Impact of Corporate Governance on Firm Performance: a Case of Insurance Industry of Pakistan

Topics: Financial ratio, Insurance, Pearson product-moment correlation coefficient Pages: 16 (4578 words) Published: November 28, 2012
Impact of Corporate Governance on Firm Performance—an Empirical investigation from the Insurance Industry of Pakistan Hafiz Muhammad Raheel Arif*
*COMSATS Institute of Information Technology and Science Lahore, Pakistan

The study is devoted to check the impact of corporate governance (CG) on the firm performance (FP) of the insurance industry of Pakistan. Four measures have been used in the paper to check the firm performance being affected by the corporate governance. These measures are Return on Assets (ROA), Return on Equity (ROE), and Market to Book ratio and Price Earnings ratio. Data of 24 insurance 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 Ordinary Least Square (POLS) regression technique is used to regress the data. Findings of this study conclude that Institutional Shareholding ratio, Board Size and Independent Directors’ ratio affect firm performance in the positive way whereas, CEO duality, Firm size, and Leverage have negative impact on firm performance overall when firm performance measured through four different measures. In future, the study may be extended to more corporate governance variables and increased sample size so that more generalized results may be achieved. Key words: Corporate Governance, Firm Performance, Insurance Industry, Pakistan.

orporate governance has now gained very much importance in the corporate world. Almost in all the countries around 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 Code of Corporate Governance [*]. Various studies have attempted to probe into the relationship of corporate governance with the firm performance in the corporate world across various countries. The study strives to investigate the impact of corporate governance on firm performance in the Insurance industry of Pakistan. The study basically 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 ensure the best practices of corporate governance in Pakistan. Najjar (2012) investigated the relationship of corporate governance with firm performance by empirically examining this relationship of CG and firm performance in the insurance industry of the Behrain. In his study Naser Najjar (2012) used only Return on Equity as a measure of the financial performance. This study employs more financial performance measuring variables like Return on Assets, Market to Book ratios, and Price Earnings ratios by controlling firm size and the leverage ratio. Naser Najjar (2012) found a positive association between firm size and the performance of the insurance companies suggesting that as the size increases the assets are more with the firms in the form of insurance policies and firms efficiently manage 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 Return on Assets. Board size showed a negative 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 board size is negatively associated with the firm performance due to the reason of board’s composition of inside as well as outside directors, and inside directors would have relatively high level of information regarding company’s internal affairs than outside directors and inside directors would work in their own interest and may confiscate the rights of shareholders and as the number of inside directors increases it makes the performance down. While another...

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