Professional Documents
Culture Documents
Lahore
Master of Commerce
(18 years)
By
Asad Ullah
Roll No: MC 14-060
Session: 2014-2018
Registration No: 2012-sps-50
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Hailey College of Commerce
University of the Punjab, Lahore, Pakistan
DECLARATION TO BE FILLED BY THE STUDENTS AT THE TIME OF
SUBMISSION OF THESIS TO THE SUPERVISOR AND/OR FOR EXTERNAL
EVALUATION
Section1: Particular of the Student
1.1 Full Name ASAD ULLAH
1.2 Father's Name SAIF ULLAH
1.3 Roll. Number MC 14-060
1.4 Program Master of Commerce 3.5 years (18 Years)
I do hereby solemnly declare that the above titled thesis submission by me in partial
fulfillment of degree program enumerated above:
a) is my original work, except where otherwise acknowledged in the text.
b) has not been published earlier and
c) shall not be submitted by me in future for obtaining any degree from this or other
university or institution.
3.2 Date
Notes:
Three copies of this Declaration must be provided by the student
One copy will stay with the Controller of Examination
The second copy will stay with the relevant Head of Department
The third copy will be attached to the thesis when it is sent to the supervisor and/or for
External Assessors.
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Hailey College of Commerce
University of the Punjab, Lahore, Pakistan
SUPERVISOR’S CERTIFICATE ON
THESIS SUBMITTED BY A STUDENT
Section 1: Particulars of the Supervisor
1.1 Full Name Prof. Dr. Muqqadas Rehman
1.2 Address Room, Old Building, HCC, PU
I certify that:
a) The above-named student has completed the cited thesis under my guidance and
supervision.
b) I am satisfied with quality of the student’s research work, and
c) I consider it worthy of submission for external evaluation.
3.1 Supervisor’s Full Signature
3.2 Date
Notes:
Supervisors are requested to complete three copies of this form and send them, along with approved
thesis, to the relevant Head of the department. One copy will stay with the Head of the department.
Second copy should be sent for record of the Controller of Examination. Third copy should be attached to
the thesis before it is sent out for external evaluation.
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Dedication
“I dedicate this study to my parents, my wife, and my beloved uncle Haji Sana
Ullah who always support me, words can never express my gratitude for the
invaluable advice and seed of challenging work and dedication to me. May Allah
Almighty
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ACKNOWLEDGEMENT
The whole praise to Almighty Allah, the Creator of this universe, who makes us the superior
I offer very special praise for our beloved HOLY PROPHET HAZRAT MUHAMMAD
I wish to express my gratitude to my supervisor respected Prof. Dr. Muqqadas Rehman for his
Thanks, and love in abundance to my parents, especially my father Saif Ullah and my uncle Sana
Ullah who always provided much support, both financial and emotional and sacrifice their
expensive time, happiness, health and many things for my success and bright future. Thanks for
their endless love and support that motivated me through the tough times when I was staying away
from home.
Least but not last, I am thankful to all teachers they contribute in my life. And I am also thankful
to my family and friends Hafiz Ghulam Murtaza, Muhammad Faisal, Muhammad Saddique and
Faisal Hayat whose prayers played a vital role in the completion of the thesis. Without their
support, it would have been impossible for me to write this thesis report.
Asad Ullah
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Abstract
and management. Since the introduction of corporate governance code in Pakistan after 2002,
corporate governance has attracted an extraordinary attention of researchers. As the sample size
and time span covered by previous investigations were considered insufficient to generalize the
findings. It is against this backdrop, this study examined the impact of corporate governance on
the financial performance of all money deposited banks which are listed in Pakistan over the period
of ten (10) years (2007 to 2016). In this study, Return on Assets (ROA) and Return on Equity
(ROE) are used for measuring the financial performance while Board Size (BS), Board
Composition (BC), Chief Executive Officer Duality (CD), Audit Committee (AC), Board
Meetings (BM) and Audit Committee Meetings (ACM) as indicators of corporate governance
along with FS (Firm Size) as a control variable. The panel data for the study were quantitatively
retrieved from the annual reports of those banks. Multicollinearity is tested through Variance
Inflation Factor (VIF) test. Ordinary Least Squares (OLS), Random Effect (RE) and Fixed Effect
(FE) models are regressed as panel data analysis techniques. It was found that larger board size,
greater portion of external directors and audit committee size contributes positively and
significantly to the financial performance of Commercial Banks in Pakistan. This study may be
useful for the regulatory bodies of the corporate governance practices as well as the administration
of the banking sector in Pakistan. This study, however, recommended that banks should increase
their board size but within the maximum limit set by the code of corporate governance. This study
further suggests that banks should avoid unnecessary meetings which influences negatively to the
financial performance.
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2.4.6 CEO (Chief Executive Officer)/ Chairman Duality and Firm Performance........... 30
2.5 Summary of the Chapter ................................................................................................ 32
CHAPTER 03 .............................................................................................................................. 33
RESEARCH METHODOLOGY .............................................................................................. 33
3.1 Overview ........................................................................................................................ 33
3.2 Methodology .................................................................................................................. 33
3.3 Epistemology and Ontology ........................................................................................... 34
3.4 Theoretical research approach ........................................................................................ 34
3.4.1 Inductive approach .................................................................................................. 34
3.4.2 Deductive approach ................................................................................................ 35
3.4.3 Research approach taken......................................................................................... 35
3.5 Research philosophies .................................................................................................... 35
3.5.1 Post positivism approach ........................................................................................ 36
3.5.2 Interpretivism approach .......................................................................................... 36
3.5.3 Philosophical approach taken ................................................................................. 36
3.6 Research Design ............................................................................................................. 37
3.6.1 Data Source and Data collection ............................................................................. 37
3.6.2 Population and Sample Size.................................................................................... 38
3.6.3 Variables Specifications and its Measurements ...................................................... 40
3.7 Theocratical Framework ................................................................................................ 44
3.8 Data analysis technique .................................................................................................. 46
3.9 Ethical issues .................................................................................................................. 46
3.10 Summary of the chapter .................................................................................................... 46
CHAPTER 04 .............................................................................................................................. 47
ANALYSIS AND DISCUSSION ............................................................................................... 47
4.1 Chapter Overview ............................................................................................................... 47
4.2 Descriptive Statistics ...................................................................................................... 47
4.3 Pair-wise Correlation Matrix .......................................................................................... 50
4.4 Multicollinearity Test ..................................................................................................... 51
4.5 OLS Model, Random Effect Model (REM) and Fixed Effect Model (FEM) for ROA . 52
4.6 OLS Model, REM and FEM for ROE ........................................................................... 55
4.7 Final Regression Analysis for ROA and ROE ............................................................... 58
4.8 Hypothesis testing and discussion .................................................................................. 63
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4.9 Comparison of the REM and FEM ................................................................................ 66
4.10 Summary of the Chapter ............................................................................................. 66
CHAPTER 05 .............................................................................................................................. 67
CONCLUSIONS AND RECOMMENDATIONS .................................................................... 67
5.0 Chapter Overview ............................................................................................................... 67
5.1 Conclusions of the Study .................................................................................................... 67
5.2 Recommendations ............................................................................................................... 68
5.3 Limitations .......................................................................................................................... 69
5.4 Future Directions ................................................................................................................ 69
5.5 Summary of the Chapter ..................................................................................................... 69
References .................................................................................................................................... 70
Appendixes................................................................................................................................... 79
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CHAPTER 01
INTRODUCTION
This chapter gives the introduction of background of the study and main concept of the
research together with the justification of the study. After that, aims of the research and the
questions of the research are formulated and main purpose of research is discussed. In addition, an
1.1 Background
business performance and increasing performance enter the external capital. In emerging markets,
good corporate governance services some objectives of the public policy. It lessens the financial
fragility emergency, reinforce property rights, reduce operation costs and investment costs and
principal to the expansion of the money market. Corporate governance involved management,
board of directors, minority shareholders and other stakeholders and control relations of
shareholders. In 2002, Securities and Exchange Commission of Pakistan (SECP) allotted a code
to the corporate regulations which was known as the Code of Corporate Governance (CCG)
publicly announcement the company has become a vital area of commercial investigation. In 2012,
the code of corporate governance was revised and amended with the name of the “Code 2012” and
further, it was replaced with the “Code of Corporate Governance 2017” which is currently being
implemented in Pakistan. The corporate governance system entails of a variety of practices and
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accounting ethics and related pecuniary institutions revelation, executive reward, composition and
The corporate governance arrangement provides help to those who retain the company and
provide it the directions of economic rewards distributed among the shareholders, employees,
managers and the stakeholders. Therefore, the affairs of a country the governance system has
profound implications for business organization and employment system, commercial relationship
and capital market. Therefore, the changes in Pakistan, the corporate governance system may have
and economic systems that protects the interests of the business owners. In Anglo-American
corporate governance system, these owners are shareholders. According to different researchers
(Berle & Gardiner, 1932; Jensen & Meckling, 1976) the thought of corporate governance
presupposes an essential tension between stockholders and corporate executives. While, the
corporate shareholders’ intention for maximum return on their financing, administrators may have
different aims, either dealing with the authority and status of a bulky and powerful group, or other
performing and other allowances. In this case, senior management’s access to internal information
and the relative weakness of many diverse shareholders and shareholders mean that executives are
predictable to advance the upper hand. The research scholars provide a variety of resolutions to
the agency problem which is existed between shareholders and managers, belonging to the class
stakeholders can be adjusted by different practices such as stock options and by other arrangements
of market-based (Fama & Jensen, 1983). Monitoring by the self-governing directors and the board
of executives ensures that the available shares of the manager are in the finest welfares of the
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shareholder. Fama and Jensen (1983) CEOs who fail to achieve the goal of maximizing the
shareholder interest, can be detached by the board of directors, while companies that ignore the
value of shareholders are subject to market sanctions for hostile takeovers (Jensen & Ruback,
1983).
Since the establishment of Pakistan in 1947, the Indian Companies Act of 1913 was passed
by the enterprise until the promulgation of the Companies Ordinance in 1984. Pakistan legal
persons were mainly governed by the Ordinance. The Securities and Exchange Commission
(SECP) assumed the obligations and powers of the Law Authority Corporation in 1999. The
purpose of the SEC was to regulate the exchange of securities and the 1997 SECP Act, encourage
challenges. The goal of the SEC was to encourage companies to adopt good business management
technical abilities to maximize their wealth. Managers are people, people have personal goals, but
also business goals. If their own interests do not respond to shareholder interests, the value of the
business will not be maximized. Managers can spend too much time eating lunch, surfing the web,
etc. instead of focusing on the task. They can use resources for the benefit of themselves and not
SECP introduced corporate governance guidelines in early 2002. That was an important
step toward reforming the corporate governance practices in Pakistan. The Code of Corporate
Governance (CCG) included several suggestions are in contour with worldwide good practices.
Main area enforcement includes reforming the board to achieve this responsible for all the
shareholders and improved disclosure, counting internal improvement and outside audits of
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registered firms. Whatsoever, the limited terms of the code, the independence of the directors was
always voluntary and provided no indication internal control, risk administration and the Board’s
reimbursement policy. In 2012, SECP replaced the CCG (the Code 2002) by the new Code of
Corporate Governance with the name of the Code 2012. The new code was adopted by all the three
Stock Exchanges (Karachi Stock Exchange: KSE, Lahore Stock Exchange: LSE and Islamabad
Stock Exchange: ISE). The Code 2012 was adopted by all the Listed Companies for compliance.
In January 2016, all the three Stock Exchanges of Pakistan were merged into one with a new name
of Pakistan Stock Exchange (PSX). In 2017, Companies Ordinance 1984 was replaced by
Companies Act 2017, the Code of Corporate Governance 2012 was amended, revised and
substituted by the new Code of Corporate Governance (Code 2017) in which new requirements
and provision were added and some of previous provision were omitted.
The core purpose of this study is to examine the affiliation between them corporate
governance and corporate performance of entirely Money Deposited Banks listed on PSX.
Therefore, we try to find out the affiliation in middle of corporate governance indicators and
financial performance of listed money deposited banks in PSX. This highlights the status of legal
rules and the quality of law enforcement. In context to the Pakistan, with the habitually weak
distribution of the property is the main method to solve the problem of the agency. The problem
is the legal protection of some investor, the use of advice supervision of senior management and
active markets controlled by the establishment. At contrast through the characteristics of corporate
governance in developed market in Pakistan less dependent on capital markets and external
investors, but more dependent achieving efficiency among major investors and financial
institutions department of business, in this case, external (smaller) investor are at risk in the form
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According to Shleifer and Vishny (1997), Corporate Governance instruments are legal and
economic systems that can be modified by political development. About the Governance Reforms
forcing companies to reduce costs, and in the context of minimizing costs adopt rules that include
corporate governance mechanism to enable them to improve. In the long run, the cost of external
capital is the lowest. Regarding the Evolutionary theory of economic change (Alchian, 1950;
The Corporate governance from the point of view of agency theory is called “Separation
of ownership and Control” (Berle & Gardiner, 1932). There are the two most communal method
of corporate governance to shield the rights of investors. The first one is to provide depositors with
legal protection expropriation of manager. Safety of smaller rights and prohibition of the law
owned by a large investor (concentration of ownership): match a significant cash flow to the
RAND (Research and Development) control. The most common corporate governance
instruments used around the world including mass properties, relationships banking and even the
appropriation can be considered as samples of big stockholders who exercises their authority. We
confer how big investor reduce agency costs. Although the major stockholders still depend on the
official system imposed by the governing body, they do not consider it as much needed keep you
own interests as small investors. However, it can be the best to use together and focus the property
on its own is described as potentially expropriated by a large investor other small investor and the
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1.2 Rationale of the study
Abdulazeez, NdibeL, and Mercy (2016) conducted a study on money deposited banks in
Nigerian stock Exchange but data were collected only five years and its results were not
generalizable to other countries. Lubabah and Bawa (2013) investigated the study in which only
six banks were taken as a sample size. For this study, the sample size is increased from five years
to ten years. The focus of this study is the money deposited banks which are listed in Pakistan
Stock Exchange (PSX). Adeusi, Akeke, Aribaba, and Adebisi (2013) conducted the study in which
ten banks were considered and six years data. No study has been conducted in this area of research.
This study points out those factors of corporate governance which affects the performance of
banking sector in Pakistan. This study contributes the guidelines for the regulatory body for
making effective corporate governance rules and regulations for banking sector of Pakistan.
This investigation devotes to the several articles. At first, this study provides evidence
regarding the impact of corporate governance on the financial performance of listed money
deposited banks for a developing country like Pakistan. Compared to developed countries, banks
have different agency problems. Unlike the latter, when there is a battle of interest between the
Secondly, the research in this area has not been conducted and the study measures the
banks. The governance mechanism is conducive to the development of the country and the
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Third, we use a larger dataset based on the sampling period and the number of banks than
existing research on Pakistan. Where our sample comprises twenty (20) banks listed in PSX for
the period of ten years from 2007 to 2016, other studies have used data for fifteen (15) banks or
Fourth, this study provides guidelines for the Pakistan banking sector to establish effective
regulatory regimes for corporate governance rules and regulations, and formulates an operative
Due to the high concentration ownership, the corporate governance practices are very low
in Pakistan. The commercial banks in Pakistan are traditionally either unaware of the general
principles of good corporate governance, or work in a relatively less open environment. Promoting
basic principles of good governance for commercial Banks is crucial in supporting the
development of a strong economic sector. So, to check the effectiveness of corporate governance
practices in Pakistan, a comprehensive study in this area is the need of the day. Good corporate
governance does not lose the business’s chances but they are looking for opportunities for the
By keeping in view of the above discussed problem, the purpose of this is as follows:
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1.5 Research Objectives of the study
1. To identify the association between Board Size (BS) and the financial Performance of
2. To explain the relationship between Board Composition (BC) and financial Performance
5. To identify the relationship between Board Meetings (BM) and financial Performance of
6. To identify the relationship between Audit Committee Meetings (ACM) and financial
7. To identify the factors of corporate governance that affect the financial Performance of
1. Does board size (BS) have any association with financial performance of listed Money
2. What is the relationship amidst Board Composition (BC) and financial Performance of
3. has CEO (Chief Executive Officer) Duality (CD) any impact on financial Performance of
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4. How does Audit Committee (AC) effect the financial Performance of Money Deposited
5. Is there any connection between Board Meetings (BM) and financial Performance of
6. Has Audit Committee Meetings (ACM) any relationship with the financial Performance of
7. What are the factors of Corporate Governance that influence the financial Performance of
1.7.1 Chapter 1
Chapter 1 introduces the subject and explains why it was chosen. This chapter also includes
the main research goals and objectives of this study. In addition, the subject is also studied through
research question. Furthermore, this chapter explains the methodology of this research, including
the different research means, philosophies, instruments and techniques for data collection and
1.7.2 Chapter 2
Chapter 2 is a literature on this subject. Much has been done on the topic of corporate
governance and its various impacts on the performance of the firms, therefore, extensive studies
have been done on the literature, in which attempts have been made to cover the work of all
researchers regarding the connection of corporate governance and firm performance topics.
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1.7.3 Chapter 3
Chapter 3 contains details of the research means that were considered in this study. Some
of the theoretical underpinnings of this chapter are also used in research methods (inductive or
deductive) and philosophical (positivist and interpretive), of course, including methods and
philosophies and the logic and reason chosen for the study. In addition, this chapter of the study
also discusses research methods (qualitative and quantitative), sampling techniques and sample
size of twenty banks listed in Pakistan Stock Exchange, as well as data collection methods used.
1.7.4 Chapter 4
This chapter discusses in detail the results found by in-depth analysis of the data by using
various statistical tools with the help of Stata13 (Statistical Software Packages).
1.7.5 Chapter 5
Finally, Chapter 5 focuses on research findings constructed on the goals and objectives of this
study, by considering, the main findings observed after data analysis. In addition,
This chapter highlights the background and rationality of this investigation and defines the
problem statement, objectives of the study, research questions and significance of the research
study. The research methods will also provide help to attain the goals and objectives of this
research. In addition, this chapter of the study also provides an overview of the upcoming chapters.
This will also be useful and redrawing to discover all applicable information and data analysis.
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CHAPTER 02
LITERATURE REVIEW
2.1 Overview
This chapter gives the detailed review of literature of previous studies similar this topic of
different span of time. In this chapter, different theories relevant to corporate governance have
been evaluated critically presented by different scholars in past. At the end of this chapter,
association of dependent variable which is performance of the firm and independent variables
After gone through corporate governance in diverse points of view in addition to unique
hypothetical framework. There are the three main theories which are discussed in this study i.e.
Agency theory, Stewardship theory and Stakeholder theory perceived by the researchers to gain
improved sympathetic of corporate governance matters. Subsequently, with the culmination goal
of this investigation, these three theories are utilized as the theoretic framework to give better
Agency theory is defined as “the relationship between the principals, such as shareholders
The agency theory is a view that clarifies the relationship between principals that usually
represent shareholders and agents which represent the managers in business. Agency theory is
concerned to remove or reduce the conflict of interests arise due to unaligned goals. The agency
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theory considers shareholder to be the leaders (principal) and administration is considered as their
Sanda, Mikailu, and Garba (2010) clarified more that the existence of asymmetry
information regarding company affairs and operations can make mediators to instigate interests
that could be averse to the attention and interests of the owner (principal). The procedures of
adjusting these opposite to each other two interests that may provoke the conflict between these
opposite interest groups. Agency theory which shows the dissimilarity to the stakeholder theory
managers are the only who develop the goal and objectives of the principal.
The agency theory investors anticipate that the agents will turn and then make decision in
the best interest of their principal to enhance the performance of the organization. Unexpectedly,
the agents might not really take decision in the best interests of principal due to the main conflict
of the interests (Padilla, 2002). These kind of agency problem was first time introduced by Adam
Smith in the Eighteenth (18th) Century and similar to this way which was investigated by (Ross,
1973). The first comprehensive portrayal of agency theory in which in-depth discussion was done,
was displayed by (Jensen & Meckling, 1976). In fact, the thought regarding such kind of issues
emerging from the separation of ownership among stakeholders and controller in agency theory
The agency theory in which investors are those who are the proprietors(owners) or
principals of the organization, enlists the management (agents) which manage the operation of the
business on their behalf. Principals have authority to appoint the running of business to the
executives or managers who are known as the investors’ agents. (Clark, 2004)
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From the previous studies, agency theory basically clarifies to the corporate governance
and performance of organizations particularly in the banking industry where the fundamental
principles of corporate governance are to secure the benefits of truant proprietors (shareholders)
who are also categorized as the principal of the management (agents). On the premise, this
investigation receives agency theory which is closed by (Akingunola, Adekunle, & Adedipe, 2013;
Osuagwu, 2013; Sanda, et al., 2010) as the theoretic foundation for clarifying the corporate
Davis, et al., (1997) defined to the theory of stewardship “a steward protects and maximizes
the shareholders’ wealth through firm performance, because by so doing, the steward’s utility
functions are maximized”. As per the definition the steward protects and make profit for
a company. Dissimilar to agency theory, the stewardship theory which is not on the point of view
of independence, but rather on the part of best admiration being as stewards, coordinating their
objectives as a major aspect of association, stewards are feel confident and satisfactory when
1991)
Akingunola, et al., (2013) by exploring the concept of stewardship, clarified that manager
are great stewards who tirelessly work to accomplish the abnormal state of benefit and investors
profits. The theory recommend that administrators will be curious in order to realize the objectives
of the shareholder at any cost (Boyd, Haynes, & Zona, 2011). Manager are propelled by
accomplishment this theory is based on that assumption, Non- official executives on the board fill
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Zábojníková (2016) described the stewardship theory and contends that agency theory
looks for economic benefits whether they look towards the employee or people which overwhelms
structures that engage the steward and offers great self- sufficiency based on trust (Donaldson &
Davis, 1991).
perform more self-ruling so that the investors returns are expanding without a doubt and this can
Al Mamun, Yasser, and Rahman (2013) focused that with a specific end goal to secure
their notorieties for being leaders in association, official and executives are unfair to work for the
development of the business organization to expand the financial related execution and investors
benefits. In sense, it is trusted that the associations execution can directly affect individual
performance.
According to (Fama, 1980) the stewardship theory is contended due effective stewards in
their organization executives and higher board of company can build their career.
Morck, Shleifer, and Vishny (1988) represented that to establish a good notoriety manager
need to return back finance to investors, that’s way they can get chance to re-enter in marketplace
in forthcoming. Stewardship Model can have connecting or likeness in different nations like Japan.
Japanese specialists expect the share of agents and takes accountability for employments and work
at them constantly.
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2.2.3 The Stakeholder Theory
The philosophy of stakeholder theory can be described in this perspective “any group or
individual who can affect or is affected by the achievement of the organization’s objectives”.
agency theory in which the administrators worked to serve the stakeholders, but stakeholder theory
guided that administrators of the firm has system that build the network of relationship to serve
like that suppliers, employees and business partners are included in this network. Furthermore, this
was contended that, this category of building system is essential apart from manager, owner and
theory was developed. The criticism on the agency theory referred that the agency theory provides
only short term view and explanations regarding the objectives of the organization whereas long
term perspective of those objectives is ignored (Freeman, 1984). Stakeholder theory can also be
Jensen (2001) has understood that defenders of the Stakeholders Theory have been failed to
give practical arrangements and proper justification in the regard of the various conflicts of those
interests of the stakeholders that organizations necessity to secure. Jensen & Meckling (1976)
“enlightened Stakeholder Theory”. The researchers recommended that a corporate would not have
a capacity to achieve the firm goal of maximization of shareholders’ wealth if any of the
stakeholder is neglected or victimized. The Stakeholder theory has a pivotal role to control
components received by the organizations, such as board size, composition of board, meetings
15
held by board, the size of audit committee and the number of audit committee sessions to which I
governance is an essential prerequisite for the integrity and credibility of financial institutions,
stock exchanges, incorporated companies and the whole market economy. It builds greater
confidence and trust by ensuring transparency, fairness and accountability with respect to
Cadbury report describes the corporate governance is “a system in which companies are
The board of director oversees the usage of corporate governance and the part of investors in
governance is to delegate the executives and the examiners, and guaranteeing that the directors
and examiners has run the fitting governance structure. While the auditor’s part in giving an
official officers, directorate attributes, age and residency of the CEO, and the affectability of CEO
Adeusi, et al., (2013) clarified the term of “Corporate Governance” as “a set of rule and
incentives through which the management of an organization is being directed and controlled”.
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This viewpoint was reached out by (Demaki, 2011) who elaborated that corporate governance
is an established plan which is used to check the over abundances of regulatory directors.
guarantee that the business is performing well in its operations and investors are getting a
reasonable return. A business is called to have watched corporate governance run the show on the
off chance that firm is made transparency, diligence, responsibility and accountability with the
Another researcher (Akingunola, et al., 2013) clarified that the corporate governance is a
key indicator which covers the universal components by which administration is directed to act as
Onakoya, Ofoegbu, and Fasanya (2012) depicts that corporate performance is an essential
idea which identifies with the what’s more, behavior in which the assets such as technical, financial
and intellectuals of an foundations are adequately used to accomplish the general corporate target
of a firm. What keeps relationship in business is essentially its capacity of wisely utilize its
accessible assets and ensure that the suppliers of financial assets and its manager commonly gain
A successful governance component can explain the agency problem. Suppliers of funds
need to guarantee that their cash is shrewdly put and used in a wise manner. The following is a
depiction of the experimental study on the topic of corporate governance and organizational level
17
Naimah (2017) concluded in her research that the principles of corporate governance have
Javaid and Saboor (2015) discussed that good corporate governance builds the good
corporate presentation and availability of outside financing that also brings the practical monetary
development. It makes link among the stakeholders, board, management, controlling and the
minority shareholder.
According to Akbar (2014) conducted a research which revealed that corporate governance
regarding the firms included in the textile sector of Pakistan is affected to performance of those
firm positively and significantly. That’s why, those firms which are the part of the textile sector of
Pakistan, shall expand their corporate governance practices to uplift the performance of the
Kim, Rasiah, and Tasnim (2012) assessed the connection between the corporate
governance and banks financial presentation during the pre and post Asian monetary crisis. Fixed
asset ratio, inventory to capital ratio and capital ratio were deployed as a proxy of corporate
governance while return on equity (ROE) was deployed as a proxy of banks financial performance.
Thus, the results of the quantitative examination reasoned that the corporate governance essentially
Some researchers like Heenetigala and Armstrong (2011) concluded their study which was
conducted to discover the bond in the middle corporate governance and performance of the firm
in term of operations of the firms, in an unstable environment politically and economically in Sri
Lanka. When the firms adopted the code of corporate governance, there was observed a huge and
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significant impact of those codes of corporate governance on the profitability of the firms as well
Another group of researchers, (Gompers, Ishii, & Metrick, 2003) tried to find out a solid
connection between corporate governance and return on investment from onward 1990 and the
Exactly,(Wright, Shaw, & Guan, 2006) demonstrate that the protection of the right of the
Khatab, Masood, Zaman, Saleem, and Saeed, (2011) also concluded that those business
firm which have effective corporate governance regulations accomplishes their objectives in a
better way than those firms which are experiencing an ineffective corporate governance.
The Board size can be defined as “the total number of directors on the board”. When we
study the literature, we discover mixed conclusions in literature regarding the effect of board size
Abdulazeez, NdibeL, and Mercy (2016) conducted a study in which it was examined the
corporate governance effects on the financial performance of fifteen money deposited banks
which are listed in Nigeria for the period of seven years. The collected data tested through Pearson
correlation and Regression was used to analyze the data. They used board size as an explanatory
variable to and ROA and ROE were proxied as explained variables. They concluded that greater
the size of the board donates positive and significant relationship to the monetary performance of
19
Akbar (2014) examined the bond amid board size and two firm performance proxies return
on equity (ROE) and return on Assets (ROA) in which he used a sample size of twelve (12) textiles
companies which were listed in Karachi stock exchange (KSE) in Pakistan for the period five years
from 2007 to 2011. The researcher included the size of the board as one of the explanatory
variables along with other explanatory variables and return on assets (ROA) and return on equity
(ROE) were used as explained variables for measuring the performance of the firm. Similar to
previous study, this study also found significant and positive affiliation between small size of board
and return on assets (ROA) while got different results in ROE. There was no significant
Akola, Amudat, and Arulogun (2012) conducted the research on the topic for investigating
the impact of corporate governance on overall performance of banking sector of Nigeria banking
by utilizing the Pearson correlation and regression analysis to investigate the connection between
corporate governance factors and financial performance of banks in which the total number of
members including in the board is used as an independent variable in company with some other
independent in which a significant but adverse relationship was reported amidst board size and the
Lubabah and Bawa (2013) analyzed financial performance of banks in company with
corporate governance by using a sample size of twelve (12) banks in Nigeria casing five years as
a period for which data is collected and analysis is done from 2006 to 2010. They also discovered
Topak (2011) found a different type of results in his study regarding board size and firm
performance. He exposed the association of board size and performance of Turkish companies
20
Weterings and Swagerman (2011) investigated the influence of board size on the value of
firms in which one hundred and fifty five property firms in company with real estate investment
trust listed in the different exchanges of different estates i.e. Malaysia, Singapore and Hong Kong.
An optimistic relationship was seen between board size and performance of those property firms
but an insignificant result was observed between board size and real estate investment trust.
Guest (2009) also tried to assess the effect of number of members in the board on the
performance of firms having such board size by means of sample of 2746 companies which have
a registered firm status. The data was collect for twenty-two years from the year 1981 to 2002. The
researcher finds out that the size of the board has strong negative influence on the variables used
as indicators of firm performance. Furthermore, the findings also exposed that firms having a
massive size are affected more in negative than those of firm having small size.
Garg (2007) explored in his study an inverse affiliation amid board size and performance
Based upon the above discussed phenomenon, the succeeding hypothesis is developed.
HA: There is a significant and positive relationship between board size (BS) and financial
Board composition (BC) means the proportion of non-executive directors in overall board.
Different studies were done and all those studies quoted different results regarding composition of
21
Abdulazeez, et al. (2016) concluded that there is insignificant association in the middle of
composition of the board and performance, financially, of fifteen (15) money deposited banks
In any case, the discoveries of (Heenetigala & Armstrong, 2011) regarding twenty-nine
(29) banks in Nepal for a time period of six years by means of the utilization of regression study,
demonstrates that non-executive directors i.e. board composition have positive and substantial
There is also a different viewpoint regarding this study,(Ehikioya, 2009) concluded his
study with no evidence found in provision of the relationship in the middle board composition
According to (Kajola, 2008), he concluded his study regarding corporate governance and
its different influences on the performance of the some listed banks in Nigeria in the vicinity from
2000 to 2006. he found an insignificant association between composition and performance. These
result were additionally, consistent with the results of (Adeusi, et al., 2013; Bhagat & Black, 2001;
Kajola, 2008; Lubabah & Bawa, 2013) who additionally included that the performance of listed
banks has a tendency to be more awful when there would be more non-executive members in board
of directors.
According to (Brickley, Coles, & Terry, 1994), the external directors of the board when
contrasted with other dependent directors of the board take more understanding and information,
so, they can impact the corporate governance practices. The outcomes on positive level of external
22
ambiguous. It was recommended that a positive affiliation occurs amidst the existence of the non-
Another research study conducted by (Klein, Shapiro, & Young, 2005) found no proof
regarding composition of board which influences the firm performance. In the organizations,
which are classified as family firms, an abnormal state of board independence improves
performance.
Chin, Vos, and Casey (2004) additionally asserted that the level of external directors have
a minor effect on general firm performance. In view of above mentioned arguments, mixed results
HB: There is a significant and positive relationship between board composition (BC) and
financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.
Investors’ concerns are secured over the exercise of audit committee (AC) since
administration may not generally move in the light of a legitimate concern for organization’s
proprietors. Studies regarding in support of a large audit committee (AC) set that when extra
individuals are engaged with inspection the exercises of supervisors, bad behaviors will be
Abdulazeez, et al.(2016) found that there is positive and important relationship amid the
size of audit committee (AC) and financial performance of money deposited banks listed in stock
exchange of Nigeria.
23
Similar to the findings previous discussed researcher, (Kallamu & Saat, 2015) concluded
that an important and confident relationship amid audit committee (AC) size and firm performance
of thirty-seven (37) financial corporations which were registered in the central market of Bursa
Malaysia.
Nonetheless, different specialists like (Kajola, 2008) detailed that there is no positive
affiliation between size of audit committee (AC) and performance of the firm.
bond between audit committed (AC) size and firm performance is incorporated.
Adams, Burton, and Hardwick,(2003) revealed that no evidence found in support of any
Xie, Davidson III, and DaDalt, (2003) assessed that there is a positive association between
From the previous studies, there occurred a diverse response regarding the relationship
between size of AC and firm performance. The situation of Prakash and Martin build up a sound
logic as the concentration of investors could be secured by various people who will be hard to
Some researchers established a positive and significant affiliation between audit committee
(AC) size and company’s performance. On the other side of this study could not establish any kind
Therefore, the following hypothesis can be generated in the light of above described
literature:
24
HC: There is a significant and positive relationship between audit committee (AC) size and
financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.
According to the requirement of the revised Pakistan CCG (2017), organizations are urged
to have consistent board meetings for releasing obligations and duties. It is essential for the board
to have at least four (4) meetings in a year. Likewise, it is compulsory for the board to reveal the
quantity of meetings by the board of directors which were held throughout in a year and facts about
the participation by each single director regarding meetings taken. The details of every meeting
such as number of meetings, attendance record etc. should be unveiled by the board in annual
enhancing the viability of the board (Conger & Lawler, 2009).It is contended that BM and
participation of such meetings are thought to be essential networks over with directors of the
companies acquire companies important information and arranged to satisfy their control part.
Makhlouf, Hidayah, Ali Basah, and Ainna Ramli (2017) explored the association amidst
the board of directors’ effectiveness and firm execution of one hundred and twenty (120) non-
financial companies registered in Amman Stock Exchange (ASE) over a spell of 5 years from 2009
to 2013. Five characteristics of the executives’ board were used to measure the effectiveness of
the panel such as panel size, panel composition, panel meetings, panel ownership and leadership
structure. The performance of the companies was measured with both market and accounting base
performance indicators i.e. Tobin’s Q and return on assets (ROA) and established that there is an
important and positive relationship in the middle of board meetings (BM) and company’s
performance.
25
According to (Johl, Kaur, & Cooper, 2015) , by examining the impact of panel
characteristics and companies execution in which board characteristics were proxied as meetings
of the board, panel size, independence of the panel and board financial expertise at the same time
companies performance was measured with the help of ROA by using both commercial and non-
commercial data from annual report of the 700 registered public companies in Malaysia for the
year 2009. The researcher concluded that meetings of board are raised to have an adverse effect
An investigation led by (Francis, Hasan, & Wu, 2015) demonstrated that organizations
with indigent board participation in meetings execute significantly inferior than that board
whatever has more board meetings attendance during the period of financial crisis.
Ntim and Oseit (2011) led a study to test the impact of commercial board meetings on
corporate performance of one hundred and sixty nine (169) firms which are registered in South
Africa for the term of 2002 to 2009 by using the board meeting frequency as independent variable
and firm performance as an explained variable. Furthermore, concluded that study the similar
outcomes in the middle of panel meetings and performance of the companies, where the board that
Yasser (2011) carried out a study to inspect the effect of corporate governance on non-
family and family contained companies performance in context to Pakistan. In conducting this
study, the researcher used seven hundred and ninety-two registered companies in KSE as a sample
size which is now has been merged into Pakistan Stock Exchange (PSX) from the spell of five
years from 2003 to 2008. The research findings revealed a significant and positive linkage in the
middle of board meeting and companies’ performance which is counted by return on assets (ROA)
26
There are some other analysts that consider that board meetings are not really valuable
because of the restricted time, external executives go through with the organization and consider
such time that could be better used for a higher important trade of thoughts with the administration
Additionally, frequent meetings include administrative time and increment traveling cost,
directors meeting remuneration and management support requirements. That may influence the
organizational actions inside the organization, as assets are being directed against less profitable
Johl (2006) led an investigation in the UK among Financial Times Stock Exchange (FTSE)
100 firms and created that there was exist a negative association in the midst of panel meetings
and the performance of the business. Based upon the above discussed arguments, there have been
uncertain results regarding the frequency of panel meeting with performance of various firms
included in the study. What’s more there is a heavy convergence of existing studies on developed
countries like USA (United States of America), Russia, Germany and UK (United Kingdom)
which have various institutional context and corporate governance proceedings where the
effectiveness of board meeting on the performance of the companies that can be anticipated to be
HD: There is a significant and negative relationship between board meeting (BM) and financial
27
2.4.5 Audit Committee Meeting (ACM) and Firm Performance
The recurrence of AC meetings attributes “to the frequency by which the AC members
meet”. It is further anticipated that Audit committee (AC) which interacts with its members
frequently is more effective to monitor the managerial activities than those which conduct less
number of meetings with its members. In Pakistan, it is compulsory for AC to meet with its
members at least once in a year. Usually, chairman of the AC in consultation with secretary call
Different studies which were conducted on this topic revealed mixed findings. Different
researchers have their own viewpoints regarding the role of numbers of AC meetings on firm
performance.
features equally AC size, total number of board session held in a year, economic expertise of AC
representatives and their autonomy, and the companies’ market performance was measured by
using Tobin’s Q and financial performance of the firm is measured with the help of ROE of
seventy-two (72) non-economic companies which were registered in London Stock Exchange
(FTSE 100) amid the period of five years from 2011-2015. The results showed the positive and
significant affiliation between the total of meetings held throughout the year. The market and
Bansal and Sharma (2016) carried out a study on the character of AC individuality,
occurrence of meetings, promoter shareholding, CEO duality, board size board composition as
proxies of corporate governance and ROA, ROE for financial performance whereas Tobin’s Q for
market funding as proxies of companies performance. By using a sample size of two hundred and
thirty-five (235) non-economic public companies which were listed in National Stock Exchange
28
(NSE) 500 of India for the period of ten years from 2004 to 2013. Findings of this study did not
reveal any significant result of the frequency of AC meetings on the fiscal performance of Indian
listed firms.
Hsu and Petchsakulwong (2010) evaluated the association amidst of corporate governance
and adaptability performance of public non-life insurance corporations in Thailand for the term
of 2000 to 2007. The results also showed a negative relationship which is existed between audit
Khanchel (2007) assessed the relation in the middle of corporate governance and execution
of six hundred and twenty-four (624) US (United States) listed non-commercial organizations for
the time of nine years from 1994 to 2003 by using Tobin’s Q as firm market performance indicator.
The results of the study revealed that there was a positive affiliation between ACM and the
performance of one hundred and three (103) registered firms which were drawn from different
countries i.e. South Africa, Ghana, Nigeria and Kenya for the time of five (5) years from 1997 to
2001 by using Tobin’s Q as a proxy of firm performance. The outcomes concluded that there was
a positive connection shown in the middle of ACM and the performance of the firms.
By dint of above discussed arguments, a mixed relationship is established between the audit
committee meetings (ACM) and firm performance. Hence, the successive hypothesis can be
expected:
HE: There is a significant and positive relationship between audit committee meetings (ACM)
and financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.
29
2.4.6 CEO (Chief Executive Officer)/ Chairman Duality and Firm Performance
Arslan, Zaman, Malik, and Mehmood (2014) defined the term “CEO Duality” as a person
who holds both the position Chairman of Board as well as the CEO in an organization.
According to (Finkelstein & D'aveni, 1994) the term “Duality” portrays the corporate
authority construction in which one individual holds the both places of CEO what’s more,
As per the revised CCG under the companies Act 2017 of Pakistan the place of Chief
Executive Officer (CEO) and the Chairman of board should be dissimilar from one another.
It was discovered an insignificant relation between CEO Duality and ROA and ROE which
were the indicators for measuring the firm performance (Abdulazeez, et al., 2016).
Another researcher (Akbar, 2014) also tried to explore the corporate governance influence
on firms performance in the textile sector of Pakistan by using 12 textile companies which were
listed in KSE for the term of four (4) years (2007-2011). The corporate governance is calculated
by explanatory variables i.e. concentration of ownership, panel size and CEO/Chair duality.
Whereas ROE and ROA were adopted as proxies for the measurement of performance of the
companies. The findings showed that CEO duality affected both ROA and ROE positively and
significantly.
Chen, Lin, and Yi (2008) assessed the impression of CEO/Chairman duality on firm
performance after monitoring the essential proxies such as characteristics of the firms, CEO
remuneration, ownership structure and activity cost. The findings could not reveal any significant
30
According to the study of (Harjoto & Jo, 2009) in which the impact of corporate
governance was investigated and checking instruments for the choice of board structure, the
performance along with the value of a firm by utilizing a vast and broad sample size for the period
of ten year from 1995 to 2005. The empirical evidences revealed that CEO Duality effect the firm
performance positively at initial phase of the firm during which it negatively effects the value of
In addition, (Sridharan & Marsinko, 1997) also investigated this wonder in the paper and
forestry item industry of United States of America (USA). The outcomes demonstrated that
organizations with double part of CEO makes well as they improve usage of advantage and creates
more prominent net revenues as imitated by sophisticated market estimation of these organizations.
Also, the double part of CEO will empower the official to appropriate extra independence and
influence in dealing with the firm happenings and tactical decision making, consequently, the firm
Bawa and Lubabah, (2012) placed that CEO duality is not supported for an effective
communication in the middle of CEO and board. In this way, the purpose of increasing
performance, the dual part of CEO should be demoralized in its total. The researcher found
significant but positive relation amid CEO duality and performance of the firm.
On the other side, some researcher found no significant connection amid CEO duality and
companies’ performance. Furthermore, (Rhoades, Rechner, & Sundaramurthy, 2001) revealed that
31
In the light of above discussed arguments, this is assessed that there is a mixed relationship
between audit CEO duality and firm performance. Hence, the coming hypothesis can be
developed:
HF: There is a significant and positive relationship between board size and financial
In this chapter, different studies of the different researchers are critically evaluated along with
their findings in a summarized way. Hypotheses are also developed on the basis of the reviewed
literature.
32
CHAPTER 03
RESEARCH METHODOLOGY
3.1 Overview
This chapter will exhibit a detailed discussion regarding the strategies and techniques that
are utilized to achieve the main targets of this study. The importance of the methodology is concise
on the part of the past research with the objective that its significance can be figured it out. So, in
such manner, different theoretical research philosophies and approaches have been talked about in
detail along with that research methods and approach which is selected for this study. Each study
needs to manage certain moral issues which have an influence on the results of the study and
ethical issues identified with current study are additionally abridged in this chapter. Moreover, the
techniques which are used in this study and the selected sample size which will provide a major
help to the reader in measuring the techniques which are used for the current study. Data collection,
one of the key elements of the investigation is also explained in this chapter.
3.2 Methodology
The main purpose of conducting this research in quantitative measure is to conclude the
Pakistan Stock Exchange (PSX). So, there is a need to apply some quantitative techniques or to
use statistical methods for the subject of obtaining empirical results as evidence. This kind of
approach is called the deductive approach in research. In this research, the impact of corporate
33
Different elements of corporate governance are explained and their impact is observed with
the help of the literature for supporting the idea of this study. Particularly, this study is conducted
on Money Deposited Banks listed in Pakistan Stock Exchange. For the listed banks in Pakistan
Stock Exchange, there are some important prudential regulations that must be fulfilled by the banks
Creswell (2014) sum up different views and debates into four assumption ontology,
epistemology, axiology and methodology , the two most important assumption are taken into
consideration i.e. ontology and epistemology. Ontology depicts the nature of reality about the idea
of knowledge whereas epistemology deals with how we know about the concept of knowledge and
what we know about any reality or truth (Lincoln, Lynham, & Guba, 2011).
In positivism worldview with respect to ontology and epistemology, there is a singular truth
which develop a sense in form of objective and researcher remain impartial regarding the collection
of data about that reality which is further analyzed through different statistical tools.
There are two types of overall approaches i.e. inductive and deductive approach.
In inductive approach, the new theory is generated in the body of knowledge while an
existing theory is verified and tested in deductive approach (Crotty, 1998). Cresswell (1998)
Expressed the induction approach as a relationship between human subjects meaning and actions
are utilized as observation and then analyzed. In inductive approach, there is no creation of prior
assumptions but provision of deep understanding regarding logic and human actions.
34
This method is recommended by (Creswell, 2014) for qualitative study in which new
knowledge is generated.
Thomas (2006) defined the deductive approach as “the general inductive approach provides
an easily used and systematic set of procedures for analyzing qualitative data that can produce
reliable and valid findings”. Deductive approach is used to test the set objectives in form of
hypothesis and to analyze the data which support the existing theory. This method is recommended
by (Creswell, 2014) for quantitative study in which researchers set certain assumptions and then
financial performance of money deposited banks listed in Pakistan Stock Exchange (PSX). That’s
why we have selected deductive approach for our study to assess the diverse theories of corporate
Different researcher gave the different names to the philosophical assumptions Guba
(1990) defines it as “a basic set of beliefs that guide action”. While Creswell (2014) termed them
as “Worldviews” and divided into four categories i.e. post positivism, constructivism,
transformative and pragmatism, (Guba, 1990; Lincoln, et al., 2011) explained them as paradigms
The most widely used and discussed approaches are discussed here one is post positivism
35
3.5.1 Post positivism approach
The followers of the post positivism worldview consider it as a traditional form of research
(Creswell, 2014). They believe that the absolute truth can be obtained by means of observation
and experiments (Guba, 1990; Lincoln, et al., 2011). Sometimes, it is termed as doing scientific
research or scientific method of research. There are some other terms are also used in place of post
positivism such as empirical science, positivist and post positivist research. In post positivism or
positivism approach determines causal-effect relationship among various elements of reality with
the help of observations and experiments (Phillips & Burbules, 2000). It is typically seemed as an
The supporters of the interpretivism have opposite beliefs against positivism, they believe
that knowledge can only be acquired by means of having good understanding of the concept of the
knowledge and exploring it in the world where they work and live. Interpretivism is also called as
qualitative research.
In this study author, has not chosen the interpretivism approach because sufficient
Therefore, theory can be verified instead of generating new theory by taking prior assumptions of
singular reality rather than multiple realities. Such kind of studies are taken into consideration by
adopting positivism, so, positivism is selected as philosophical approach for this study.
36
3.6 Research Design
Research design is the roadmap to effectively address the research problem. It is the set of
strategies to align the whole research process. Research design is the whole picture of collection,
measurement and analysis of data. In this study, the ex post facto research design is selected, which
examined, how independent variable affects the dependent variable without random placement of
participants by using panel data for the period of ten years from 2007 to 2016 as it takes into
consideration for the collection of multi-dimensional and past data which give premise to the full
foundation of the relationship between corporate governance and the financial performance of
There are two types of data sources one is called the primary data source and the other is
The data which is collected by the researcher for some specific purpose is called primary
data. i.e. observations, interviews, questionnaires etc. While data which is collected by someone
other and utilized in research for specific purpose is known as secondary data. i.e. documents,
In this study, the secondary data source is used which is collected through the annual
reports of the Money Deposited Banks listed in Pakistan Stock Exchange. All the data is collected
37
3.6.2 Population and Sample Size
Population is the set of elements i.e. objects or things having similar qualities,
In this study, all the money deposited banks are selected as population which are listed in
Pakistan Stock Exchange. There are twenty banks which are listed in Pakistan Stock Exchange.
These listed banks are chosen because only these can be termed as public banks and can be
expected to comply fully with the requirements of the corporate governance set by the PICG. which
38
Table 3.1: List of Banks
The employed population of this study is composed of twenty listed banks in Pakistan.
Whatsoever, these banks are also selected as the sample size for this study as well. Aside from the
way that the compulsory data for all the foretasted banks are accessible. The main reason behind
of this is to give more scope to generalizing the results and findings as past studies regarding to
39
this area covered less bank and short span of time. Practically. WP = n, where WP is equals to the
working population and n is equal to the sample size. In past, (Abdulazeez, et al., 2016; Lubabah
& Bawa, 2013) had also used in their working population as a sample size.
In this study, basically, there two variables and one control variable is used. Corporate
dependent variable. The size of the firm is used as a control variable in this study which is proxied
The performance of the banks is used as an explained variable in this study for which two
proxies for the measurements of the banks performance are used one is ROA and second one is
ROA is one of the main predictor of firm performance and profitability. ROA is calculated
by dividing the net profit after tax by the total assets of the banks to investigate that how
productively the assets of the banks have been used to generate maximum wealth.(Abdul Rahman
40
Return on Equity (ROE)
Return on equity (ROE) is calculated by dividing the net profit after tax by the total equity
of the shareholders of the banks which indicates the profitability and financial performance of the
banks. This method for measuring the financial performance of banks is used by (Abdulazeez, et
Corporate governance is the explanatory variable along with the following proxies and
measurements.
Board size represents the total number of directors in the board of a certain bank. There
should not be more than twenty (20) members in the board of directors as stated by the code of
corporate governance. This study assesses the degree of which banks’ performance will be affected
PICG focuses that there must be sufficient mix of board member. One third of the total
members of the board must be non-executive director. This is the number of external (non-
41
CEO/Chairman Duality (CD)
CEO duality occurs when single individual grips both the positions i.e. Chairman and CEO
of the company. CEO duality is used as a binary variable. For banks with one (1) value is assigned
if CEO and Chairman of the banks are separated and zero (0) value is assigned otherwise.
According to the PICG (2017) there should be two different offices for the post of the chairman
According to the necessities of the CCG (2017), there should be at least three member in
AC. AC is measured by the total members in AC. Further, it is anticipated that the higher the
number of members in accord with the set limit by CCG, the healthier the performance of the
banks.
According to the prerequisite of the revised Pakistani CCG (2017), organizations are urged
to have consistent board meetings for releasing obligations and duties. It is essential for the board
to arrange at least four (4) sessions during the calendar year. BM is the total number of meeting
Investors’ benefits are secured over the exercise of audit committee since organization may
not generally perform in the light of a legitimate concern for organization’s proprietors. Studies
regarding in support of a large audit committees, stated that when more individuals are engaged
with checking the exercises of supervisors, bad behaviors will be diminished and performance will
be improved. ACM frequency means the total number of audit committee meetings which are
42
Control variable
The size of the banks is taken into consideration as a control variable in this investigation
which is counted by the total assets of every bank. The natural logarithm was occupied for reducing
the large values of the banks’ total assets due to reason of large values of the total assets of the
banks. Which could create difficulty at the time of running the regression analysis for data.
Performance might be affected due to some supplementary factors which are not captured in the
explanatory variables (independent variables). So, size of the firm (FS) is utilized as a control
Dependent variable
Return on Asset ROA Calculated by dividing the net profit after tax to total
Return on Equity ROE Counted by dividing the net profit after tax to total
Independent Variables
Board size BS Total number of members in board of directors
Board Composition BC Proportion of non-executive (external) directors in
board
CEO Duality CD One (1) value is assigned if CEO and Chairman are
Separated and zero (0) for the same.
Audit Committee AC Total number of members in audit committee
Audit Committee Meetings ACM Total number of audit committee meetings held in a
year
Board Meetings BM Total number of audit board meetings held in a year
Control variables
Firm size FS Natural logarithm of the total net assets of the banks
43
3.7 Theocratical Framework
Independ Variables
Dependent Variables
Corporate Governance
Board Size
Board Composition
CEO Duality
Audit Committee
size
Audit Committee
Meeting Firm Performance
Board Meeting
Return on Assets
Return on Equity
Control Variables
Firm Size
44
Model Specification
This study implements and adjusts the econometric model which is also used by
Model (1)
Model (2)
t = time
a0 = constant term
BS = Board size
BC = Board composition
CD = CEO Duality
BM = Board meetings
FS = Firm Size
All the data is collected through the annual audited reports of the listed banks. Annual audit
reports are downloaded from their official websites. The collected data is entered in Statistical
software STATA 13 for performing different data analysis. Different pre-and post-statistical
analysis are done with the help of these software i.e. descriptive analysis, correlation analysis,
regression analysis and multicollinearity tests to strengthen the study. The details of all the analysis
In this research, some ethical issues are taken into consideration. Firstly, all the data are
collected with complete honesty and analysis of the data are done because of data collected.
Researcher did not show any personal biasness in the study so that the objectives of the study can
be achieved. Seriousness and great care is shown by the researcher while collecting the data and
applying different analysis and their interpretations. For the acknowledgment to the researcher,
proper citation and End list referencing have been made. All the results depend on the data given
In this chapter, main viewpoints, tactics and different approaches of the research has been
discussed with the proper justification of chosen the relevant philosophy, suitable approach and
supported methods for this study. Furthermore, research design, brief introduction of analysis,
46
CHAPTER 04
In this chapter, to evaluate the impact and relationship between corporate governance and
financial performance of the banks, quantitative data technique is used. The performance of the
listed banks is counted by means of ROA and ROE as dependent variables and different
independent variables along with control variable. Based on secondary data, analyze some
descriptive tests. Analytical Techniques begin with descriptive tests and use different regression
model estimates to get the effect of dependent variables on the explanatory (independent)
variables. OLS model, lag range multiplier, multicollinearity test and Pair wise correlation analysis
for the relationship between variables. The research section describes the analysis of this study.
The table 4.1 describes the results of a statistical sample by calculating the basic statistical
parameters. The descriptive examination of the study reveals that the sum of observations, mean
values, standard deviation, minimum values and maximum values of the data.
47
Table 4.1: Descriptive Statistics
The descriptive analysis of the study represents that ROA has the number of the
observations is 200, the mean value is .007023 that shows the average ROA is 0.07% annually
and the standard deviation of ROA is .0178413 which represents the variance and deviation from
mean in data and minimum and maximum values of ROA are -.092 and .0438 respectively.
The mean value of ROE is .055607 that defines the banks give the return on equity 5% per
anum and the standard deviation value is .3163617 that depicts the variance of the data. -1.989 and
.3766 are the minimum and maximum values of the data with respect to ROE. Comparatively,
ROE has the greater standard deviation which represents ROE is riskier than ROA.
Likewise, the Average value of BS is 8.62 which displays that approximately 9 members
are included in the Board of directors in average and the deviation in BS is 1.735123. 4 and 13 are
the lower and upper boundaries of the members in the board of directors.
48
The average value of BC is .618644 which explains that about 61.8 % of the total members
of the board are the external (non-executive) directors. The value of standard deviation is 0.227359
which represents the expected change in the composition of board. The maximum value of BC is
The CD mean value .965 explains that 96.5% of the banks are those which have separate
AC average value is 3.92 which defines that there are about 4 members in audit committee
on average and .9686545 shows the standard deviation. Audit committee of banks contains
The mean value of BM 6.51 which displays the normal number of BM held during the year.
There was minimum 3 and maximum 17 sessions held throughout the year by board.
The mean value of ACM 5.565 which shows the average figure of audit committee
meetings detained in a year. There was minimum 3 and maximum 28 meetings held in a year by
board.
The average value of size 12.42231 that represents the average log of total assets of the
49
4.3 Pair-wise Correlation Matrix
Correlation analysis portrays the relationship among different variables. The table 4.2
BC 0.1659 1
CD 0.1783 -0.1489 1
The results of analysis show that there is a positive and but not too strong because their
value is less than 0.50 except one pair of variable among BS (board size) and BC (board
composition) with the value of .1659, BS and CD (CEO Duality) having the value of .1783, BS
and Size, BC and AC (audit committee), BC and ACM (audit committee meetings), BC and size,
AC and BM, AC and ACM, AC and Size, BM and ACM, BM and Size, and ACM and Size with
the values of .2389, .0958, .5480, .1663, .3501, .1541, .2991, .2514, .2368, .1978 and .2899
respectively.
50
There is negative relationship is found but not too strong among different pairs of variables
such as BS and BM, BS and ACM, BC and CD, BC and BM, CD and AC, CD and BM, CD and
ACM, CD and size having the values of -0.0289, -0.0929, -0.1489, -0.1245, -0.1002, -0.2752, -
When the predictors are multiple, there is a chance of multicollinearity. The existence of
multicollinearity does not matter but its severity is. According to Gujarati (2009) predictors are
very relevant if the VIF of the variables is greater 10 and the TV is less than 0.10, if the VIF is
greater than 5 but less than 10, there exists mild multicollinearity which is ignorable. If the VIF is
less than 5 it shows no multicollinearity exists between the variables. The table represents the
51
4.4.1 Interpretation of Multicollinearity
The above results show that VIF values of all predictors is less than 10 and TV is also
greater than 0.10. In addition, mean value of VIF of all the variable which is 1.86 also less than 10
that concludes that there is no multicollinearity among the predictors of the study.
4.5 OLS Model, Random Effect Model (REM) and Fixed Effect Model (FEM) for ROA
There are three models are regressed on our panel data that is OLS model, Random effect
model and Fixed effect model and results are as under as follows:
By using ROA as a proxy for the measurement of performance, we run regression by using
the three models i.e. OLS, FE and RE model. By using OLS model, RE (random effect) model and
FE (fixed effect) model, we obtain the results which show that Board size, Board composition,
52
Audit committee and Board meetings impact on ROA significantly while CEO Duality and Audit
LM Test
Breusch and Pagan Lagrangian multiplier test for the selection of better model between
Results
chibar2(01) = 11.67
So, the researcher rejected the null hypothesis which shows that Random Effect model is
good fit.
F restricted test
F restricted test is applied for the chosen of appropriate model between OLS and Fixed
Effect model.
53
Results
F= 10
So, the researcher rejected the null hypothesis which recommends that FE model is good
fit.
Hausman Test
By applying the Hausman test, the researcher tested the following hypothesis for the
Results
The researcher got the results chi2 = 3.25 while Prob > chi2 = 0.8607. However, the
researcher failed to reject the null hypothesis that shows the RE model is most appropriate for the
54
4.6 OLS Model, REM and FEM for ROE
There are following three models are regressed on our panel data that are OLS, RE and FE
Explanation
By using ROE as a proxy for the measurement of performance of banks, the researcher run
regressions by using the three models i.e. OLS, FE and RE model. By using OLS model, RE
(random effect) model and FE (fixed effect) model, he obtained the results which show that Board
size, Board composition, Audit committee and Board meetings impact on ROA significantly while
55
4.6.1 Selection of Appropriate Model for ROE
LM Test
Breusch and Pagan Lagrangian multiplier test for the selection of better model between
Results
chibar2 = 29.19
So, the researcher rejects the null hypothesis which shows that Random Effect model is
good fit.
F restricted Test
F restricted test is applied for the chosen of appropriate model between OLS and Fixed
Effect model.
Results
F= 13
So, the researcher rejects the null hypothesis which recommends that FE model is good fit
56
Hausman test
By applying the Hausman test, the researcher tested the following hypothesis for the
Results
The researcher got the results chi2 = 19.14 while Prob > chi2 = 0.0078. However, the
researcher rejects the null hypothesis that represents FE model is most appropriate for the
57
4.7 Final Regression Analysis for ROA and ROE
According to the results of Hausman test for both performance measures i.e. ROA and
ROE, RE model is chosen for ROA and FE model is suitable for measuring the performance by
means of ROE.
Interpretation of intercept
For model 1, C is the constant term, the coefficient value of C is -.0782579 which represent
that the performance in term of ROA will be equal to -.0782579 units by keeping all other
58
While for model 2, coefficient value of C is -1.378438 that represents that performance of
the banks in term of ROE is equal to -1.378438 units by keeping all other variables to be constant.
Interpretation of BS
According to model 1, coefficient value of BS is .0014434 that shows that one-unit increase
in BS will bring .0014434 units increase in performance of Pakistani listed banks in terms of ROA
on average by keeping all other explanatory variables constant. T-statistics is 1.85* with one steric
which represent at 5% level of significance BS has a positive and committed relationship with
While in model 2, coefficient value of BS is .0769329 that shows that one-unit increase in
BS will bring .0769329 units increase on average in performance of the banks with respect to ROE
while keeping all other explanatory variables constant. 3.48* is T-statistics with one steric which
Interpretation of BC
In model 1, .0280132 is the coefficient value of BC that defines that one-unit increase in
BC will bring .0280132 units increase in performance of registered banks in PSX in terms of ROA
on average by keeping all other explanatory variables constant. T-statistics is 4.83*** with three
steric which represent at 1% level of significance BC has a positive and significant relationship
While in model 2, coefficient value of BC is .2207765 that shows that one-unit increase in
BC will bring .2207765 units increase on average in performance of the banks with respect to ROE
while keeping all other explanatory variables constant. 1.85* is T-statistics with one steric which
59
represent at 10% level of significance BC has a positive and significant relationship with
Interpretation of CD
will bring -.0062105 units decrease in performance of PSX listed money deposited banks in terms
of ROA on average by remaining all other independent variables as constant having very low T-
statistics i.e. -.75 with no steric which represents that CD has negative but insignificant relationship
CD will bring .0249813 units increase in performance of listed banks in terms of ROE on average
by remaining all other independent variables as constant having very low T-statistics i.e. 0.16 with
no steric which represents that CD has no significant relationship with performance of banks in
terms of ROE.
Interpretation of AC
In model 1, AC has the coefficient value of .0025767 that describes one-unit increase in
AC will bring .0025767 units increase in performance of Pakistani listed banks in terms of ROA
on average by remaining all other independent variables as constant having T-statistics i.e. 1.95*
with one steric which represents that at 10% level of significance, AC has a positive and significant
Whereas in model 2, AC has the coefficient value of .0532653 that describes one-unit
increase in AC will bring .0532653 units increase in performance of the banks by using ROE as a
proxy measure on average by remaining all other independent variables as constant having T-
60
statistics i.e. 2.09** with two steric which represents that at 5% level of significance, AC has a
Interpretation of BM
In model 1, BM has the coefficient value of -.0019436 that shows one-unit increase in BM
will bring -.0019436 units decrease in performance of banks in Pakistan with respect to ROA on
average by putting all other independent variables as constant having T-statistics i.e. -3.28*** with
three steric which represents that at 1% level of significance, BM has a negative and significant
increase in AC will bring -.0098795 units increase in performance of the banks by using ROE as
a proxy measure on average by remaining all other independent variables as constant having T-
statistics i.e. -0.77 with no steric which specifies that BM has a negative but insignificant
Interpretation of ACM
In both models, coefficient values of ACM are -.0002915 and -.0020115 respectively with
very low T-statistics i.e. -.62 and -0.21 that explains ACM has neither relationship with ROA nor
ROE.
61
Interpretation of Size
In both models, coefficient values of Size are .005287 and .038391 respectively. T-
statistics values are 4.61*** and -3.22*** with three steric that represents firm size has and
significant and positive relationship at 1% level of significance with ROA while in case of ROE
Size of the banks has a negative but highly meaningful relationship with the performance of the
banks.
According to the hausman test RE model is good fit for measuring the performance of the
banks by using the ROA while in case of ROE, FE model is good fit for our study. Overall R
squared depicts the descriptive power of the model. In model 1, the value of overall R squared is
50.21% as given in the table 4.8. R-squared displays that change in dependent variable
(Performance) is 50.21% due to independent variable while the rest of the change in performance
Whereas in model 2, overall value of R-squared is 20.95% as given in the table 4.8. R-
squared portrays that change in dependent variable (Performance) is 20.95% due to explanatory
variables while the rest of the change in performance due to other factors such as control variable
62
4.8 Hypothesis testing and discussion
After conducting regression analysis by using random effect model for ROA which is used
as a proxy for performance of the banks whereas fixed effect model is used for measuring the
performance of the banks in which ROE is taken as an indicator for the assessment of the
performance of listed banks. The hypothesis discussed in the Chapter 2 will be accepted or rejected
The first hypothesis of this study HA defines that there is a significant and positive
relationship between board size and firm performance calculated by using ROA and ROE. The
results of the random effect panel data regression are consistent with this hypothesis. So, the
researcher rejects our null hypothesis against this hypothesis. It means that BS can influence the
performance of the money deposited banks listed in PSX. this study is also supporting the findings
of (Abdulazeez, et al., 2016; Adeusi, et al., 2013; Akbar, 2014), all of them established that greater
board size donates more in the performance of the banks than lesser size of the board of directors.
Furthermore, our study is inconsistent with the study of the (Akola, et al., 2012; Akpan & Riman,
2012; Bawa & Lubabah, 2012; Osuagwu, 2013; Topak, 2011) those recommend the smaller board
size has more contribution in the performance of banks than bigger size of the board.
The second hypothesis HB indicates that BC has a positive and significant impact on
performance of the firm counted by ROA and ROE. The outcomes of our regression analysis
confirm that there is a positive and highly significant relationship between BC and performance of
the money deposited banks listed in PSX which indicates more number of external (non-executive)
63
members in the board play a significant role in the performance of the banks. So, the researcher
rejects the null hypothesis against BC. The results of our study are consistent with the study of
(Heenetigala & Armstrong, 2011) who also found a strong relationship between board composition
The third hypothesis of this study HF represents that CD has a significant relationship with
the performance of the banks. We investigate no association between CD and performance of the
banks measured with the help of ROA and ROE. Thus, the failed to reject the null hypothesis
against H33. It means CD does not matter in the performance of banks in Pakistan. The findings of
this study are consistent with the results of (Abdulazeez, et al., 2016) who also identified an
performance indicator. On the other hand, this study is inconsistent with the study of (Akbar, 2014;
Lubabah & Bawa, 2013) who concluded that a significant impact of CD on firm financial
performance.
The fourth hypothesis HC predicted that there is a positive and significant relationship
between AC size and financial performance of the listed banks in Pakistan. Since the outcomes of
regression analysis, the researcher found a significant and positive relationship between AC size
and the performance of the banks which shows that AC size can positively influence the
performance of the banks in Pakistan. this study also proves the study of (Mollah & Talukdar,
2007; Zábojníková, 2016) who also investigated a positive and significant impact of AC on the
financial performance. On the other side, our results are incompatible with the results of (Kajola,
64
2008; Mak & Kusnadi, 2005) who discovered a negative and insignificant association between AC
The fifth hypothesis HD which anticipates a significant impact of board meeting and
financial performance of money deposit banks in Pakistan. The results obtain by regression
analysis represents a negative but significant association between BM and financial performance
of banks by using ROA. The findings of this are similar with the findings of (Conger & Lawler,
2009; Francis, et al., 2015; Johl, 2006). In case of ROE, the researcher could not find any
substantial impact of BM on performance of the banks in Pakistan which in accord with the results
The last hypothesis HE predicts that ACM have a significant impact on financial
performance of the banks in Pakistan but in our regression analysis the researcher finds that there
is insignificant impact of ACM on the performance. So, the researcher failed to reject the null
hypothesis against H66. It implies that there is negative but minor impact of audit committee
meetings on the performance of the banks in Pakistan. These results are similar to the results of
(Bansal & Sharma, 2016) who also found an insignificant impact of ACM on financial
Firm size is taken as a control variable which shows the significant and positive connection in
65
4.9 Comparison of the REM and FEM
According to hausman test, REM is chosen for measuring the performance in term of ROA
and FEM is selected for the measurement of performance by using ROE as an indicator. In both
model BS, BC, AC are significant but BM is significant is model 1 but BM is insignificant in
In this chapter, different analysis is done. At start, descriptive analysis and pair-wise
correlation matrix analysis is done. After that three models of regressions are presented along with
the explanation. At the end, hypotheses are tested and results are explained.
66
CHAPTER 05
This chapter provides a comprehensive summary about the impact of corporate governance
on the financial performance of the banking sector of Pakistan and provides recommendations on
the basis of empirical findings and analysis that may provide guidance to the regulatory body of
banking sector in Pakistan for improvement of financial performance of the banking sector. Main
results of this study are discussed. Finally, the limitations and future recommendations are
discussed.
In the business context, corporate governance is an essential factor that affects a company’s
performance because owners and managers are two different things. In recent years, the area of
corporate governance has grown in importance by cause of the increasing number of administrative
frauds like Enron and WorldCom. Numerous studies have been led in developed countries to
examine the perceived connection between corporate governance gears and corporate
performance. This study also examines a similar phenomenon in context to banking sector in
Pakistan. A comparative analysis of regression estimates, random effects and fixed effects on the
extent to which Pakistani banks adopt a corporate governance structure in line with corporate
governance guidelines from 2007 to 2016. The value of data depends upon the twenty Money
Deposited Banks listed in PSX for the period of ten years from 2007 to 2016. Corporate
governance is measured by different variables such as Board Size (BS), Board Composition (BC),
CEO Duality (CD), Audit Committee (AC) size, Board Meetings (BM) and Audit Committee
Meetings (ACM) while ROA and ROE are taken as indicators for measuring the performance of
67
the banks by using Firm Size as a control variable which is proxied by the total assets of every
The outcomes of regression analysis represent that board size has a significant and positive
relationship with ROA and ROE. The results of the descriptive statistics express that the average
size of the board of banks in Pakistan is approximately 9 members. The regression analysis reveals
that banks having bigger board size impact performance of the banks more than those having small
board size. Furthermore, when the BS is large, it’s hard for a person (probably Chief Executive
Officer) leading the board, the board made the decision seems to be derived from strong and
constructive arguments. Board Composition and Audit Committee size are also significant
positively. Whereas Board Meetings is negatively significant with the performance of banks with
5.2 Recommendations
It is recommended that the board size of the banks should be large because it is directly
impact the performance of the banks but the maximum figure of members in board should not be
members in the board because they are experts people and having diversified experiences in
business. Their expertise are positively affects the performance of the banks in Pakistan.
The banks should avoid unnecessary board meetings because they have negative impact on
performance of banks in Pakistan. It may be due to heavy expenses occurred on conducting the
68
5.3 Limitations
The scope of this research study is focused to limitations on sample size. Sample size is
consisted of 20 money deposited banks which listed in PSX. These registered banks are nominated
The findings of this study are generalizable only to the listed banks in Pakistan. The size
of the sample is very small, prohibiting an in-detail study of the relationship between the variables.
The results may vary if the sample size is large. The study period includes the period from
2007 to 2016 and the data are collected from the banks’ annual reports as a secondary source of
data and results are based on the available information in annual reports.
Due to time and data limitations, non-listed banks are not involved in this study.
Despite the result and the methods used in this study, the results and comments may be biased due
In this study, due to the different limitations, only listed banks are included while in future
the study on this topic can be conducted by taking a comparison with non-listed banks or with
another sector. The new variables can be added regarding board of directors i.e. their qualifications
This chapter presents the broad conclusions and recommendations which are based on
findings and results of this study. In addition, this chapter also discusses the limitations and future
research directions.
69
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Appendixes
Appendix A: List of Tables
Sr. No. Name of tables
BS Board size
BC Board Composition
CD CEO Duality
AC Audit Committee
BM Board Meetings
FS Firm Size
79
PSX Pakistan Stock Exchange
80