The impact of internal attributes of corporate governance on firm performance

Abstract

PurposeThe purpose of this paper is to investigate whether internal attributes of corporate governance such as board size, outside directors, CEO duality, managerial ownership, and ownership concentration affect the performance of Pakistani firms.Design/methodology/approachPanel econometric technique namely pooled ordinary least squares is used to estimate the relationship between internal governance mechanisms and performance measures (i.e., return on assets, return on equity, earnings per share, and market‐to‐book ratio) using the data of non‐financial firms listed on the Karachi stock exchange Pakistan during 2004‐2008.FindingsThe empirical results indicate that board size is positively, whereas outside directors and managerial ownership are negatively related to the return on assets, earnings per share, and market‐to‐book ratio. Ownership concentration is positively related to all measures of performance used in this study. CEO duality is positively related to earnings per share only. As far as control variables are concerned, leverage is negatively related to the return on assets, return on equity, and earnings per share. Alternatively, firm size is positively related to all measures of performance. In sum, empirical results indicate that internal governance mechanisms have material effects on firm performance.Practical implicationsEmpirical results provide support to managers to understand how internal governance mechanisms affect the firm performance. Moreover, results provide support to regulatory authorities for enacting laws to make internal governance mechanisms work more effectively in the country.Originality/valueThis paper contributes to the literature by exploring the effects of internal governance mechanisms on firm performance using the data of Pakistani firms. Moreover, empirical findings somehow proceed to confirm that theories of corporate governance surely provide some support to explain the relationship between internal governance mechanisms and firm performance.