Impact of Corporate Governance on Performance: A Study of Listed Firms in Pakistan

Ali, Amjad and Alim, Wajid and Ahmed, Jawad and Nisar, Sabahat (2021): Impact of Corporate Governance on Performance: A Study of Listed Firms in Pakistan.

Abstract

The objective of this exploration is to show the relationships among corporate governance tools (Board size, board independence, CEO status, Board Education, and Established Years of the firm) and firm performance which is determined by Return on Asset (ROA). Quantitative data is used to discover the association between the variables. The top seventy-five companies registered on the Pakistan Stock Exchange involving the period from 2010 to 2019 are taken as a sample. The research found that there is a connection between the performance of the firm with the overall extent of directors, board independence, and average education of board representatives. Insignificant results came for CEO duality and established years of the firm. The result predicted that an increase in total board members and average education of board members will increase firm performance (ROA) whereas a reduction in board independence will reduce firm performance (ROA) which explains the importance of corporate governance for the success of firm performance. Unlike previous studies, this study tried to find a long-term influence of corporate governance on firm performance by analyzing five different variables for the listed firms of Pakistan. The study provides the importance of corporate governance tools and their effectiveness for the success of organizations, especially in Pakistan.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corporate Governance; Firm Performance; Pakistan; ROA; CEO Duality; Board Size; Board Independence; Board Education
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

References

Abdullah, S.N. (2004). Board composition, CEO duality and performance among Malaysian listed companies. Corporate Governance, 4(4): 47- 61

Abor, J. (2007). Debt policy and performance of SMEs: evidence from Ghanaian and South African firms, Journal of Risk Finance, Vol. 8 No. 4, pp. 364-79.

Agrawal, A. & Knoeber, C. (1996), “Firm performance and mechanisms to control agency problems between managers and shareholders”, Journal of Financial and Quantitative Analysis, Vol. 31, pp. 377-97.

Ali, A. (2015). The Impact of Macroeconomic Instability on Social Progress: An Empirical Analysis of Pakistan. Ph.D. Dissertation. NCBA&E, Lahore, Pakistan., 1-152.

Ali, A. (2018). Issue of Income Inequality under the perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan. Pakistan Economic and Social Review, 56(1), 121-155.

Ali, Ali and Audi, M. (2016). The Impact of Income Inequality, Environmental Degradation and Globalization on Life Expectancy in Pakistan: An Empirical Analysis. International Journal of Economics and Empirical Research, 4(4), 182-193.

Alim, W. Ali, A. and Farid, M. (2021). The Impact of Islamic Portfolio on Risk and Return. Archives of Business Research, 9(11), 108-122.

Alim, W. Ali, A. and Rauf, M. M. (2021). The Effect of Liquidity Risk Management on Financial Performance of Commercial Banks in Pakistan. Journal of Applied Economics and Business, 9(4), 109-128.

Audi, M. Sadiq, A. Ali, A., and Roussel, Y. (2021). Performance Evaluation of Islamic and Non-Islamic Equity and Bonds Indices: Evidence from Selected Emerging and Developed Countries. Journal of Applied Economic Sciences, 16(73), 251–269.

Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the CEO and chairman of the board. Journal of corporate Finance, 3(3), 189-220.

Cadbury Committee (1992). The Report of the Committee on the Financial Aspects of Corporate Governance, London.

Casillas, J.C. & Pastor F. (2015). The Top 250 Multinational Family Firms, Chair of Santander Family Business. University of Seville (Spain).

Chan, A. W., & Cheung, H. Y. (2012). Cultural dimensions, ethical sensitivity, and corporate governance. Journal of business ethics, 110(1), 45-59.

Chrisman, J.J (2019). Stewardship theory: Realism, relevance and family governance

Coles, J.W., McWilliams, V.B. and Sen, N. (2001). An examination of the relationship of governance mechanisms to performance. Journal of Management, Vol. 27 No. 1, pp. 23-50.

Daily, C.M. & Dalton, D.R .1992, 'The Relationship Between Governance Structures and Corporate Performance in Entrepreneurial Firms', Journal of Business Venturing, vol. 7, no. 5, pp. 375-86.

Daily, C.M. & Dalton, D.R. (1997a). Separate, but not independent: board leadership structure in large corporations. Corporate Governance: An Int. Rev. 5(3): 126-136.

Deegan, C. (2004), Financial Accounting Theory, McGraw-Hill Australia Pty Ltd, NSW.

Dmytriyev, S. D., Freeman, R. E., & Hörisch, J. (2021). The Relationship between Stakeholder Theory and Corporate Social Responsibility: Differences, Similarities, and Implications for Social Issues in Management. Journal of Management Studies.

Donaldson, L. & Davis, J.H. (1991). Stewardship theory or agency theory? CEO governance and shareholder returns. Austr. J. Manage. 16(1): 49-65.

Ehikioya, B.I. (2009). Corporate governance structure and firm performance in developing economies: evidence from Nigeria, Corporate Governance, Vol. 9 No. 3, pp. 231-43.

Eloumi, F. & Gueyie, J.P. (2001). Financial distress and corporate governance: an empirical analysis. Int. J. Bus. Soc. 1(1):15- 23.

Fama, E.F. & Jensen, M.C. (1983). Separation of ownership and control. J. Law Econ. 26(2):301-325.

Fan, J. P., Wei, K. J., & Xu, X. (2011). Corporate finance and governance in emerging markets: A selective review and an agenda for future research: Elsevier.

Floyd, S. W. (81). Lane. PJ (2000) Strategising throughout the organisation: managing role conflict in strategic renewal. Academy of Management Review, 25(1).

Goergen, M., Manjon, M. C., & Renneboog, L. (2008). Is the German system of corporate governance converging towards the Anglo-American model?. Journal of Management & Governance, 12(1), 37-71.

Golden, B. R., & Zajac, E. J. (2001). When will boards influence strategy? Inclination× power= strategic change. Strategic management journal, 22(12), 1087-1111.

Gompers, P.A., Ishii, J.L. & Metrick, A. (2003). Corporate governance and equity prices. Q. J. Econ. 118(1):107-155.

Gulzar, M., & Wang, Z. (2010). Corporate governance and non-listed family owned businesses: an evidence from Pakistan. International Journal of Innovation, Management and Technology, 1(2), 124.

Guo, Z. & Kumara, U. (2012). Corporate governance and firm performance of listed firms in Sri Lanka. J. Soc. Behav. Sci. 40:664-667.

Hermalin, B.E. & Weisbach, M.S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. Am. Econ. Rev, 88: 96-118.

Houcine, A., Zitouni, M., & Srairi, S. (2021). The impact of corporate governance and IFRS on the relationship between financial reporting quality and investment efficiency in a continental accounting system. EuroMed Journal of Business.

Hussain, S., & Safdar, N. (2018). Tunneling: Evidence from Family Business Groups of Pakistan. Business and Economic Review, 10(2), 97-121.

Jackling, B. & Johl, S. (2009), Board structure and firm performance, Corporate Governance: An International Review, Vol. 17 No. 4, pp. 492-509.

Jan, A. A., Lai, F. W., Draz, M. U., Tahir, M., Ali, S. E. A., Zahid, M., & Shad, M. K. (2021). Integrating sustainability practices into islamic corporate governance for sustainable firm performance: from the lens of agency and stakeholder theories. Quality & Quantity, 1-24.

Kang, E. Zardkoohi, A. (2005). Board leadership structure and firm performance. Corporate Governance; An Int. Rev. 13(6): 785-799.

Kiel, G.C. & Nicholson, G.J. (2003). Board composition and corporate performance: how the Australian experience informs contrasting theories of corporate governance, Corporate Governance, Vol. 11 No. 3, pp. 189-205.

Krivogorsky V. (2006). Ownership, board structure, and performance in continental Europe. Int. J. Account. 41: 176-197.

Laing, D. & Weir, C.M. (1999). Governance Structures, Size and Corporate Performance in UK Firms. J. Manage. Decis. 37(5): 457-464.

Lam, T.Y. & Lee, S.K. (2008). CEO duality and firm performance: evidence from Hong Kong. Corporate Governance 8(3):299-316.

Li, H.X., Wang, Z.J & Deng X.L. (2008). Ownership, independent directors, agency cost and financial distress: evidence from Chinese listed companies. Corporate Governance 8(5):622-636.

Mashayekhi, B. & Bazaz, M.S. (2008). Corporate governance and firm performance in Iran, Journal of Contemporary Accounting & Economics, Vol. 4 No. 2, pp. 156-72.

Miller, D. & Breton-Miller, I.L. (2006). Family governance and firm performance: Agency, stewardship and capabilities. Family Business Review. 19/1: 73-87.

Mohd Ghazali, N.A. (2010). Ownership structure, corporate governance and corporate performance in Malaysia. International Journal of Commerce & Management, Vol. 20 No. 2, pp. 109-19.

Nandelstadh, VA. & Rosenberg, M. (2003). Corporate governance mechanisms and firm performance: evidence from Finland. Working Papers 497, Hanken School of Economics, Helsinki.

Pande, S., & Ansari, V. A. (2014). A theoretical framework for corporate governance. Indian Journal of Corporate Governance, 7(1), 56-72.

Porfírio, J., Felício, J., & Carrilho, T. (2020). Family business succession: Analysis of the drivers of success based on entrepreneurship theory. Journal of Business Research, 115, 250-257.

Rosentein, S. & Wyatt, J.G. (1990). Outside directors, board independence, and shareholder wealth. Journal of Financial Economics, Vol. 26, pp. 175-91

Sami H, Wang J & Zhou H (2011). Corporate governance and operating performance of Chinese listed firms. J. Int. Account. Auditing Taxation 20:106-114.

Shaheen R & Nishat M (2005). Corporate governance and firm performance – an exploratory analysis. Paper presented at Conference.

Sharma P, and P. Irving. (2005). Four Bases of Family business Successor Commitment: Antecedents and consequences’, Entrepreneurship Theory and Practice 29 (1), 13-33

Sheikh, M. F., Shah, S. Z. A., & Akbar, S. (2018). Firm performance, corporate governance and executive compensation in Pakistan. Applied economics, 50(18), 2012-2027.

Smallman, C. (2004). Exploring theoretical paradigms in corporate governance. International Journal of Business Governance and Ethics, 1(1), 78-94.

Spanos, LJ (2005). Corporate Governance in Greece: Developments and Policy Implcations, Corporate Governance, vol. 5, no. 1, pp. 15-30.

Switzer, L. N., & Tahaoglu, C. (2015). The benefits of international diversification: market development, corporate governance, market cap, and structural change effects. International Review of Financial Analysis, 42, 76-97.

Ujunwa, A. (2012). Board characteristics and the financial performance of Nigerian quoted firms. Corporate Governance: The international journal of business in society.

Vafeas, N (1999). Board meeting frequency and firm performance. J. Financ. Econ. 53, 113-142.

Vieira, E. S. (2018). Board of directors characteristics and performance in family firms and under the crisis. Corporate Governance: The International Journal of Business in Society.

Yermack, D. (1996). Higher market valuation of companies with a small board of directors, Journal of Financial Economics, Vol. 40, pp. 185-211.

Zellweger, T. (2017). Managing the family business: Theory and practice. Edward Elgar Publishing.