Impact of Corporate Governance on Firm's Performance : A Comparative study of Firm's Performance & Financial Crisis

Abstract

Effective corporate governance has a significant importance for any country as it directly influences the economic development. To design and implement an effective corporate governance system is very crucial for an effective decision making. The study analyses the empirical association between firm’s performance and corporate governance in the developing capital market of Pakistan. The measures for the firm’s performance include the profitability of the firm and its value. Tobin’s, Returns on assets (ROA) and returns on equity (ROE) are used as the measure of firm’s financial performance. Three indices are prepared on the basis of multifactor corporate governance rating by incorporating 21 different factors to investigate this relationship. To measure the impact of macroeconomic events, GDP and Inflation rate are also added in the study. The sample consists of twenty six non-financial and twenty financial firms listed at Karachi Stock Exchange from the year 2003 to 2013. The research is going to explain how corporate governance is measured in terms of different mechanisms opted by the firms and the impact they make on the overall corporate profitability. A separate analysis is performed for both the sectors keeping in consideration the different capital structures and nature of business. Generalized Moment of Method (GMM) is used as the estimation technique to tackle the problem of endogenity. A significant direct relationship among the firm’s profitability and variables of corporate governance is indicated by the results. Macroeconomic variables also have a positive influence on firm’s value and profitability. The research will help to resolve the debate on “stakeholders’ vs. shareholders” by providing the best mix of strategies that can be applied to serve the interests of stakeholders and shareholders simultaneously.