Impact of Corporate Governance on Firm Performance

touch on of Corpo localise ecesis on hard exertionan Empirical investigating from the indemnification Industry of Pakistan Hafiz Muhammad Raheel Arif* emailprotected com 00923216190575 *COMSATS Institute of Information Technology and Science Lahore, Pakistan hook The engage is devoted to check the collision of corporal political science (CG) on the fuddled transaction (FP) of the policy industry of Pakistan. Four measures guide been use in the paper to check the mansion execution of instrument being alter by the in corporald system. These measures be hold back on Assets (ROA), degenerate on right ( roe), and Market to Book proportion and Price hire ratio.Data of 24 indemnification companies is taken from websites of the companies and Karachi Stock Exchange website for the years 2007-2011 making up 107 observations excluding the missing observations. Pooled intermediate Least Squargon (POLS) regression technique is apply to regress the data. Findings of thi s national conclude that institutional Sh beholding ratio, dialog box coat and unaffiliated Directors ratio affect cockeyed effect in the positive guidance whereas, chief operating officer dichotomy, household surface of it of it, and supplement surrender oppose impact on unbendable movement overall when cockeyed public presentation measured through and through four diametric measures.In future, the check may be extended to to a greater extent(prenominal) bodily governance variable stars and increased sample size so that more generalized results may be achieved. Key words corporeal brass section, besotted proceeding, indemnity Industry, Pakistan. Introduction C orporate governance has now gained real such(prenominal) vastness in the corporate world. Almost in all the countries well-nigh the globe corporate governance has become mandatory and is regulated by the concerning bodies. Like in Pakistan, this is mandatory for the corporations to comply with the best practices according to the cypher of collective Governance *.Various studies have attempted to probe into the tellingship of corporate governance with the smashed cognitive operation in the corporate world across various countries. The study strives to investigate the impact of corporate governance on level performance in the Insurance industry of Pakistan. The study essentially extends the findings of Naser Najjar (2012), in his study Naser * Code of corporate governance is included in the Regulation No. 37 for the listing regulations of Karachi Stock Exchange to see to it the best practices of corporate governance in Pakistan.Najjar (2012) investigated the parityship of corporate governance with hard performance by empirically examining this semblanceship of CG and unassailable performance in the amends industry of the Behrain. In his study Naser Najjar (2012) used all submit on Equity as a measure of the pecuniary performance. This study employs more f inancial performance measuring variables like succumb on Assets, Market to Book ratios, and Price net income ratios by peremptory watertight size and the supplement ratio.Naser Najjar (2012) prime a positive knowledge mingled with firm size and the performance of the indemnification companies suggesting that as the size increases the assets are more with the firms in the form of insurance policies and firms efficiently wield things to an ultimate gain. In their study Ming-Cheng Wu, Hsin-Chiang Lin, I-Cheng Lin, and Chun-Feng Lai found the positive relationship of firm size with the performance when measured by tax return on Assets. display panel size coming into courted a banish relation in the past studies as in the study of Ming-Cheng Wu, Hsin-Chiang Lin, I-Cheng Lin, and Chun-Feng Lai they found that jump on size is banly associated with the firm performance due to the reason of boards composition of inside as well as outdoor(a) directors, and inside directors wou ld have relatively mellowed level of information regarding comp any(prenominal)s internal affairs than outside directors and inside directors would work in their own interest and may grab the rights of shareholders and as the number of inside directors increases it makes the performance down.While some other(prenominal) study, Bacon (1973) gave a different opinion that larger board size positively affects the performance justifying in a way that larger board usually comes with a alter background and qualifications which generates different viewpoints and hence increases quality of managerial conclusions. One a nonher precise important way to keep corporate bodies by trim back agency issues is to separate the chief executive officer from Chairman (William et al. 2003).If these two characters are performed by a unmarried individual, is known as chief executive officer Duality. This situation if exists, inflicts firm performance as in that respect would be no one to take in the watchers (Zubaidah 2009). Independency of directors yet another variable to reduce confiscation of shareholders rights as self-sufficing directors would work in the best interest of the shareholders. The more the in pendant directors in the board, higher will be the performance of the firm (Zubaidah 2009).Upcoming sections are composed as Next section reviews the literature regarding the variables of corporate governance and performance measure. Then there comes the methodology section followed by the findings and results with death at the end. Review of Literature Enormous studies empirically investigated the relationship between corporate governance and firm performance regarding various types of industries and across the world. Insurance industry is one of the financial sectors of any economy and it continuously gaining importance in Pakistan.Likewise, the issues of governing corporate bodies are raised during practices, the reason the study intends to check impact of co rporate governance on the firm performance in the insurance industry of Pakistan. A number of studies used ROE and ROA as a measure of performance while checking for the impact of corporate governance on these variables. Naser Najjar (2012) found that there does not exist any real association between CEO Duality as a measure of corporate governance and Return on Equity (ROE) as a performance measure.Masood Fooladi Chaghadari (2011) found negative relation between CEO Duality and firm performance which tells some the fact that if a single person acts as CEO and Chairman of the board it will reduce the performance of a firm. The study of Sanjai Bhagat & Brian Bolton (2007) overly suggests the alike(p) results the separation of CEO and Chairman of the board is positively and evidentiaryly associated to the firm performance. Anthony Kyereboah-Coleman (external Conference on somatic Governance in Emerging Markets) in his study found that CEO duality has negatively relationship with the firm performance.Sanjai Bhagat & Brian Bolton (2007) found very interestingly the negative relationship of board independence with operating performance and made it relevant that with respect to the board independence which received corporate governance listing requirement from NYSE and NASDAQ. Masood Fooladi Chaghadari (2011) found negative relation of supplement with ROA and positive relation of the same variable with ROE. Anthony Kyereboah-Coleman ( global Conference on Corporate Governance in Emerging Markets) also found negative relation of leverage with Return on Assets. Methodology I. Sample DataThe study initially undertook data of randomly selected 27 insurance companies of Pakistan from 2007-2011 making up 135 observations out of which 3 companies acquainted incomplete information due to which they were excluded from the study and 13 observations were missing in the data. The study then includes 107 observations. Data is calm from Karachi Stock Exchange (KSE) and w ebsites of insurance companies. Current study has used Pooled Ordinary Least Square (POLS) regression method to regress the data unruffled to fulfill the objective of measuring impact of corporate governance on firm performance. II.Models In order to measure the firm performance the topical study uses 4 different measures viz. Return on Assets (ROA), Return on Equity (ROE), Market to Book ratio (MB ratio), and Price Earnings ratio (PE ratio) and variables Board Size (BS), institutional Shareholding ratio (ISH ratio), CEO duality (CEOD) and Board Independence as corporate governance variables while leverage ratio (LEV) and tighten Size (FS) are controlled and included in the samples as follow- Perf(ROA) jit = ? 0 + BS jit? 1 + ISH jit? 2 + CEODjit? 3 + IDjit? 4 + LEVjit? 5 + FSjit? 6 + ? Perf(ROE) jit = ? 0 + BSjit? 1 + ISHjit? 2 + CEODjit? + IDjit? 4 + LEVjit? 5 + FSjit? 6 + ? Perf(MB) jit = ? 0 + BSjit? 1 + ISHjit? 2 + CEODjit? 3 + IDjit? 4 + LEVjit? 5 + FSjit? 6 + ? Perf(PE)ji t = ? 0 + BSjit? 1 + ISHjit? 2 + CEODjit? 3 + IDjit? 4 + LEVjit? 5 + FSjit? 6 + ? Where Perfjit= Firm Performance measured by ROA, ROE, MB, and PE ratios form firm j, ith observation at time t. ?0= the intercept. BS = Board Size ISH = institutional Shareholding CEOD = CEO Duality ID= In interdependent Directors LEV = Leverage Ratio FS = Firm Size ? = Stochastic disturbance term, and all the betas are coefficients of change rate in the variables against one unit increase.III. Variables Definition bow 1 AcronymVariable NameProxies reliant Variables ROAReturn on AssetsProfit Before Tax/ good Assets ROEReturn on EquityEarnings Available to shareowner/Total Equity MBMarket to Book ratioMarket price Per Share/Book re apprise Per Share PEPrice Earnings ratioMarket price Per Share/Earning Per Share individual Variables BSBoard Size physical body of Directors in the Board of Directors ISHinstitutional ShareholdingPercentage shares held by institutional Investors CEODCEO DualityDummy var iable, equals to 1 if CEO and Chairman is the same person or 0 otherwise.ID unconditional DirectorsThe ratio of No. of Independent Directors/Total Number of Directors in the Board of Directors LEVLeverage ratioTotal Debt/Total Assets FSFirm SizeNatural Log of Total Assets Results circumvent 2 discusses the descriptive statistics of all the variables including dependent variables Return on Assets (ROA), Return on Equity (ROE), Market to Book ratio (MB), and Price Earnings ratio (PE). The slopped value of PE 5. 134 is less as compared to the other dependent variables which denote the lower earnings gained by insurance companies as compared to the mean value of ROE which is 12. 91 which is almost double and depicts the picture that insurance companies earn more on equity. BS mean value 10. 654 shows that on average nearly 11 numbers of directors is part of the board having a standard warp of 1. 108. On the average 40. 489% of all the issued share of an insurance go with are held by institutional investors with a standard deviation of 6. 333%. The ratio of CEOD in the insurance industry of Pakistan is 0. 477 which expresses that on the average there are 47. 7% companies where CEO and Chairman is the same individual.The mean value of ID, 0. 425 tells about the average ratio of board independence in an insurance company in Pakistan. Leverage value of 0. 581 shows that on average an insurance company employs 58. 1% debt in the capital anatomical structure ratio. parry 2 Descriptive Statistics MeanMinimumMaximumStd. Deviation ROA9. 631-25. 63852. 78320. 035 ROE12. 791-53. 85989. 36936. 980 MB5. 1343. 427. 781. 456 PE10. 3428. 716. 62. 059 BS10. 6549121. 108 FS16. 72916. 17917. 2130. 288 ISH40. 48931. 23053. 9306. 333 CEOD0. 477010. 502 ID0. 4250. 2220. 6670. 091 LEV0. 5810. 3990. 6930. 073 put off 3 imitates summary tells about the R-Square(s), correct R-Square(s) and the Durbin-Watson determine which tell about the fact that is there any auto- correlation pr oblem? The metric values for the models individually tell that there is not auto-correlation problem as all the values are in the range 1. 5-2. 5. Adjusted R-Square of model 4(PE) is largest 0. 897 which tells that all the covariates explain the model by 89. 7%, while the Adjusted R-Squared value of model 3 is smallest 0. 722 which explains about 72. 2% of the model. Table 3 Models Summary ModelRR SquareAdjusted R SquareStd.Error of the EstimateDurbin-Watson 1 (ROA)0. 9370. 8770. 8707. 22601. 913 2 (ROE)0. 8620. 7430. 72819. 3001. 982 3 (MB)0. 8590. 7380. 7220. 7681. 907 4 (PE)0. 9500. 9020. 8970. 6622. 257 Table 4 tells about the individual significance of the four models used in the study. The F-value of model ROA is 119. 139 and p-value is 0. 000 which tells that the model is large, while the F-value for model ROE is 48. 189 and p-value is 0. 000 which is significant. F-value of model MB is 48. 863 and p-value is 0. 000 which is again significant and the model PE is also signi ficant as the p-value for that model is 0. 00. All the models are significant at 5% level of significance. Table 4 ANOVA Model Sum of SquaresdfMean SquareFSig. 1 (ROA)Regression37325. 50766220. 918119. 1390. 000 Residual5221. 53310052. 215 Total42547. 040106 2 (ROE)Regression107706. 536617951. 08948. 1890. 000 Residual37250. 738100372. 507 Total144957. 274106 3 (MB)Regression165. 773627. 62946. 8630. 000 Residual58. 9571000. 590 Total224. 730106 4 (PE)Regression405. 554667. 592154. 0760. 000 Residual43. 8701000. 439 Total449. 424106 Table 5 narrates the Pearson correlation coefficients for the model 1 where the dependent variable is ROA.Institutional Shareholding has the largest coefficient 0. 845 which means that it has a strong positive relationship with Return on Assets. Firm size also has significantly positive relation with the return on assets. Board size unexpectedly showed a very anaemic relationship with the return on assets, the coefficient is 0. 048. CEO duality is anoth er case which has a weak positive relationship with ROA, the coefficient of CEOD and ROA is 0. 034. The empirical demonstrate shows that there is negative relation between firm size, institutional shareholding, leverage and board size either the relations among these variables are not strong.Leverage also have negative but near to zero relation to the firm size. Board independence (ID) is also negatively associated to the institutional shareholding. Table 5 Pearson Correlation ROABSFSISHCEODIDLEV ROA1 BS0. 0481 FS0. 556-0. 0451 ISH0. 845-0. 2130. 3911 CEOD0. 0340. 2140. 0360. 0921 ID0. 2360. 0750. 707-0. 097-0. 0301 LEV0. 441-0. 010-0. 0010. 425-0. 321-0. 1531 Table 6 discusses the regression coefficients when the dependent variable is ROA. The results show that all the coefficients are significant except the firm size and CEO duality.Firm size has negative relation with the return on assets which is consistent with the literature. CEOD has negative impact on the firm performance w hen it is measured by ROA the results are not significant but support the literature. While, Board Size (BS), Institutional Shareholding (ISH), Independent Directors (ID), and Leverage has positive impact on firm performance. in that respect is no multi-collinearity problem with the variables as suggested by the VIF values. Table 6 Coefficients ModelVariablesUnstandardized Coefficients interchangeable CoefficientstSig.Collinearity Statistics BetaStd. ErrorBeta ToleranceVIF 1(Constant)-179. 18670. 247 -2. 5510. 012** BS4. 1100. 6870. 2275. 9850. 000*0. 8501. 176 FS-0. 8464. 625-0. 012-0. 1830. 8550. 2783. 595 ISH2. 8300. 1730. 89516. 4020. 000*0. 4132. 424 CEOD-2. 2511. 620-0. 056-1. 3900. 168***0. 7461. 341 ID71. 95713. 3210. 3275. 4020. 000*0. 3342. 993 LEV26. 02312. 1630. 0952. 1400. 035**0. 6201. 613 Dependent Variable ROA. *, **, *** show 1%, 5% and 10% significance level respectively. Table 7 discusses the Pearson correlation coefficients now taking Return on Equity as depend ent variable.Again consistent with the previous model, Institutional Shareholding has the largest coefficient which shows a strong relation of ISH with ROE. COED has the smallest coefficient but has positive association with the ROE. BS has negative relation with Firm size, ISH and Leverage which in line with the literature. Independent directors ratio is negatively associated to the ISH but has a weaker relationship. ID has also inverse relation with leverage and also has weak relation. Table 7 Pearson Correlations ROEBSFSISHCEODIDLEV ROE1 BS0. 0531 FS0. 485-0. 0451 ISH0. 739-0. 2130. 3911 CEOD0. 0190. 2140. 0360. 0921ID0. 2890. 0750. 707-0. 097-0. 0301 LEV0. 371-0. 010-0. 0010. 425-0. 321-0. 1531 The results of some of the variables are now different form the results of the previous model where dependent variable was ROA. In the table 8, the dependent variable is Return on Equity (ROE), the reason why leverage has become insignificant. Board size, Firm size, Institutional Sharehol ding, and Independent directors ratio are the statistically significant variables. While COED and Leverage are insignificant but both have positive impact on firm performance. The Institutional Shareholding has largest beta coefficient of 0. 20 which means every 1% increase in Institutional Shareholding will increase firm performance by 0. 920. CEOD has negative impact on firm performance which is consistent with the findings of Masood Fooladi Chaghadari (2011). VIF values depict the absence of multi-collinearity problem in the variables. Table 8 Coefficients Model Unstandardized Coefficients Standardized CoefficientstSig. Collinearity Statistics BetaStd. ErrorBeta ToleranceVIF 2(Constant)138. 509187. 627 0. 7380. 462 BS7. 1561. 8340. 2143. 9020. 000*0. 8501. 176 FS-31. 18112. 354-0. 243-2. 5240. 013**0. 2783. 595 ISH5. 3790. 4610. 92111. 6720. 00*0. 4132. 424 CEOD-5. 4804. 326-0. 074-1. 2670. 208***0. 7461. 341 ID218. 28535. 5810. 5386. 1350. 000*0. 3342. 993 LEV20. 27232. 4860. 04 00. 6240. 5340. 6201. 613 Dependent Variable ROE. *, **, *** show 1%, 5% and 10% significance level respectively. Consistent with previous models, Institutional shareholding ratio has largest coefficient which strong relationship with firm performance. Board size, CEO duality and independent directors ratio found to have negative but weak relation with firm performance in this model. Independent directors ratio has negative association with Institutional shareholding.Independent directors ratio is negatively associated to the leverage ratio also. Firm size has strong positive relation with independent directors ratio the correlation coefficient between these two variables is 0. 770. Table 9 Correlations MBBSFSISHCEODIDLEV MB1 BS-0. 0411 FS0. 005-0. 0451 ISH0. 624-0. 2130. 3911 CEOD-0. 2240. 2140. 0360. 0921 ID-0. 0310. 0750. 770-0. 097-0. 0301 LEV0. 375-0. 010-0. 0010. 425-0. 321-0. 1531 In Table 10 dependent variable is Market to Book ratio. In this model Firm Size (FS), COE Dualit y and Leverage have negative but significant impact on firm performance.Variables Board Size, Institutional Shareholding and Independent Directors ratio have positive and significant impact on firm performance. negative coefficient of FS -0. 927 means every unit increase in firm size will lead to -0. 927 times decrease in firm performance. The results are consistent with the previous literature. VIF statistics show that there is no multi-collinearity problem. Table 10 Coefficients Model Unstandardized Coefficients Standardized CoefficientstSig. Collinearity Statistics BetaStd. ErrorBeta ToleranceVIF 3(Constant)67. 2377. 464 9. 0080. 000* BS0. 2590. 0730. 1973. 5540. 001*0. 501. 176 FS-4. 6920. 491-0. 927-9. 5470. 000*0. 2783. 595 ISH0. 2740. 0181. 19014. 9240. 000*0. 4132. 424 CEOD-1. 0680. 172-0. 368-6. 2070. 000*0. 7461. 341 ID11. 0621. 4160. 6927. 8140. 000*0. 3342. 993 LEV-2. 8151. 292-0. 142-2. 1790. 032**0. 6201. 613 Dependent Variable MB. *, **, *** show 1%, 5% and 10% signi ficance level respectively. In table 11, dependent variable is Price Earnings ratio and it shows the Pearson Correlation coefficients. Inconsistent with the previous models, Institutional Shareholding has negative and strong relationship with Price Earnings (a measure of firm performance).In this model Leverage also has strong negative relationship with firm performance. Firm Size, ISH, and LEV are negatively associated with Board Size. But only the leverage has negative relation with Firm size, CEO duality and Independent Directors ratio. Independent Directors ratio has strongly positive relationship of 0. 707 with Firm size. Table 11 Pearson Correlations PEBSFSISHCEODIDLEV PE1 BS0. 0531 FS0. 406-0. 0451 ISH-0. 582-0. 2130. 3911 CEOD-0. 1050. 2140. 0360. 0921. 0 ID0. 6680. 0750. 707-0. 097-0. 0301 LEV-0. 575-0. 010-0. 0010. 425-0. 321-0. 1531In table 12 all the independent variables are significant except for Board Size, the only variable which is insignificant but is negatively as sociated to the firm performance. This is also consistent with previous literature. Values of VIF tell about the absence of multi-collinearity in the variables. Table 12 Coefficients ModelUnstandardized CoefficientsStandardized CoefficientstSig. Collinearity Statistics BetaStd. ErrorBeta ToleranceVIF 4(Constant)-38. 3486. 439 -5. 9560. 000* BS-0. 0720. 063-0. 039-1. 1460. 2550. 8501. 176 FS3. 6760. 4240. 5148. 6700. 000*0. 2783. 595 ISH-0. 2000. 016-0. 615-12. 6330. 00*0. 4132. 424 CEOD-0. 6570. 148-0. 160-4. 4250. 000*0. 7461. 341 ID4. 3461. 2210. 1923. 5590. 001**0. 3342. 993 LEV-9. 4391. 115-0. 336-8. 4670. 000*0. 6201. 613 Dependent Variable PE. *, **, *** show 1%, 5% and 10% significance level respectively. Conclusion Corporate governance plays a pivotal role in the performance of Insurance Companies. There are different statutory bodies in different countries which control and ensure the best practices in the corporations like in Pakistan Securities and Exchange commitment of Pakistan is responsible for monitoring and controlling such practices in the corporations.This study finds that Board Size (BS), Institutional Shareholding (ISH) and Independent Directors ratio have positive and significant impact on corporate governance. The reasons are if Board size is large, the board has fragments having diverse background, more viewpoints, and competitive and experienced individuals which lead towards right decision making and towards better performance as compared to the industry norms. Institutional investors have more interest in the investment and management skills which adds to the performance of the firm.The more the Independent Directors in the board, the more the transparency and integrity which ultimately leads towards deepen performance. CEO duality have negative impact on the firm performance due to reason that inefficiencies and mismanagement in the operations is not watched by any independent person which make the performance of the company wors e. The study also finds that Firm Size and Leverage also have negative impact on firm performance. As the size of the firm increases due to the reason of diseconomies of scale it puts worse impact on the financial performance of the firm.For the future research, scholars may increase the sample size to hold fast more generalized results and there should be included more corporate governance variables like family ownership, concentration, directors remuneration and many others. References Najjar, Naser (2012). The Impact of Corporate Governance on the Insurance Firms Performance in Bahrain. International Journal of Learning & Development ISSN 2164-4063 2012, Vol. 2, No. 2 Zubaidah Z. A. , Kamaruzaman J. and Nurmala M. K. (2009). Board structure and corporate performance in Malaysia.International Journal of Economic and finance 1(1) 150-164. Williams S. M. and Ho C. A. (2003). International Comparative Analysis of the Association between Board grammatical construction and the effici ency of Value Added by a Firm from its Physical great(p) and Intellectual Capital Resources. 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