Corporate Governance and Performance of Peer Firms

Project Report, 2014

125 Pages, Grade: A


Table of Contents



Chapter-1: Introduction
Existing Studies
Gap in Literature
Rationale of the Study
Research Contribution to Corporate Governance Literature
Research Significance for Corporate Practices/Practical Implications
Significance of Corporate Governance in Different Era
Research Objectives
Proposed Methodology

Chapter-2: Literature Review
Prologue for Literature
Corporate Governance
Corporate Governance Mechanisms
Capital Structure
Capital Structure Construct
Dividend Policy
Dividend Policy Construct
Firm Performance
Firm Performance Construct

Chapter-3: Research Model and Hypotheses Development
Corporate Governance and Capital Structure
Corporate Governance and Dividend Policy
Corporate Governance and Firm Performance
Capital Structure and Firm Performance
Dividend Policy and Firm Performance
Hypothesized Research Model

Chapter-4: Methodology and Data Collection 59
Research Paradigm
Sampling Procedure and Population
Data Collection
Data Analysis
Structural Equation Models Development
Measurement Models
Structural Models
Variables Involved in the Study
Independent Variables
Mediating Variables
Dependent Variables

Chapter-5: Data Analysis and Empirical Results
Objective of the Chapter
Descriptive Statistics
Correlation Matrix
KMO Measures of Sample Adequacy (MSA)
Partial Least Square Analysis
Analysis of the Measurement Model
Analysis of the Structural Model
Cross-Lagged Structural Models

Chapter-6: Recommendations and Conclusion 94
Contribution to Literature
Corporate Practices/Practical Implications
Further Research Opportunities
Limitations of Research







Praise be to Allah almighty who, in His infinite wisdom and benevolence, enabled me to undertake and complete this task despite my failings and human limitations.

I feel short words when it comes to thanking Dr. Naheed Sultana (Dean Faculty LBS) for his precious guidance, immense patience, and constant encouragement during this research project. Whenever I needed, he provided me with his guidance. I will remain forever indebted for his efforts that he has put not only in getting this study done but also for enhancing my learning skills and improving my confidence as a researcher. I am also immensely grateful to Dr. Omer Farooq (Professor at LBS) and Dr. Mariam Mushtaq (Professor at LBS) both of them has been very kind and helpful to me during my Master Research Program at LBS. I will remember her continuous encouragement, motivation and guidance in both formal and informal ways that has made possible for me to successfully complete my research work. How can I forget Mr. Adnan Saeed at this moment, who has been coordinating my program at LBS. he always provided me his help and support during my stay at the institution.

Last but not least I am highly thank full to my parents for providing me all the necessary support, guidance and encouragement, They are the individuals who have played a very vital role in the construction of my personality and getting me at the stage where I am right now. I offer my profound gratitude to my dearly respected and trustworthy for his unending support and devotion. I am also thankful to my all family members for their patience in my whole of this journey.


In this study we elaborate the effects of corporate governance practices which recently practiced in Pakistani firms and also examine the relationship among corporate governance mechanisms, capital structure, dividend policy and firm performance. Those researchers who could not find significant link between corporate governance and firm performance suggest that good corporate governance has at least indirect effect on performance. This research attempts to prove that corporate governance effects firm performance directly; relatively it exerts its effects on firm performance through other factors such as capital structure decisions and dividend policy.

This research study develops a multilevel model linking corporate governance, capital structure, dividend policy and firm performance then proves it through structural equation modeling (SEM). Corporate governance has been measured and conceptualized through Board Size, Board Composition, CEO Duality, Audit Committee Size and Annual General Meetings. Capital structure has been measured through it standardized proxy that is debt to equity ratio, while dividend policy is measured by dividend payout ratio. Firm performance has measured by two ratios return on assets (ROA) and return on equity (ROE) both are used as accounting and financial measure in the literature review.

This study is based on strong theoretical foundations and research proven methodology such as; agency theory, MM theorem and theory of firm. It attempts to prove the structural link between corporate governance and firm performance using stratified random sample of all KSE listed companies. Data related to corporate governance, capital structure, dividend policy and firm performance were collected through annual reports of listed companies over the period of 2006-2011. The final sample includes 15 companies from cement sector, 9 companies from coke and refined petroleum products, 15 companies from sugar, 21 companies selected from textile companies (spinning, weaving and composite units), 13 companies from fuel and energy, 11 companies from information communication & transport services, 16 companies selected from motor vehicles, trailers and auto parts. Out of the total 100 companies, 27 related to services sector while 73 are manufacturing companies. Manufacturing sector consists of 73%, while service sector accounts for 27% of the overall sample for data analysis. In general it is the manufacturing dominates and textile dominate sample as it is depends on the Pakistan’s economy and stock market conditions.

Research models and hypothesis was tested through cross-lagged structural equation modeling (SEM) using SPSS, Excel and Smart-PLS graph version-3.0; basically this technique is reliable and more valid to handle both types of indicators either formative or reflective. Reliability and validity of measurement models tested and confirmed before applying path coefficients, significance and test of predictive relevance for structural models are analyzed.

The study reveals and determines the existence of critical structural relationship among corporate governance, capital structure, dividend policy and firm performance. The model developed in the study is relatively useful in enhancing the firm performance through corporate governance measures and financing decisions. The study concludes that corporate governance does improve financial performance directly; rather corporate governance can enhance it significantly through exploiting capital structure and dividend policy. The outcome of study taking place the importance of corporate governance practices for peer firms to restructure their debt policies and enhance the firm performance. Moreover, if firms need to get more resources and develop shareholder’s trust, they would have to develop their corporate governance practices.



1.1). Background

Corporate governance is the set of laws, processes, policies, and institutions affecting the way company is directed, administered or controlled. The term “corporate governance” came into popular use in the 1980's to mostly describe the common principles by which the business and management of companies were directed and controlled. (Cadbury, 1992) defined corporate governance as “the system by which companies are directed and controlled”. The key objective of corporate governance is to make sure accountability of related parties and transparency in both financial and non-financial transactions (OECD 1999, revised 2004).

Corporate governance has been converted into an essential concern in managing corporations in the recent global and multifaceted surroundings. This is also means to maximize the best interest of the economy and to a greater extent for the society by the diverse corporate governance provisions (Gillan, 2006) and (Shleifer & Wolfenzon, 2002). Corporate governance is vital for organizational sustainability and absence of it results financial instability and depression (Konzelmann, Wilkinson, Fovargue-Davies, & Sankey, 2010). It is also concerned with the duties and responsibilities of a company’s board of directors to successfully lead the company, and their relationship with its shareholders and other stakeholder groups. Corporate governance refers to the “private” and “public” corporations, including laws, policies and established business performances, which collectively govern the relationship, in a marketplace economy, among corporate directors and entrepreneurs “corporate insiders” taking place individual hand, and individuals who invest capital in firms.

Mechanisms that protect the interests of the shareholders are known as corporate governance mechanisms. Good corporate governance helps in financial and economic development. During the previous two decades it has observed that ever-increasing influences of research on the theme of corporate governance. There is a general concern with the purpose of good corporate governance practices exercise positive significant effects on the capital structure of the firm. (Shleifer & Vishny, 1997), examines that with the help of these mechanisms capital structure decision maker of the firm confirm that they possibly will attain a considerable returns and benefits on their investments. By means of reliable governance structure, it is significantly easier for goodwill of corporations towards achieving loans from investors as a well-designed corporate structure protects the interest of shareholders, enhances firm’s transparency and disclosure as well as reduces the agency conflicts. According to Core, Holthausen, and Larcker, (1999), the firms having weaker governance structures face more agency problems and directors of those firm’s get more classified benefits, due to weak governance structures.

Research literature states that senior management generally prefer to use debt less than the shareholders expect to avoid further monitoring from the lender and their interest seeking behaviour tends to lead the financial decision against of shareholders interest (Hart and Moore, 1995; Jensen, 1993). But lack of transparency and accountability of issuing and re-packaging debt security (see Enron case) in the capital structure generate higher cost and lower cash flow only. Effective corporate governance can make sure balanced capital structure decision and sustainable development of the firm protecting the rights of principals (Abdullah, Ahmad and Roslan, 2012).

This research thesis would make an effort to find out how corporate governance practices can help the firm to maximize their financial performance. As well examines the effects of corporate governance mechanisms on the financing decisions of firm which may directly lead towards firm’s financial performance. This study is conducted in context of developing economy.

1.2). Existing Studies

Corporate governance is an important factor in improving the value of the firm. If we relate corporate governance with economy the role of financial objectives have vital importance. There is no general contract with economists, that financial development is positive for growth. Pagano (1993), concludes that the steady state growth rate depends positively on the percentage of savings diverted to investment; therefore one channel through which financial expanding influences growth is converting savings to investment. United States, United Kingdom, Germany, and Japan having some of the best corporate governance systems in all over the world, and the differentiation along with them are possibly less comparative to their variations from the other countries. Pagano, Panetta, and Zingales (1996), examine in their study that the Italian corporate governance mechanisms are so undeveloped as well towards significantly slow down the flow of external capital to firms and financial sustainability. In less developed countries, including some of the transition economies, corporate governance mechanisms are essentially incomplete.

Shleifer and Vishny (1997), conclude that “corporate governance” deals through the agency dilemma, the division of “management” and “finance”. The essential problem of corporate governance is how to assure investors that they obtain a benefit on their financial investment. The agency dilemma is important; the opportunities for managers to escape with investor’s resources, otherwise to waste them on preference projects are overflowing and well-accepted. Nodoushani, O., and Nodoushani, P. (1999), explained that “corporate governance” measures influence the proficient usage of the general public’s resources and the ability of corporate to generate more assets, the theory of “management control” since locates forward by Adolf Berle and Gardiner Means, still appears to be occupied of assure considered for management researchers and practitioners. Certainly the challenging and structure flouting model reallocate argued through the researchers of “The Modern Corporation and Private Property” might facilitate to unlearn a confusing discussion which is express suitable established insight on the corporate governance discussion.

Understanding the corporate governance practices not only explains the discussion of possibly insignificant progress in richest economies, even though that could also be stimulating most important institutional changes in places where they have needed to be made them. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000), argues that corporate governance is a certain extent and a set of mechanisms through which outside investors protect themselves and their investments against appropriation by the insiders. The corporate governance structure is comprised of a broad series of institutions and practices, from the accounting principles and laws regarding financial disclosure towards administration return as well to the size and composition of corporate boards. The impact of corporate governance differs country to country because of dissimilar corporate governance structures resulting from different economic, social, and regulatory circumstances (Rouf, 2011).

There are different research studies that have been conducted to provide empirical evidences and towards conceptualizing the impact of corporate governance on corporate performance. Keenan and Aggestam (2001), in their influential proposal and emphasizes that it is the fiduciary responsibility of corporate governance to create, develop and exploit financial resources embedded in shareholders, structures and procedures of a firm. Jackson and Hoepner (2001), argues that throughout the good corporate practices, companies are enabled to attract investors and financial capitals consequently performs efficiently and resourcefully generates long-term economic value for its stakeholders. Taking into consideration the above arguments corporate governance mechanisms have been treated as a performance driver for investors and firm’s financings.

Previous literature on corporate governance has shown that the board’s meeting frequency and board independence have significant impacts on firm performance and executive compensation (Vafeas, 1999) and (Ryan Jr & Wiggins III, 2004). It is also extensively believed that agency conflict has a strong influence on financial policies of the firm. Financial policies of firms comprise both capital structure and dividend decision. According to Kajananthan, R., (2012) argue that corporate governance quality has a strong influence on key financial policy such as capital structure decision as debt ratio in the capital structure and the risks of financial distress is closely associated.

John Carver (2010), explained that “corporate governance” always recommends “decision making” authority, although can be utilized in a diversity of situations, as well as the governance of a state, the governance of a procedure, and the governance of a corporate object. Governance can signify the complete “external” and “internal” structure of main performers and effects on those performers concerning with the legal structure, the market for “corporate control, ownership patterns, and the boards of directors”.

This research study will try to extend such studies into the Pakistan context and investigates the role of independent directors and supervisory board on the firm performance as well as executive compensations in the Pakistani publicly listed companies. Basically this study tries to examine the efficiency of both supervisory board, monitoring organs and independent directors, in Pakistani publicly listed firms. Furthermore, we explore the impacts of corporate governance on both financing decisions such as; capital structure and dividend policy of firm and also find out their impact on firm performance, and the particular directions of such effects whereas taking the interactions among them into important concerns.

1.3). Gap in Literature

This research thesis is an initiative to address the gaps in the literature by examining how and which corporate governance practices impact the financial performance of firms in developing countries. This study also explores the relationship among corporate governance, capital structure, dividend policy and firm performance directly and indirectly in the context of Pakistan. Furthermore, this study also filled the gap by examining the mediating role of capital structure and dividend policy whiles corporate governance effecting on firm performance. As well elaborates the direct and indirect effects of corporate governance towards financing decisions and firm performance which considered as output at the end of financial year.

The research study also focus on the cross-lagged analysis, for this purpose develops multilevel model linking corporate governance, capital structure, dividend policy and firm performance then proves it through structural equation modeling (SEM) using SmartPLS to analyzing Cross-lagged effects. Cross-lagged models are widely used in the analysis of Panel data, or data collected more than once on the same individuals or units over time, to provide evidence regarding the direction of causality between variables X and Y and to estimate the strength of the casual effects of each variable on the other.

This study also focuses on the significant of corporate governance for firms in developing countries because it can lead to decision-making excellence and help firms to raise capital and attract foreign investors. The purpose of this paper is to examine the challenges, difficulties and issues hindering effective development and implementation of corporate governance in Pakistan.

1.4). Rationale of the Study

1.4.1). Research Contribution to Corporate Governance Literature

The purpose of this study is to examine the corporate governance of quoted firms in the Pakistan. This study provides first empirical evidence of association among corporate governance, capital structure, dividend policy and firm performance around the world thus would be a good source of reference for Corporate Governance researchers in future. The study uses new generation multivariate technique; based on Structural Equation Modeling (SEM) particularly appropriate in causal-predictive analysis in complex situation which has not been applied before in the field of Corporate Finance. The contribution of this research is important for both academic researchers and business managers. Understanding the role of Corporate Governance while taking financial decisions to get more attention of shareholders and other stakeholders as well as getting more effective benefits towards achieving high firm performance. While business managers may benefit by understanding the corporate governance and its role in allocating the valuable resources to supporting their financial decisions and ultimately firm financial performance.

Corporate governance aims to control the management activities for the best interest of shareholder specifying the rights and responsibilities among different related parties in the organization. Definitely, corporate governance literature has two stands; Firstly, it considers as the way of guiding and improving the firm performance (Hart, 1995; Fama and Jensen, 1983) and the other consider as the ways that provide suppliers of finance with some protection in regards to their investment policies (Rahman, 2006; Shleifer and Vishny, 1997). The second thought has become the center of contemporary corporate governance studies since the collapse and scandals of the large corporation in developed economies. This research falls into the both school of corporate governance literature, and it examines the effect of corporate governance mechanisms on financial policies such as capital structure and dividend policy, as well examines the effect of this whole phenomenon on firm performance.

I study the relationship between corporate governance and firm performance, on the one hand, this relation measures by capital structure and, on the other hand, dividend policy measured as discretionary accruals. I am particularly interested in the role of corporate governance practices and their effects. I examine the effects of their proportion on capital structure, dividend policy, and firm performance. Discretionary accruals are estimated using modified models. I conduct the analysis in a sample of large publicly traded Pakistani firms. This study could enrich the literature of relationship between corporate governance and firm performance reporting by selecting Pakistani firms for analysis. This thesis does a more comprehensive study on various characteristics of corporate governance mechanisms, and thus may provide more valuable information to Pakistani accounting regulators in making recommendations for corporate governance practice.

1.4.2). Research Significance for Corporate Practices / Practical Implications

In Pakistan the corporate governance topic is newly discovered and getting high consideration of academic researchers in the field of corporate sector. There are mixed views found in literature about the effects of corporate governance on capital structure as well as on firm performance. A number of academic researchers examined that while adopting the corporate governance practices exert positive effect on capital structure and some are elaborating that corporate governance mechanisms negatively related with firm performance and capital structure. The given research study having importance in the sense that it empirically provides evidence for directors, managers, shareholders, investors and other decision makers that how effective Pakistani firm’s board composition can be on their financial decisions into the way of reaching at high value and improving the financial performance of the firms to attain high growth level.

This research study presents strong evidence to report corporate governance mechanisms in annual reports of joint stock companies. This might be not only being useful for evaluating the portfolios by existing and potential investors although benchmarking within industry would also be possible. On the bases of available information related to the corporate governance measures and corporate financing decisions, potential investors would be in a better position towards estimating the risk associated with their investments that might be reducing the borrowing cost and ultimately reduction in weighted average cost of capital (WACC) for the company.

The given research project also provides recommendations to the Pakistan Institute of Corporate Governance for developing more awareness program in the board of directors of companies. Board of directors would be held responsible to look after exploiting, attracting and the developing financial resources of their companies to gain higher financial performance. Security Exchange Commission of Pakistan and other policy makers might be able in a better position to encourage companies on the way towards adopting Corporate Governance mechanisms as it has proved that these mechanisms affects positively and significantly financial performance of the firms.

1.5). Significance of Corporate Governance in Different Era

Corporate governance is a developing concept at the present era. There are several emerging countries which are continuously enhancing their effort and focus towards improving the corporate regulation and management in order to elaborate enhanced governance structure of the firms. Primarily the production firms and businesses govern simply on the reasons of “faith, transparency and accountability”. Although the fact that, a marvelous increase in the size of firms, growing difficulties, bankruptcy, economic failures, crises and frauds in different organizational structure and procedures motivated they requires to grow-up and modernize the corporate cultures. Corporate governance has also lead towards the improvement of diverse set of laws, regulations and principles to construct enhanced corporate structure and performance for to prevent financial crises and instructions of financial sector. World Trade Organization (WTO) and International Finance Corporation (IFC) are the two major organizations that are performing an immeasurable role in the coverage of these structures through planning and examining these procedures along with the other countries.

The business environment is getting very competitive in proportion of without charges (quota free) WTO settings. The same ending results mostly firms are facing new challenges with reference to enhancing their financial performance to remain sustainable position in the industry. In such kind of situations, corporate governance have being recognized as a mechanism intended for identifying maximum value and performs a significant role in productivity, sustainability, as well as profitability to meet-up the new challenges of proportion of without charges (quota free) global environment. The main important challenge faced by the corporate governance in the particular century is to grow up of its intellectual assets and analyze company understanding the same as existence of the maximum sustainable resources intended for realistic gains in the industry. The corporate governance mechanism helps organizations towards enhancing their effectiveness and efficiency with the assistance of perfect control and management; in these manners also performing a very important role in supporting the interest of shareholders and management towards reducing the agency conflicts in the organization.

Corporate scandals at the large level in USA during the years 2000 and 2001 such as; Enron, WorldCom and Tyco etc. and due to these scandals rest of the world left deep scars on the corporate world globally. These scandals pushed up the regulatory authorities on the way towards bring laws against complains of corruption, deception, frauds and insider trading such as; Sarbanes-Oxley Act (2002). It was proved that the traditional governance structure could not stop appropriation of insiders and was a source of inefficiency. The confidence level of the investors on capital market was hardly shaken due to these scandals. Therefore, regulatory authorities around the world made it compulsory for corporate sector to submit through the codes of best corporate governance practices towards encouraging the accountability, transparency and fairness for all stakeholders. That is turn around might perhaps mitigate the agency cost such as predicted by (Jensen & Meckling, 1976). These corporate scandals and agency theory had the most important reasons behind the distribution of codes and standards of corporate governance practices around the world.

Corporate governance in Pakistan is still at developing stage, State Bank of Pakistan (SBP), and the Securities and Exchange Commission of Pakistan (SECP) are the chief adaptable bodies being continuously engaged in framing and governing an optimal governance structure in Pakistan. The code of corporate governance introduced by Security and Exchange Commission of Pakistan (SECP) in early 2002, this is the most important step towards corporate governance reforms in Pakistan. These codes contain several recommendations in line through international best practices. The main areas of enforcement include reforms of board of directors in order to formulate it responsible to all shareholders and enhanced disclosure including better internal and external audits for listed companies. In exercise of its powers under Section 34(4) of the Securities and Exchange Commission of Pakistan Ordinance, 1969, the SECP issued instructions to the Islamabad, Karachi, and Lahore Stock Exchanges to include the requirements of the Code in their particular register regulations. As a result, the listing regulations were properly customized by the stock exchanges.

1.6). Research Objectives

1). This study seeks to explore the relationship among corporate governance mechanism, capital structure decision, dividend payout policy, and firm performance in the Pakistan non-financial sector.

2). The main purpose of this study is to develop firstly the structural model connecting corporate governance with capital structure as well as dividend policy and their effects on firm performance through applying structural equation modeling (SEM).

3). Corporate governance significantly impact the capital structure and dividend policy of the firm, in that, the choice of financing decisions of the firm dependent on corporate governance.

4). The firm performance better explained by the alignment among corporate governance, capital structure and dividend policy.

5). More specifically, this study would attempt to achieve sub objectives:-

a). Determine structural linkage among corporate governance, capital structure, dividend policy and firm performance.

b). Determine the relationship of corporate governance mechanisms with capital structure and dividend policy.

c). Investigate the effects of capital structure and dividend policy on firm performance.

1.7). Proposed Methodology

The given research study focus on the cross-lagged analysis, for this purpose develops multilevel model linking corporate governance, capital structure, dividend policy and firm performance then proves it through structural equation modeling (SEM) using SmartPLS to analyzing Cross-lagged effects.

This study is based on strong theoretical foundations and research proven methodological approach on the basis of literature from agency theory, MM theorem and theory of firm. As well elaborates the direct and indirect effects of corporate governance towards financing decisions and firm performance which considered as output at the end of financial year.

This study made use of secondary data in establishing the relationship among corporate governance, capital structure, dividend policy and firm performance of the 100 non-financial firms listed in the Karachi Stock Exchange (KSE). The secondary data is obtained basically from published annual reports of these companies. Balance sheet analysis and other related materials collected from State Bank of Pakistan and the Karachi Stock Exchange of Pakistan. Analysis of quantitative data was conducted using Variance Inflation Factor (VIF) multicollinearity for reliability of constructs. Structural Equation Modeling (SEM) and Cross-lagged analysis was used to test the hypothetical models of the study.


Literature Review

2.1). Prologue for Literature

The main purpose of this study is to examine how and which corporate governance mechanisms have an effects on capital structure decisions and dividend payout policy, and also examines their impact on firm performance of Pakistani companies. With the intention of providing a background of the research subject this section reviews previous theoretical research literatures to develop the main constructs involved in this study. Following are the main constructs involved in the study.

1. Corporate Governance

a. Board Size

b. Board Composition

c. CEO Duality

d. Audit Committee Size

e. Annual General Meeting

2. Capital Structure

a. Debt to Equity Ratio

3. Dividend Policy

a. Dividend Payout Ratio

4. Firm Performance

a. Return on Assets

b. Return on Equity

2.1.1). Corporate Governance

Corporate governance originates from “agency theory” from the time when the early work of Berle and Means in 1932 “the modern corporation and private property”. Agency theory refers to a set of proposals in controlling a modern organization which is naturally differentiated through large number of “shareholders” and “owners” who allocate separate individuals to “control” and “direct” the employ of their group of resources designed for potential gains. Behind Adam Smith (1776), Berle and Means (1932) initiate the discussion relating to the distresses of separation of “ownership” and “control” in a large size organization. Lewis (1935), explains that it may gives the impression which are practically essential for the corporate governance structure is on the way to continuing the “control” of the great organizations be supposed to increase in a entirely neutral technocracy, corresponding a diversity of argues through the selection of grouping within the public and turning over in the direction of every segment of the earnings concern resting on the source of unrestricted strategy towards a certain extent than confidential materialism.

Jensen and Meckling (1976), in their research study “Theory of the Firm” they presumed towards the entire analysis with the purpose of that they are distributing only through means of a particular “financing investment decision” by the industrialist and have unobserved the concerns related with the reasons influencing “expected financing investment decisions” which may be occur after that the original set of dealings are accomplished among the industrialist director, external stockholders and bondholders. These are the essential matters which are gone intended for expected analysis. Their explanation resolve definitely establish various adjustments into the conclusions of the particular decision analysis. It give the impressions obvious designed for illustration that the probability of expected sales of external equity and debt determination changes the costs and benefits appeared the directors in making financial decisions which are beneficial themselves for the short-run expenditure of the current bondholders and stockholders.

Jensen (1976), identifies an agency connection as a agreement under which an individual or else more individuals “principal” connected to another individual “agent” for to perform some service on their behalf which engages assigning various decision making authority towards the agent. If both parties in the direction of the association are value maximizes, there is good quality rationale to believe that the agent may be will not constantly perform in the most excellent benefits of the principal. The principal can limit differences from his interest by instituting suitable incentives designed for the agent and by deserving examining costs considered to limit the irregular behaviors of the agent. Eisenhardt (1989) explained in the research study that the positivist researchers have concentrated on classifying circumstances within which the “principal” and “agent” might be possible on the method to have contradictory objectives and subsequently relating to the corporate governance mechanisms with the purpose to control the agent’s well-situated performance. In actually “positivist research” be with a reduction of mathematical than “principal-agent research”. Furthermore, positivist researchers have concentrated approximately entirely on the particular project of the principal-agent relationship among owners and directors of large size public organizations (Berle and Means, 1932). According to a theoretical point of view, the positivist stream has been essentially concerned with describing the governance mechanisms with the purpose of resolve the agency problem.

Shleifer and Vishny (1997) explained that “corporate governance mechanisms” are financial and officially permitted establishments that can be changed throughout the political procedure sometimes designed for the enhancement. Individual may get an observation that they must not be concerned about “governance restructuring”, subsequently, in the long -run, “product market competition” would force firms to decrease costs, and as measurement of this cost minimization to implement rules, as well as corporate governance mechanisms, allowing them to increase external capital at the minimum cost. The corporate governance mechanisms make available the declaration that the “product market competition” possibly will decrease the returns on capital and therefore reduce the amount that directors can probably appropriate, however it does not prevent the directors from appropriating the reasonable return later to the resources is insolvent.

Gul and Leung (2004) dispute in the research study and the outcome of their research must be supposed to be of benefits to directors in which countries whose corporate ownership and controlling structures are similar to each others. Although the outcome are almost certainly dependent on “Hong Kong’s institutional environment”, studies the level in the way to which the consequences perform generalize determinations to facilitate for enhanced value that how organizational structures matter intended for corporate governance. Therefore, further studies in diverse controls on the topics those are elevated in this research paper are reasonable. Proposed studies concerning that area must as well observe how the other mechanisms of corporate governance such the same as the “board’s size”, “corporate family ownership” and “outside shareholders” are related with the corporate controlled strategies. Clearly, the previous studies illustrate a significant relationship between “corporate disclosures” and “cost of equity capital”, a reasonable expansion designed for proposed research studies must be on the method to observe the relationships between corporate governance, corporate disclosures and cost of equity capital.

Martijn and Nair (2005) in their study investigate that how internal and external corporate governance mechanisms interact with each others. They conclude that external and internal corporate governance mechanisms are effective complement in being related with long-term abnormal returns and financial measures of profitability. The significance of internal governance critically depends on the level of external governance. This relation is moreover stronger for low leverage firms.

Kroll, Walters, and Le (2007), in their research study on “the post-IPO performance of young entrepreneurial firms”, the results recommended with the purpose of a majority of the board members in corporate governance system might be inside the corporation. Coles, Daniel and Naveen (2008) dispute among the objective of multifaceted corporations control better recommending conditions. While outsized boards potentially convey new information and understandings are able to consequently suggest enhanced recommendation, the research also hypothesize that multifaceted corporations be supposed to have better and most self-governing boards. On the other hand, moreover hypothesize to facilitate corporate, intended for which firms particular information of insiders is relatively further significant, such as knowledge thorough new economy firms, are expected on the method to grow since better illustration of insiders on the board of a firm’s corporate governance structure.

Brown, Beekes, and Verhoeven, (2011) conclude that the corporate governance is regarding to the governance of organizations. As embodied into the reports and policies of essentially outstanding practice, it is concerning issues which the shareholders and the board of directors are able to properly make a decision and execution. They also illustrate this same as the lawful analysis. The financial analysis, that is the analysis reserved within the finance literature, is towards some extent diverse. It provides emphasis to the role of corporate governance, frequently in the grouping among financial policies and financial decisions, in explanatory agency costs.


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Corporate Governance and Performance of Peer Firms
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