“Investigating the effect of corporate governance on audit quality and its impact on investment efficiency”

There is an academic discussion about investment efficiency, regarding its determi- nants and effects. Corporate Governance (CG) and Audit Quality (AQ) are determinants of investment efficiency The main objective of the article is to investigate the effect of CG and AQ on investment efficiency, this objective is divided into sub-objec-tives: to investigate the direct effect of CG on AQ, AQ on investment efficiency, and CG on investment efficiency. Moreover, the indirect effect of CG on investment efficiency through AQ as a mediator variable. This paper focuses on non-financial listed firms in the Egyptian Stock Exchange (EGX), especially firms recorded in EGX 100 for four years’ period (2013–2018), for 103 firms and 412 completed observations. The researcher uses Structural Equation Modeling (SEM) through SmartPLS software. The paper shows evidence that management that has good CG mechanisms obtains a suit- able atmosphere to prepare transparent financial statements, which helps enhance the auditor’s role and improve AQ. Improving AQ lowering IA, which increases the trust of investors in management decisions, this leads to reduce pressure on management and improve efficiency of investment decisions. Having good CG mechanisms pro- vides management with a good atmosphere to make right investment decisions, and having good CG mechanisms increases AQ, which helps management to have a good environment to make investment decisions with higher efficiency, or in other words, there is a significant and positive effect of integration between CG and AQ on invest- ment efficiency.

Investigating the effect of corporate governance on audit quality and its impact on investment efficiency INTRODUCTION An investment is an asset or item acquired to generate or obtain other benefits. The level of suitable investment is evaluated using the concept "investment efficiency" (Li & Wang, 2010). There are two cases of investment efficiency: first, underinvestment case, where a firm that missed investment opportunities can bring positive Net Present Value (NPV) or there is a production capacity shortage; second, overinvestment case, where there is negative NPV or the firm will have loads that should not even exist (Islami, 2017;Siregar & Nuryanah, 2019).
Investment efficiency determinants are presented through information asymmetry (IA) (Salin, Nor, & Nawawi, 2018). Since IA prevents efficient investment due to the differential degree of information between related parties, it helps managers select investment opportunities that are not in the best interest of owners but are favorable for managers (Verdi, 2006).

Corporate governance and audit quality
Previous studies that investigated the effect of CG on AQ are divided into three groups. The first group reveals that all CG mechanisms, or at least all tested mechanisms, associate with AQ. Okaro  The last studies interested in the relationship between CG mechanisms and investment efficiency show evidence that there is a positive effect of CG mechanisms on investment efficiency. However, to the best of the researcher's knowledge, no study tested AQ's influence as a mediator in this association.
Finally, the literature adequately identifies some determinants of investment efficiency, but there are some shortcomings. First, there is less knowledge about the effect of these determinants in emerging or underdeveloped markets. Second, the existing literature does not link CG and AQ in emerging markets before. Therefore, this paper's main question is testing the effect of both CG and AQ on investment efficiency.

RESEARCH OBJECTIVES AND HYPOTHESES DEVELOPMENT
According to the literature review, this paper's main objective is to investigate the effect of CG and AQ on investment efficiency as determinants of investment efficiency. This main objective is divided into four sub-objectives: first, investigating the effect of CG on AQ, second, investigating the effect of AQ on investment efficiency, third, investigating the direct effect of CG on investment efficiency, and fourth, investigating the integration the effect of CG and AQ on investment efficiency.
Based on the objective and literature review groups, the hypotheses are as follows: H1: Corporate Governance has a significant association with Audit Quality.
H2: Audit Quality has a significant association with investment efficiency.
H3: Corporate Governance has a significant effect on investment efficiency through Audit Quality as a mediator variable.

The model
The AQ's mediating role on the association between CG mechanisms and investment efficiency is represented in Figure 1.

First: Measuring the dependent variable (investment efficiency (Inv. Eff.))
Biddle and Hilary (2006) express investment efficiency as a deviation from the optimal investment. A positive residual represents overinvestment, whereas a negative residual represents underinvestment. This model uses panel data methodolo-gies. The researcher reports coefficients estimated using standard errors adjusted. The main equation to compute investment is as follows: where Invest it -Capital expenditures, scaled by net PPE at the beginning of the year; CFO it-1 -Operating cash flow, scaled by net PPE at the beginning of the year; MTB it-1 -Market to book ratio, measured as the ratio of the market value of equity plus the book value of total assets minus the book value of equity, which is divided by the book value of total assets.

Second: Measuring mediation variables (Audit Quality (AQ))
AQ proxies are used in this research are: 1. Audit tenure (Aud. Ten.): According to Chen, C.-J. Lin, and Y-C. Lin (2008), the longer the audit tenure, the better auditors' understanding of the client's activities with time, increasing their ability to do auditing jobs efficiently. Besides, auditors' long-term period pushes auditors to make more efforts to maintain their reputation. This leads to improved AQ. Almutairi, Dunn, and Skantz (2009) mention that longer tenure enhances the auditor and client's economic association, which considers audit tenure one of AQ proxies. Besides, Dashtbayaz and Mohammadi (2016) and Li (2018) confirm that audit tenure positively affects investment efficiency. This proxy is measured by the natural logarithm of the audit tenure.

Number of audit committee members (Aud.
Comm. Mem.): Chen, Sung, and Yang (2017) presented it as a natural logarithm of the number of audit committee members.

Number of audit committee meetings (Aud.
Comm. Meet.): Chen, Sung, and Yang (2017) presented it as a natural logarithm of the number of audit committee meetings.

Data description
Published annual reports in the Thomson Reuters Eiko database were used. The sample lasts from 2015 to 2018. The researcher excluded data until 2014 due to the 2011 Egyptian revaluation and the subsequent events, which affected Egyptian stock market stability. Moreover, the researcher excluded all banks and financial institutions because this sector is affected by additional rules related to auditing and CG mechanisms issued by the Central Bank of Egypt that could significantly affect research results. Table 1 introduces descriptive statistics for all study variables.

Descriptive statistics
The main sample is divided into two sub-samples since the first sub-sample is related to overinvestment cases, which has 186 yearly observations. The second sub-sample is related to underinvestment cases, which has 226 yearly observations. The observations that are suffering from overinvestment problems are higher than underinvestment problems. Moreover, Table 1 indicates that Skewness ranges are between -3 and +3, and Kurtosis ranges are between -10 and +10 for all variables, which means the deviations are normal and do not have any significant effect on the following results.

Model goodness of fit
The model makes sure that models have trusted and generalized results (see Table 2).  Table 2 indicates that both research models are fit and easy to interpret. Moreover, OVERINV model is fit more than UNDERINV model.

Inner model assessment (structural model)
R-squares are presented in Table 3 to judge the model's relevance.
Based on Table 3, the amount of variability of data, which was explained by the structural model, was 68.8% for OVERINV model and 56.6% for UNDERINV model. The structural models for OVERINV and INDERINV in the study have a good fit.

Discriminant validity
Discriminant validity assures the association between proxies and latent variables. The results ob-tained from the discriminant validity test are as follows (see Table 4). Table 4 indicates that all proxies make up each variable (the values in bold) that meets the discriminant validity since it has the largest outer loading value for the variable formed.

Outer model assessment (structure model)
The convergent validity tests are presented in Table 5.

RESULTS
Using bootstrapping of the PLS analysis, the results are presented in Table 6.
The results of Table 6 are presented as follows: 1. The association between CG and AQ is obtained from line 1. The path coefficient is 0.546 with a t-value of 13.458 for OVERINV model and 0.438 with a t-value of 10.237 for UNDERINV model, which is higher than 1.96. This means that there is a positive and significant association between CG and AQ at a 1% significance level. So the first hypothesis ( • The indirect association between CG and INV. EFF. is presented in lines 6 and 7. The path coefficient is -0.274 with a t-value of 7.602 for OVERINV model and 0.183 with a t-value of 6.317 for UNDERINV model, which is higher than 1.96 at a 1% significance level. So the third hypothesis (H3) is accepted.

DISCUSSION
Regarding the discussion about investment efficiency determinants, this paper aims to analyze CG and AQ's effect on investment efficiency. This objective is divided into four sub-objectives: the first is testing the effect of CG on AQ, the second is testing the effect of AQ on investment efficiency, the third is testing the direct effect of CG investment efficiency, the fourth concerns with the indirect association between them through AQ as a mediator variable.
Regarding sub-objective (1), Table 6 shows evidence that CG mechanism has a positive effect on AQ, since having good CG mechanisms enhance the transparency of financial statements, which facilitates the auditors' role to do their jobs. Therefore, AQ is higher, and vice versa.
Regarding sub-objective (2), Table 6 shows that AQ has a positive effect on investment efficiency. A good AQ means providing investors can fine-tune their decisions based on the audit opinion since this opinion has informativeness value, and its in-surance value can lead to lower IA, then improve investment efficiency.
Regarding sub-objective (3), Table 6 reveals that CG has a positive and direct effect on investment efficiency since having good CG mechanisms helps management have the right vision, improving the efficiency of their investment decisions.
Regarding sub-objective (4), Table 6 confirms that there is a positive and indirect effect of CG on investment efficiency through AQ as a mediator variable, since having good CG mechanisms provides a good atmosphere to increase AQ then lower IA, which gives a management push and trust to make right decisions, means increasing investment efficiency.
Finally, there are determinants to control investment efficiency. This paper introduces CG and AQ as investment efficiency determinants. CG and AQ have a significant and positive effect on investment efficiency. Moreover, there is a mediation role of AQ in the association between CG and investment efficiency.

CONCLUSION
Many literature reviews are interested in investment efficiency. This paper is interested in investigating some determinants of investment efficiency, such as CG and AQ. Besides, this paper concerns with the mediation effect of AQ on the association between CG mechanisms and investment efficiency, or in other words, investigating the integration between CG and AQ on investment efficiency.
For 103 Egyptian listed firms in EGX 100 from 2015 to 2018, which include 412 observations, the finding indicates that: (1) management that has good CG mechanisms has a suitable atmosphere to prepare transparent financial statements, which helps to enhance auditor role and improve AQ; (2) improving AQ helps to reduce IA since a good AQ means investors can fine-tune their decisions based on the audit opinion since this opinion has informativeness value and its insurance value can lead to lower IA, which increases the trust of investors in management decisions and leads to reduced pressure on management; therefore, it improves the efficiency of investment decisions; (3) having good CG mechanisms provides management with a good atmosphere to make the right investment decisions since having good CG mechanisms helps management to have the right vision; (4)having good CG mechanisms leads to increased AQ, which helps management have a good environment to make investment decisions with higher efficiency; or in other words, the integration between CG and AQ has a significant and positive association on investment efficiency.
The paper introduces three contributions: 1) management uses CG mechanisms to improve AQ; 2) AQ helps management improve investment efficiency;3) there is a mediation effect of AQ in the association between CG and investment efficiency.