Ebook Corporate Governance and Firm Performance- An Exploratory Analysis
Pakistan stock market is one of the leading emerging markets in the world. It has gone through series of reforms and structural changes since 1991. Financial reforms during 1990s have influenced the pattern of capital structure, dividend policy, risk premia, and compliances to corporate governance (Nishat, 1999). Very recently in 2002 Securities Exchange Commission of Pakistan (SECP) has directed for the purpose of establishing a framework of good corporate governance whereby a listed company is managed in compliance with best practices and in exercise of the powers conferred by sub-section (4) of the section 34 of the Securities and Exchange Ordinance, 1969 (XVII of 1969). The underline motives for planned corporate governance was to improve the overall governance practices firstly, through quality and independent board of directors and secondly improved management policies on investor communications. It is the first time that corporate sector is required to implement the corporate governance rules and provide the undertaken of its compliance. We expect that with the openness and compliance the performance of corporate sector will improve at both individual firm level and at aggregate level.
Better corporate governance is supposed to lead to better corporate performance by preventing the expropriation of controlling shareholders and ensuring better decision-making. Corporate governance is the process and structure through which a firm’s business and affairs are managed by enhancing business prosperity and corporate accountability with the ultimate objective of enhancing shareholder’s wealth. Most of the research in the area of corporate governance is done for developed economies, as rich data is only available for these economies where active market for corporate control exists and the ownership concentration is low (Bohren and Odegaard, 2001). Pakistan like many developing countries is characterized by relatively weak investor’s protection and corporate law enforcement. Pakistani market is also characterized by the ownership concentration; cross-shareholdings, pyramid structure and the dominance of family business.
Earlier Mir and Nishat (2004) empirically tested the link between corporate governance structure and the firm performance in Pakistan. This study differs from Mir and Nishat (2004) since it includes a different set of performance parameters which include, return on equity, net profit margin, sales growth, Tobin’s Q and dividend yield. Moreover, to determine parameters of corporate governance, Mir and Nishat (2004) used secondary data from the annual statements. This paper is based on the secondary as well as on primary survey of different companies listed with Karachi Stock exchange. We create a summary index of firm-specific governance, “Gov-Score,” and relate it to operating performance, valuation, and cash payouts for 226 firms listed with Karachi stock Exchange. We show that poorly governed firms (i.e., those with low Gov Scores) have lower operating performance, lower valuations, and pay out less cash to their shareholders, while better-governed firms have higher operating performance, higher valuations, and pay out more cash to their shareholders. This paper identifies several factors representing good governance that (as expected) are related to good performance that have seldom been studied before, providing new focal points for those seeking to link good governance to good performance.
The rest of the paper is organized as section 2 identifies the hypotheses. Section 3 describes the data and methodology followed by discussion of results in section 4. The summary and concluding remarks are presented in section 5.
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