Reconnecting the Ownership Structure and Independence with Financial Performance: An Empirical Evidence from Manufacturing Sector of Pakistan

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Date: June 30, 2014
From: Pakistan Journal of Social Sciences(Vol. 34, Issue 1)
Publisher: Knowledge Bylanes
Document Type: Article
Length: 2,964 words
Lexile Measure: 1380L

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Byline: Masood-ul-Hassan Sadia Shaukat and Muhammad Saqib Nawaz

Abstract

Debate on the corporate governance is among contemporary issues in business. In consistent with this research stream this study aims to find the impact corporate governance elements i.e. independence (board and audit committee) and ownership structure (ownership concentration and managerial ownership with financial performance (EPS and Market to Book ratio). For this purpose 500 firm-year observations of 50 non-financial companies (for the period of 2001 to 2010) listed at Karachi Stock Exchange (KSE) are used for analysis. The findings of the study show that corporate governance has significant impact on firm performance. The implication and limitations of the study has also been discussed.

Keywords: Corporate Governance Firm Performance Pakistan Karachi Stock Exchange

I. Introduction

Sound corporate governance has emerged as a crucial success factor in national and international market. Countries all over the world are keen to encourage good corporate governance to ensure fairness transparency and accountability in the corporate sector and safeguard the interest of all stakeholders especially the minority shareholders. Empirical evidence also put forward that jurisdiction that adheres to good governance practices tend to attract more capital. The importance of corporate governance structure and practices has been reinforced by recent financial crises. The structure of corporate governance plays pivotal role in not only improving organizational performance but also in sustaining competitive advantage (Erickson Park Reisingand Shin 2005)

The separation of owners and managers gives rise to agency problem. Managers have control over the resources and they can utilize them for their self-interest. The primary aim of the organization is maximizing the shareholders wealth. To achieve this aim managers should behave in the ways that maximizes the shareholders wealth. However behavioral and other social sciences provide the evidence that humans are self- interested. Therefore the effective governance system is required which can oversee the activities of the individuals. Moreover the effectiveness of the governance system depends on the corporate governance quality. According to Shah Butt and Hassan (2009) the corporate governance quality depends on the independence (board independence and audit committee independence) and ownership structure (managerial ownership and ownership concentration).

A plethora of studies provided the evidence between independence and ownership structure and organizational performance. But the results are mixed and cannot be generalized. For instance several studies stated that opportunistic actions can be taken due to privileged information in case of stock ownership (Yermack 1997; Bartov and Mohanram 2004). And many other studies suggest that managerial ownership increases the shareholder wealth by removing the agency problem.Similarly the results of the literature focusing on linkage of independence and ownership structure with firm performance are mixed (KrishnamoorthyandMaletta 2012; Larcker 2011).

Considerable research work has been done on the relationship between structure of corporate governance and organizational performance particularly in developed world. However there is limited literature on the influence of corporate governance tools such as board independence audit committee independence managerial ownership and ownership concentration. Moreover despite the great importance and well discussion on corporate governance it is still controversial...

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Gale Document Number: GALE|A411668350