Corporate Governance Index, Financial Performance, Access to Finance and Bankruptcy Prediction: Evidence from Sugar Sector of Pakistan

Abstract

The purpose of this study is to develop a corporate governance index and to investigate the influence of corporate governance index on the financial performance of firms, access to finance and bankruptcy prediction of sugar sector listed firms on Pakistan Stock Exchange during the period 2008-18. Data of 30 sugar sector firms listed on PSX have been used for analysis. Corporate governance index is developed on the basis of 19 attributes, covering 4 broad categories: Board structure, its functionality, disclosure of information and committees of board. The fixed and random effect models have been used based on Haussmann specification test for analysis purpose. This study shows that there is a positive relationship among corporate governance based on corporate governance index and firm performance when performance is measured in term of market capitalization and it has negative relationship when performance of a firm is measured is terms of return of assets, return on equity and net profit marginal. Further corporate governance index has positive relationship with access to finance when it is measured with KZ index and SA index while there is no direct relationship observed among corporate governance index and access to finance when measured by WW index. The results of the study shows that there is positive linkage among corporate governance index and bankruptcy prediction when bankruptcy prediction is measured by Working Capital/Total Asset ratio and negative relationship with bankruptcy predictions when measured by using Retained Earnings/ Total Asset, Earnings before interest and taxes/ Total Asset, Sales/ Total Asset, Cash flow/Total debt, Net income/ Total Asset and Total debt / Total Asset ratios. Results of the study suggest that good corporate governance practices lead towards better firms financial performance and improves the chances to acquire finance.