Impact of Corporate Governance Practices on Financial Performance: Empirical Evidence from Pakistan

Abstract

Corporate governance refers to the mechanism which ensures that the affairs of a corporate body are conducted in order to serve and protect the individual and collective interests of all stakeholders. It ordains that while a firm is achieving its goal of shareholder’s wealth maximization, this achievement should not be at the expense of other stakeholders. This study attempts to find an empirical evidence for impact of corporate governance practices on firm’s financial performance. A sample of 50 non financial firms (listed on any one of three stock exchanges in Pakistan) was randomly selected. The study period covers from 2003 to 2005, thus covering 150 firm years. To measure the quality of Corporate Governance practices in the sample firms, a Corporate Governance Index (CGI) consisting of 30 indicators/parameters was developed which measures the strength/quality of Corporate Governance practices. These CG index scores for each firm were then compared with the financial performance indicators i.e. ROA, ROE, Price to Book ratio and P/E of the sample firms to find out any relationship between them. The results show that CGI scores are positively associate with ROA, ROE and Price to Book (P/B) ratio and statistically significant. P/E is also positively correlated with CGI scores but the impact is insignificant.