087***
6

ASQ -2.401* -2.495* -2.312* -2.428* -2.308* -2.261* -2.308* -2.432* -2.343* − 1.641 -2.206*
STO 0.399 0.424 0.367 0.414 0.417 0.394 0.421 0.379 0.413 0.311* 0.455*
FOR 0.272* 0.250* 0.223 0.243* 0.266* 0.231 0.249* 0.262* 0.257* 0.234* 0.305**
NIM 1.445* 2.149** 1.593* 1.520* 2.286** 2.469*** 2.378*** 2.318*** 1.895** 1.974** 2.007**
CFR 0.145 0.153 0.181* 0.148 0.189* 0.177 0.187* 0.189* 0.195* 0.232** 0.170
GDP 0.703** 0.679* 0.664* 0.659* 0.708** 0.660* 0.690* 0.889** 0.614* 1.245*** 1.003***
CR3 -0.097 -0.067 -0.136 -0.075 -0.151 -0.122 -0.165 -0.194 -0.213 − 0.851 -0.171
Constant 9.917*** 10.070*** 9.964*** 9.881*** 10.282*** 10.269*** 10.277*** 9.630*** 10.584*** 9.473*** 9.694***
Year fixed effect yes yes yes yes yes yes yes yes yes yes yes
Country fixed effect yes yes yes yes yes yes yes yes yes yes yes
Observations 1,062 1,062 1,062 1,062 1,062 1,062 1,062 1,062 1,062 1,062 1,062
Within R2 0.303 0.308 0.307 0.302 0.302 0.317 0.316 0.324 0.315 0.306 0.309

Note: This table presents the results of the estimates of Eq. (1). Regression (1)–(5) involve panel data and are estimated with bank-specific fixed effects. Regression (6)–(11) presents the results of the
estimates of Eq. (2) using the components of the quality of governance index instead of the quality of governance index overall. Regressions involve panel data and are estimated with bank-specific fixed

Finance Research Letters xxx (xxxx) xxx

effects. *Significance at 10%, **significance at 5%, and ***significance at 1%.
 Q.K. Nguyen
Table 5
System GMM (S-GMM) regression results of bank stability.
Z-score AZ-score NPLS
Full period Pre-crisis Crisis Post-crisis Full period Pre-crisis Crisis Post-crisis Full period Pre-crisis Crisis Post-crisis

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
FAC 0.209 0.527 2.722 0.238 10.572 -6.124 -12.481 -1.701 -0.112 -0.456** -0.041 -0.172
ACS -0.278* -0.650* -1.306* -0.155 -2.305* -3.781* -0.579* -2.830** 0.040* 0.056* 0.002** 0.048**
ACI 1.582* 3.441* 10.690* 3.829*** 18.443** 18.463* 0.931** 8.271* -0.161** -0.191* -0.066* -0.219**
FAE 0.157 2.941 9.952** -0.585 -7.345 -13.675 9.440** 6.300 -0.256** 0.050 -0.074*** -0.107
BSIZE -0.469** 0.300 1.621 -0.054 -14.797*** -7.392** -7.651* -5.042*** -0.048* 0.011 0.004 -0.009
DIV 0.089** 0.158** 0.039* 0.053* -0.654 9.008 0.298 -0.018 0.000 -0.056 -0.010 0.001
ASQ -8.470 1.945 5.549 -41.290* -116.283*** -34.751 -111.337*** -502.380*** 0.554* 0.715 0.125** 4.151
STO 0.289 0.611 0.468 0.155 8.174 -10.618 -13.969 8.982 0.071* 0.049 0.000 0.027
7

FOR -0.159 -0.227 -2.009 -0.669 7.391 -0.808 -6.680 2.592 0.050 -0.003 -0.044 0.032
NIM -0.962 8.233 28.109 5.836 67.590 131.249 67.925 77.966** -0.395 -1.201** -0.384 -0.114
CFR -0.307 0.026 -0.975 0.179 -15.433* 2.441 2.004 -0.355 -0.112 -0.013 0.019 0.015
GDP 0.873 -0.468** -9.520* -1.620* 14.247*** -1.534 3.543 2.431 0.163* -0.013* -0.061 0.085
CR3 -0.173 1.566 -10.058* -1.132 -10.088 -15.754 -12.975 -9.132 0.176 0.304 0.081** 0.067
Constant 5.285 -0.535 30.556 9.196** 120.866*** 101.721*** 85.451* 36.181** -0.008 -0.195 0.161 -0.252
Observations 1,062 172 289 600 1,067 174 290 602 1,067 174 290 602
Hansen J test (p-value) 0.531 0.283 0.747 0.881 0.641 0.877 0.322 0.318 0.566 0.661 0.797 0.808
AR2 (p-value) 0.125 0.403 0.624 0.155 0.415 0.345 0.703 0.311 0.182 0.431 0.707 0.109
Instruments 59 21 15 25 84 24 19 67 71 21 19 28

Note: This table presents the results of the system GMM estimates of Eq. (3). Z-score, AZ-score, and NPLS are used as proxies of bank stability. *Significance at 10%, **significance at 5%, and ***sig­
nificance at 1%.

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Q.K. Nguyen Finance Research Letters xxx (xxxx) xxx

Table 6
Audit committee effectiveness and bank stability – Two-stage quantile regression.
Variables 10th 25th 50th 75th 90th

FAC − 0.029 − 0.200 − 0.359 − 0.491 − 0.585

ACS − 0.016** − 0.045*** − 0.106* − 0.128*** − 0.135**
ACI 0.084* 0.076** 0.169*** 0.184** 0.260*
FAE 0.095 − 0.040 − 0.165 − 0.269 − 0.343
BSIZE 0.004 0.003 0.001 0.000 − 0.001
DIV 0.146** 0.148*** 0.149*** 0.150*** 0.151***
ASQ − 0.860 2.028 4.698 6.924 8.509
STO 0.167 0.078 − 0.005 − 0.074 − 0.123
FOR 0.180 0.170 0.161 0.154 0.149
NIM 1.135** 0.687* 0.273 − 0.072 − 0.318
CFR 0.054* 0.026** 0.000** 0.021*** − 0.037
GDP 0.014* 0.007** − 0.001 − 0.007 − 0.011
CR3 0.104 0.017 − 0.064 − 0.131 − 0.178
Observations 1,062 1,062 1,062 1,062 1,062
F-test for equality of quantile coefficient 34.32***

Note: This table presents the results of the two-stage quantile estimates of Eq. (1). We use the Machado and Silva (2019) method to apply the
structural quantile functions defined by Chernozhukov and Hansen (2008). *Significance at 10%, **significance at 5%, and ***significance at 1%.

ACS is significantly negative and that on ACI is significantly positive with E/A and ROA. These findings indicate that audit committee
effectiveness principally drives bank stability (Z-scores) higher through the reallocation effect for profits and incentives to hold higher
capital ratios.

4.3. Institutional quality and audit committee effectiveness–bank stability relationship

Table 4 presents the estimation results of estimating Eq. (2). The coefficient on ACS is negative, and that on ACI is positive and
significant with the Z-score, but this relation depends on institutional quality. The interaction terms ACS*INS and ACI*INS enter
positively and significantly in regressions (2), (3), and (5). These results support our second hypothesis and suggest that high insti­
tutional quality not only enhances the important role of independent audit committee members in maintaining bank stability but also
mitigates the inverse relation of audit committee size and bank stability.
To examine the role of each component of institutional quality in the audit committee effectiveness–bank stability relationship, we
estimate Eq. (2) by replacing the INS variable with the six variables of institutional quality. Table 4 shows that not all components of
institutional quality affect the audit committee effectiveness–bank stability relationship. Specifically, we find that the coefficients of
ACS*INS in columns (6)–(10) and ACI*INS in columns (6), (7), (9), and (10) are positive and significant. This result implies that
improving institutional quality through channels such as enhancing government effectiveness, political stability and absence of
violence, regulatory quality, and rule of law helps increase the role of audit committees in maintaining bank stability. Overall, our
results are consistent with the notion that a high level of institutional quality enhances the role of the audit committee in maintaining
bank stability.

4.4. Robustness test

Table 5 reports the regression results of bank stability using the Z-score as well as some alternative measures of bank stability and
the system GMM estimation technique. The results in Table 5 quantitatively remain the same as in Table 3. The diagnostics tests in
Table 5 show that all the regressions are valid. Overall, the “System GMM” estimates in Table 5 support the notion that even after using
other proxies of bank stability variables and controlling for unobserved heterogeneity, simultaneity, and dynamic endogeneity, audit
committee effectiveness is found to be related to bank stability in a way that is consistent with our expectations.
Table 6 shows an additional test by allowing for heterogeneous responses to the audit committee by conditioning on bank stability.
The results show that the coefficient of the audit committee remains the same and significant across the quantiles, but the values of the
coefficients are different and increasing across the quantiles. Our results imply that the more stable the banks, the higher the value of
coefficients on audit committee structure variables with bank stability. Our results suggest that banks should consider that any change
in audit committee structure policy may affect bank stability differently depending on the health of the banks. The two-stage quantile
regression method can also treat potential endogeneity well. The result of our F-test rejects the null hypothesis for the equality of the
coefficients.

5. Conclusion

In this paper, we conduct the empirical assessment of theories concerning bank stability, banks’ audit committee structures, and
national institutional quality. Our primary results state that audit committee effectiveness can enhance bank stability by increasing
bank performance and capitalization levels. However, these relationships depend on the institutional quality in each country and the
level of stability of each bank. This study additionally provides regulators as well as shareholders with an implication that audit

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Q.K. Nguyen Finance Research Letters xxx (xxxx) xxx

committees play an important role in overseeing bank risk and maintaining bank stability. Regulators should clarify this role when
designing banking sector regulations. They should also instruct banks to develop an appropriate audit committee structure to improve
their effectiveness. Governments need to pay more attention to improving institutional quality. This may indirectly make the corporate
governance of banks operate more efficiently and help maintain stability.

CRediT authorship contribution statement

Quang Khai Nguyen: Conceptualization, Data curation, Formal analysis, Investigation, Methodology, Resources, Writing –
original draft, Writing – review & editing.

Acknowledgment

“The author would like to thank the editor and other anonymous reviewers for constructive comments and suggestions. We also
thank Dr Phu Quoc Pham (University of Economics Ho Chi Minh City) and Dr Chau Le Ho An (University of Lincoln) for all support.
Special thanks are also due to an anonymous reviewer of the journal for helpful ideas towards improving the quality of the paper. This
research is funded by University of Economics Ho Chi Minh City, Vietnam”.

Appendix 1

Table A1: Variable definitions.

Variables
Bank stability
1. Z-score
2. Altman’s Z-score
3. Nonperforming loan ratio
(NPLS)
Audit committee
1. Female audit committee
member (FAC)
2. Audit committee size (ACS)
3. Audit committee
independence (ACI)
4. Financial or accounting
expertise (FAE)
Other control variables
Bank size (BSIZE)
Diversification index (DIV)
Assets quality (ASQ)
State ownership (STO)
Foreign ownership (FOR)
Net interest margin (NIM)
Cash flow right (CFR)
GDP per capita (GDP)
Bank concentration (CR3)
Panel C: Interaction variable
Institutional quality (INS)
Measures
Z-score = Natural logarithm of [ROA + (equity/total assets)]/Std(ROA). We use logarithm because the Z-score is highly
skewed.
Z = 1.2a1 + 1.4a2 + 3.3a3 + 0.6a4 + 1.0a5, Altman (1968) define “a1 = working capital/total assets, a2 = retained
earnings/total assets, a3 = earnings before interest and taxes/total assets, a4 = market value of equity/total assets, and a5 =
sales/total assets”.
The nonperforming loans/total loans
FAC = The number of female members/total audit committee members
ACS = The number of audit committee members
ACI = The number of independent directors/total audit committee members
FAE = The number of members who have had experience in banks or nonbanks as accountants or auditors or have accounting
degrees or financial degrees/total members on the audit committee
The natural logarithm of bank total assets
Net interest income − Other operating income
A diversification index is defined as follows: 1 − | |
Total operating income
Loan loss provisions/total assets
Government shares/total shares of bank
Foreign shares/total shares of bank
Net interest margin = (investment income – interest expenses)/average earning assets
CFR equals 1 if banks have at least one shareholder that holds 10% of the share or more and 0 otherwise.
Natural logarithm of GDP per capita in a year
∑ ∑
Concentration ratio = 3n=1 branchn / ki k=1 branchk , (the three largest banks are defined by the number of bank branches)
The quality of governance index = the mean value of six governance dimensions for each country every year, measured by
Kaufmann et al. (2009): control of corruption (COC), government effectiveness (GOE), political stability, and absence of
violence (PSAV), regulatory quality (RQ), rule of law (RL), and voice and accountability (VA)

Apendix 2: Introduction of ASEAN region

“The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic, political, and security
cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand,
and Vietnam. The group has played a central role in Asian economic integration, spearheading negotiations among Asia-Pacific nations
to form one of the world’s largest free trade blocs and signing six free trade agreements with other regional economies.” (Council on
Foreign Relations)

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Q.K. Nguyen Finance Research Letters xxx (xxxx) xxx

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