IMPACT OF CORPORATE GOVERNANCE ON

FIRMS PERFORMANCE: A STUDY OF NON-

FINANCIAL FIRMS LISTED IN PAKISTAN
STOCK EXCHANGE
By
Malik Israr Ahmed Khan
(F22-1038-MGT-MS(MGT)/UOH)

Supervisor Dr. Daud Ali Khan Department of Management Sciences

…………
Signature

Co-Supervisor Dr Atiq KhattakS Department of Management Sciences

…………
Signature

Chairperson Prof. Dr. Abdul Majid Department of Management Sciences

…………
Signature
Dean Dr. Ammara Gull Faculty of Management Sciences
…………
Signature

DEPARTMENT OF MANAGEMENT SCIENCES

FACULTY OF MANAGEMENT SCIENCE,
THE UNIVERSITY OF HARIPUR, HARIPUR KHYBER PAKHTUNKHWA, PAKISTAN
Introduction

1.1 Background of the Study

Over the past few decades, corporate governance has become a significant global
economic phenomenon. Compared to developed countries, developing nations place greater
emphasis on it (Omran, M. (2009). The collection of guidelines and practices used to manage
and oversee a corporation's operations is known as corporate governance. It addresses the goals
of all parties involved, including the corporation's management, shareholders, lenders, and board
of directors. It addresses the goals of all parties involved, such as the board of directors, lenders,
shareholders, and the corporation's management (Dar, et al 2011). The transfer of ownership
from public entities to private entities is known as privatization (D'Souza, J., et al (2007). Better
performance and alleviation for all stakeholders are the goals of corporate governance. The
agency theory outlined by Jensen & Meckling is the foundation of the corporate governance idea
(Meckling, & Jensen, 1976).

Agency theory provides a comprehensive explanation of how to solve this issue for the
corporations. The agency theory states that companies may reduce agency costs and improve
governance to deliver higher performance. Additionally, ownership concentration is linked to
better-governed businesses and has a direct impact on business success (Sami, et al 2011).
Corporate governance is determined by two categories of elements: internal and external
influences. External influences include laws and consumer advocacy organizations, whereas
internal elements are determined by the company's officials, investors, and other leaders (Khan,
et al (2011). Improved corporate governance in developing markets addresses a number of
issues, such as lowering financial crises, capital costs, and transaction costs, all of which
contribute to the growth of the capital market (Dar, et al 2011). Businesses that enhance their
corporate governance procedures might do better overall. It helps to attract fresh investment,
which make it competent to satisfy legal requirements and defend the interests of shareholders
(Dar, et al 2011). Institutional investors may also have a significant impact on improving the
businesses' governance, which will ultimately improve the firms' performance (Hearn, B. (2011).

The effect of corporate governance are predicted on the firms performance which are
helpful for the stakeholders to classify the matters which affect the firm performance, it
deliberates those matters as measurement of organization achievement or failure. The researcher
Aydin, N., & Khan, H. (2020) investigated the association between corporate governance
structures and performance of firms in Saudi listed companies. They originate that corporate
governance and performance of firms are dissimilar. Similarly, Miao, et al (2023), investigate
impact of corporate governance on performance of firm on Bahrain’s companies and Gupta, P.,
& Chauhan, S. (2023) investigated that corporate governance has partial effect on firm
performance and firm’s share.

1.2 Literature Reviews

A company's ability to accomplish its social and financial goals depends heavily on its
corporate governance (CG) (Ehsan, et al 2022). Scholars have been examining the connection
between corporate governance and company success for a very long time. Scholars concur that
appropriate corporate governance methods are becoming more and more respected (Johl et al.,
2016). A mixed or nonexistent link is found between the two, according to some study (Gompers
et al., 2003; Bebchuk et al., 2009), whereas Yermack (1996) finds that successful corporate
governance drives business performance. Over the past few decades, corporate governance has
gained popularity among researchers and academics. Globally, corporate governance has an
impact on a company's financial performance.

Al-Sartawi and Sanad (2019) investigate institutional ownership in Bahraini enterprises

as one facet of governance to see how it relates to company performance. A multiple regression
analysis was performed to examine any potential correlation between the profitability of the
company and institutional ownership. The sample firms have a poor overall governance level,
indicating a need for regulators to take action and raise awareness of the issue to improve
corporate acceptance. Overall results point to a negative correlation between the two. Further,
Pillai and Al-Malkawi (2018) examined the relationship between internal governance
characteristics and company performance using sample companies from Gulf Cooperation
Council (GCC) nations. The generalized least squares approach is used to depict the association
between the 349 GCC listed enterprises that make up the sample data, which was gathered
between 2005 and 2017. Findings indicate a strong correlation between governance and
corporate success. The effect of the Malaysian Code of Corporate Governance on the
performance of 113 publicly listed firms in Malaysia is examined by Bhatt and Bhatt (2017). The
self-development corporate governance index assesses the standard of governance in the sample
companies. The results demonstrate a strong positive correlation between company success and
governance quality. Furthermore, there was a noticeable increase in the quality of governance
between MCCG 2012 and MCCG 2007. Arora and Bodhanwala (2018) used data on ownership,
board composition, market rivalry, and the market for corporate control to establish the corporate
governance index in the Indian context. 407 firms that are listed on the Bombay Stock Exchange
are included in the research, which spans the years 2009 through 2014. A substantial positive
correlation between the Corporate Governance Index (CGI) and firm erformance.

1.3 Problem Statement

In emerging markets, the field of corporate governance research is expanding in Pakistan.

The business sector in Pakistan is growing efficiently. However, there are still obstacles to
overcome in building strong governance structures and successfully incorporating Corporate
Social Responsibility practices. It remains unclear how Corporate Social Responsibility activities
regulate this relationship within the Pakistani context, despite worldwide studies showing a
favorable correlation between corporate governance and firm performance. Better corporate
governance leads to firms’ financial performance but in Pakistan corporate governance is not
being practiced properly which is the concern of this study to improve the corporate governance
in Pakistani non-financial sector. So, this study aims to close this gap by examining the
relationships between firm performances and cooperate governance in non-financial industries
by employing the moderating role of Corporate Social Responsibility.

1.4 Objectives of the Research Study

This study's goals are to emphasize the relationship between governance corporate
metrics and business performance as well as investigate the effect of corporate governance on
Pakistan's non-financial sector's performance. The study also looks into the moderating effect of
Corporate Social Responsibility on the relationship between governance corporate and
performance of non-financial firms listed in Pakistan Stock Exchange.

1.5 Significance of the Research Study

This research study is highly significant for the corporate sector in Pakistan. Companies
in the business sector disregard the value of corporate governance and flout its regulations. They
must deal with unfavorable outcomes as a result. The focus of this study will be the corporate
governance metrics used by the business sector also find out the impact of corporate governance
on Non-Financial Firm with the moderating effect of Corporate Social Responsibility. By
adhering to corporate governance principles, the business sector may perform better.
Additionally, it will sustain the nation's stalled economy.

Materials & Methods

This section will present the material and methods of the research study. This includes,
Data Collection, Sources, Measurement of the variables, and data size. This also includes the
proposed methodologies which are most probably to use for the findings.

2.1 Data Collection

The study utilized Secondary Data which is based on the audited financial statements of
160 listed firms on State Bank of Pakistan and data collection sources are:

 Basic Balance Sheet Analysis issued by state bank of Pakistan

 Official Websites of corporate
 Annual audited financial reports issued by corporations.
 Official Website of Karachi Stock Exchange (KSE)

The sources listed above provided data on dependent and all independent variables and
control variables for the years 2015 to 2023. Financial data to measure the financial performance
of the firm and firm size was collected from basic balance sheet analysis issued by State Bank of
Pakistan.

2.2 Experimental Set-up/Procedures

In order to achieve the goals of the study, econometric equations are created in order to
obtain statistical data and regression analyses. The research provides a first explanation of how
corporate governance affects non-financial firms' performance in Pakistan. Second, the study
analyzes the moderating effect of Corporate Social Responsibility on the relationship between
corporate governance and non-financial firms' performance in Pakistan. The study will applied
Fixed Effects Model (FEM) and the Random Effects Model (REM). Based on Dougherty's
(2007) recommendation, the regression models were estimated using both the Fixed Effects
Model (FEM) and the Random Effects Model (REM). This is because researchers should employ
both models when data is randomly selected from the population. The Hausman specification test
was run on the data following the use of the procedures to determine whether model is more
suited.

2.3 Theoretical/Mathematical Model/Statistical Analysis

The econometric and mathematical equations that were developed for regression analysis
to determine the association are listed below.

ROA = f (ID, CD, BS, FA, FS, CSR)……….. (1)

ROE = f (ID, CD, BS, FA, FS, CSR)……….. (2)

NPM = f (ID, CD, BS, FA, FS, CSR)……….. (3)

The above equations are the mathematic equation of the study. In the above equation, the
Performance of Non-Financial Firms is measured by Return on Asset (ROA), Return on Equity
(ROE) and Net Profit Margin (NPM). In the first equation the dependent variable is by Return
on Asset (ROA), which is measured by Net Income/ Average of Total Assets. In the second
equation of the study, the dependent variable is Return on Equity (ROE), which is measured by
Net Income / Shareholder’s Equity. In the third equation, the dependent variable is (NPM) which
is measured by Net Income/ Sales Revenue. The Corporate Governance is measured by
Independent Directors (ID), CEO/Chairman Duality (CD) and Board Size (BS). The study also
used control variables such as Firm Age (FA) and Firm Size (FS). CSR is Corporate Social
Responsibility which is measured by Donations Community Development Education. The
econometric equations of the study are;

ROAit= β0 + β1IDit + β2CDit + β3BSit + β4FAit + β5FSit + β6CSRit + µit……. (4)

ROEit= β0 + β1IDit + β2CDit + β3BSit + β4FAit + β5FSit + β6CSRit + µit……. (5)

NPMit= β0 + β1IDit + β2CDit + β3BSit + β4FAit + β5FSit + β6CSRit + µit……. (6)

 The second objective of the study is to analyze the moderating effect of Corporate Social
Responsibility (CSR) on the relationship between corporate governance and non-financial firms'
performance in Pakistan. The moderating equations are as follows:

ROAit= β0 + β1ID*CSRit + β2CD*CSRit + β3BS*CSRit + β4FAit + β5FSit + β6CSRit + µit……. (7)

ROEit= β0 + β1ID*CSRit + β2CD*CSRit + β3BS*CSRit + β4FAit + β5FSit + β6CSRit + µit……. (8)

NPMit= β0 + β1ID*CSRit + β2CD*CSRit + β3BS*CSRit + β4FAit + β5FSit + β6CSRit + µit….. (9)

2.4 Ethical Considerations

Accessing some of the organization's confidential documents may not be ethical. As a

result, the ethical code of the organization was taken into consideration without significantly
compromising the study's findings. In addition, prior to the beginning of the distribution of the
questionnaire, all of the study's participants were adequately informed of the study's objective
and obtained their consent. Regarding the respondents' right to privacy, the study kept each
respondent's identity confidential. In all cases, names were discarded for secrecy thus aggregate
names like respondents were utilized.

References:

Al-Sartawi, A. M. M., & Sanad, Z. (2019). Institutional ownership and corporate governance:
evidence from Bahrain. Afro-Asian Journal of Finance and Accounting, 9(1), 101-115.

Arora, A., & Bodhanwala, S. (2018). Relationship between corporate governance index and firm
performance: Indian evidence. Global Business Review, 19(3), 675-689.

Aydin, N., & Khan, H. (2020). The Effect of Incentive Structure Offered to Top Executives and
Corporate Governance Culture on the Performance of Publicly Listed Companies in Saudi
Arabia.

Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance?. The
Review of financial studies, 22(2), 783-827.

Bhatt, P. R., & Bhatt, R. R. (2017). Corporate governance and firm performance in Malaysia.
Corporate Governance: The international journal of business in society, 17(5), 896-912.
Boubakri, N., Cosset, J. C., Guedhami, O., & Saffar, W. (2011). The political economy of
residual state ownership in privatized firms: Evidence from emerging markets. Journal of
Corporate Finance, 17(2), 244-258.

Dar, L. A., Naseem, M. A., Rehman, R. U., & Niazi, G. S. (2011). Corporate governance and
firm performance: A case study of Pakistan oil and gas companies listed in Karachi stock
exchange. Global journal of management and business research, 11(8), 1-10.

D'Souza, J., Megginson, W., & Nash, R. (2007). The effects of changes in corporate governance
and restructurings on operating performance: Evidence from privatizations. Global Finance
Journal, 18(2), 157-184.

Ehsan, S., Tariq, A., Nazir, M. S., Shabbir, M. S., Shabbir, R., Lopez, L. B., & Ullah, W. (2022).
Nexus between corporate social responsibility and earnings management: Sustainable or
opportunistic. Managerial and Decision Economics, 43(2), 478-495.

Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The
quarterly journal of economics, 118(1), 107-156.

Gupta, P., & Chauhan, S. (2023). Dynamics of corporate governance mechanisms-family firms’
performance relationship-a meta-analytic review. Journal of Business Research, 154, 113299.

Hearn, B. (2011). The impact of corporate governance measures on the performance of West
African IPO firms. Emerging markets review, 12(2), 130-151.

Johl, S., Khan, A., Subramaniam, N. and Muttakin, M. (2016), Business group affiliation, board
quality and audit pricing behavior: evidence based on Indian companies, International Journal of
Auditing, Vol. 20 No. 2, pp. 133-148

Khan, K., Nemati, A. R., & Iftikhar, M. (2011). Impact of corporate governance on firm
performance: Evidence from the tobacco industry of Pakistan. International Research Journal of
Finance and Economics, 61(7), 14-31.

Meckling, W. H., & Jensen, M. C. (1976). Theory of the Firm. Managerial Behavior, Agency
Costs and Ownership Structure.
Miao, M., Irfan Khan, M., Pervaiz Ghauri, S., & Imran Zaman, S. (2023). The effect of corporate
governance on firm performance: perspectives from an emerging market. Economic research-
Ekonomska istraživanja, 36(3).

Omran, M. (2009). Post-privatization corporate governance and firm performance: The role of
private ownership concentration, identity and board composition. Journal of comparative
Economics, 37(4), 658-673.

Pillai, R., & Al-Malkawi, H. A. N. (2018). On the relationship between corporate governance
and firm performance: Evidence from GCC countries. Research in International Business and
Finance, 44, 394-410.

Sami, H., Wang, J., & Zhou, H. (2011). Corporate governance and operating performance of
Chinese listed firms. Journal of International Accounting, Auditing and Taxation, 20(2), 106-
114.

Yermack, D. (1996). Higher market valuation of companies with a small board of directors.
Journal of financial economics, 40(2), 185-211.