Corporate governance and firm performance: empirical evidence from Pakistan

Abstract

Purpose The purpose of this research is to look into the governance–performance relationship in the context of critical firm characteristics, such as firm size. Design/methodology/approach Based on total assets, sample firms were classified as small or large. The governance index, which is based on 29 governance provisions covering the audit committee, board committee, ownership and compensation structure of the respective firm, measures governance quality among sample firms. A higher governance index indicates a higher level of governance quality and vice versa. Accounting and market value measures are used to determine firm profitability. The authors used the two-stage least square (2SLS) method of estimation of the model to eliminate the simultaneous equation bias. Findings Corporate governance (CG) appears to have a positive impact on accounting return and market indices (Tobin’s Q), but it has little impact on return on equity. In terms of firm size, larger companies profited more from better governance implementation than smaller firms that lacked these principles, thus improving CG. The findings indicate that small businesses should improve their governance mechanisms to reap the benefits of CG in terms of increased profitability. Research limitations/implications There are certain drawbacks to this research. First, the authors omitted qualitative aspects of CG from the CG index, such as the board’s decision-making process, directors’ perceptions of the board’s position and directors’ age and qualifications. Such a qualitative component will improve the governance index in the future while building the governance index. Second, as the current study only looks at the nonfinancial sector, caution should be exercised before applying the findings to the entire population. Practical implications The findings show that companies that follow good governance standards have better accounting and market efficiency than those that do not. As a result, good governance practices can help firms in developing countries improve their performance. Academic researchers, regulators, investors, lenders and practitioners can find the findings useful in establishing a true relationship between firm performance and CG practices in Pakistan. Originality/value The relationship between governance and profitability in the context of firm size is examined in this research. Firms with varying resources and ability to implement CG codes have varying effects on profitability. To the authors’ knowledge, there was a gap in the literature that addressed this topic in the local context.

Nexus between audit committee and corporate risk: evidence from Pakistan

“…CG has an impact on corporate risk. A good CG system will not only mitigate corporate risk but will also ensure higher profitability through better resource utilization and an effective check on management (Farooq et al , 2021; Arora and Sharma, 2016; Ehikioya, 2009). According to Ferrero-Ferrero et al (2012), CG activities reduce firm risk by reinforcing firm risk control through the implementation of a risk management strategy.…”

The impact of priority issues for publicly traded companies in corporate governance (CG) rating notes: an empirical study in Turkey

“…Similarly, Khalil and Ben Slimene (2021) examine the effect of board structure on financial soundness. Also, Judge et al (2003), Aggarwal (2013), Kakilli Acaravcı et al (2015, Arora and Sharma (2016), Bhatt and Bhatt (2017), Bhagat and Bolton (2019), Merendino and Melville (2019), Al-ahdal et al (2020), Tran (2021) and Farooq et al (2022) examine the relationship between the CG principles and company performance. Besides, many studies have been reported in the literature where the authors have investigated the relationship between the CG principles and company value (Lazonick and O'sullivan, 2000;Yenice and Do ¨len, 2013;Kavcar and Gu ¨mrah, 2017;Hidayat and Yuliah, 2018).…”

Convergence and compliance of corporate governance codes: a study of 11 Asian emerging economies

“…mandatory regimes vs comply-or-explain vs voluntary. There is extensive empirical and anecdotal evidence that good CG is vital to increase the financial performance and market value of a firm (Bhatt and Bhatt, 2017;Erena et al, 2021;Farooq et al, 2022;Kao et al, 2019;Lattemann, 2014;Malik and Makhdoom, 2016;Merendino and Melville, 2019;Mishra and Mohanty, 2014). Structural problems are one of the main reasons for which effective CG reforms are required in emerging economies.…”