Corporate Governance And Firm Performance:A Comprehensive Study Of Pakistani Market

Many developing countries are facing economic crisis and other societal problems like Pakistan.Therefore,industrial sector has much importance for the economic development and growth to overcome the economical and societal issues.Corporate governance plays vital role for the development of industrial sector.Generally,corporate governance is defined as,the structure which has various rules,regulations,and responsibilities to make and implement corporate decisions for the betterment of firms.Corporate governance covers multiple aspects as,ownership,board structure,management,shareholders,regulatory bodies,and markets,social and environmental functions to run the firms in a well manner way.Thus,the improvement of corporate governance structure leads to the development of industrial sector which generates higher profits.Consequently,a profitable industrial sector can produce employment opportunities and make economic conditions better.Therefore,this study has motive to present the proper corporate governance mechanism for the improvement of economical conditions of Pakistan.This study has various aims such as firstly to evaluate the impact of internal corporate governance on firm performance.Because majority of the studies reported that internal corporate governance and firm performance have positive relationship while some reported negative or insignificant relationship as investigating corporate governance only single or few factors.Prior to this,no study has investigated the reason for this positive,negative or insignificant relationship between internal corporate governance and firm performance.Therefore,this is the first study which applies external corporate governance factors as moderating elements to investigate the actual relationship between internal corporate governance and firm performance.Prior to investigate external corporate governance factors as moderating this study secondly examine the role of external corporate governance on firm performance.Thirdly and importantly,this study inspects the relationship between internal corporate governance and firm performance with the moderating role of external corporate governance.Moreover,we have also divided firm performance into two aspects as,book based firm performance and market based firm performance.We have selected 339 firms from Pakistan Stock Exchange(PSX)market for a period of 2009-2018.Prior to this,no study in Pakistan captured all these firms and therefore this is the first study which investigated at a large sample size according to the Pakistani context.In addition,we have theoretically evaluated the internal corporate governance impact on both book and market based firm performance measures and external corporate governance impact on both book and market based firm performance measures.Thirdly,this study theoretically evaluated the relationship between internal corporate governance and firm performance with the moderating effect of external corporate governance.Various theories employed to inspect these relationships as,agency theory,stakeholder theory,and organization theory,the managerial power theory,and Porter hypothesis.Furthermore,this study used multiple statistical methods to investigate such as firstly,we employed ordinary least square(OLS)regression to find the endogeneity by conducting Durbin-Wu-Hausman test.Secondly,we employed fixed effect model(FE)on the basis of Hausman test to over-come the unobservable heterogeneity under the notion of stringent endogeneity.Thirdly,this study applied 2 stage least square(2SLS)to correct the endogeneity.Fourthly,for the more accuracy of the results,this study employed generalized method of moments(GMM)to control endogeneity from data.Lastly,for robustness test,this study employed feasible generalized least sqaure(FGLS)and which also overcome the overall heterogeneity.The empirical outcomes of the association between internal corporate governance and firm performance demonstrates followings results as,CEO power as duality is not beneficial for firms and has negative relationship with firm performance.On the other hand,CEO power as CEO pay ratio have positive role for firm performance.Board independence which is also reveals that positive effect on firm performance.Board size is important for firm performance because it is positively affects the firm performance.In addition to this,our study reveals that ownership concentration have imperative role for the improvement of firm performance.Moreover,this study results contend that positive and significant association between ownership concentration and firm performance.Similarly,managerial ownership also plays vital role for the betterment of firm performance.Furthermore,internal corporate governance factor as audit quality is also beneficial for the improvement of firm performance.Our findings suggest that audit quality and firm performance have positive and significant connection with firm performance.Besides,our results reported that remuneration committee and firm performance have also positive and significant relationship.In addition,this study investigation contends that dividend payment is an advantageous tool to enhance the firm performance similarly we discovered positive and significant connection between dividend payment and firm performance.On the other hand,this study evaluated the impact of external corporate governance on firm performance and results are following as,product market competition has positive effects on firm performance.After that we have divided product market competition into high product market competition and low product market competition by considering HHI.Our results demonstrate that HPMC and firm performance have positive and significant connection.On the other side,results reported that LPMC and firm performance have negative and significant connection.Furthermore,our results indicate that CSR and firm performance have also significant and positive connection.Moreover,capital market as a CAPM has positive effects on the firm performance.In addition to this,our findings reported that environmental regulations as an external corporate governance factor plays vital role firm performance.Because this investigation exposed that environmental regulations and firm performance have significant and positive relationship.Lastly,information disclosure positively affects the firm performance.Most importantly,this study examines the relationship between internal corporate governance and firm performance with the moderating role of external corporate governance.Firstly,our results stated that internal corporate governance all factors CEO Power,CEO Duality,Board Independence,Board Size,Ownership Concentration,Managerial Ownership,Audit Quality,Remuneration Committee,and Dividend Payment have positive impact on firm performance with the moderating role of product market competition.Secondly,our results reported that high product market competition significantly moderates the positive connection between internal corporate governance all factors and firm performance.Thirdly,the results of this study concluded that internal corporate governance does not significantly or positively affect the firm performance with the moderating role of low product market competition.Fourthly,this study reported that corporate social responsibility as a moderating factor creates positive relationship between internal corporate governance and firm performance.Similarly,fifthly this study finding discovered that capital market as a moderating factor also reported that positive connection between all internal corporate governance variables and firm performance.Sixthly,this study examined the moderating role of environmental regulations on the association between internal corporate governance and firm performance.The outcomes also discovered that all internal corporate governance factors positively influences on firm performance with the moderating role of environmental regulations.Lastly,this study examined the moderating role of information disclosure for link between all internal corporate governance factors and firm performance.The outcomes discovered positive association between internal corporate governance and firm performance with the moderating role of information disclosure.Based on our outcomes,we suggest the following recommendations for owners,policy makers,shareholders,regulatory bodies,and governments of both developing and developed economies.Pakistan and other developing economies can improve economical conditions with the upgrading of industrial sector.This study presents proper corporate governance mechanism therefore Pakistan and other developing economies can enhance corporate governance activities which automatically grow the industrial sector.This study strongly recommended the role of external corporate governance for the improvement of internal corporate governance and firm performance.Many of the countries in the world facing environmental and other social problems because of the industrial sector and this study shed light on the environmental and social aspects for corporate governance.Thus by following the outcomes,the environmental and social issues can be minimized.The study is also valuable for the capital market of the countries which gives directions for improving internal corporate governance and firm performance.Furthermore,this study suggests to all regulatory bodies in Pakistan for making more strict regulations for implementing the all these external corporate governance factors for the betterment of firm performance and internal corporate governance.This study provides directions to the shareholders for investing in those firms which are socially responsible.Pakistani market has family ownership and thus this study suggested the role of external corporate governance factors to overcome this situation.High product market competition is serving as best external corporate governance factor to control the family ownership.Therefore,SECP should focus on the high competitive market.