Impact of Corporate Governance on Financial Performance of

Commercial Banks: An empirical study of Pakistan Stock Exchange

(PSX) listed Banks

Thesis Submitted to the

Hailey College of Commerce

University of the Punjab

Lahore

In partial fulfillment of the

Requirements for the degree of

Master of Commerce
(18 years)
By
Asad Ullah
Roll No: MC 14-060
Session: 2014-2018
Registration No: 2012-sps-50

Hailey College of Commerce, University of the Punjab, Lahore

i
ii
 Hailey College of Commerce
University of the Punjab, Lahore, Pakistan
DECLARATION TO BE FILLED BY THE STUDENTS AT THE TIME OF
SUBMISSION OF THESIS TO THE SUPERVISOR AND/OR FOR EXTERNAL
EVALUATION
Section1: Particular of the Student
1.1 Full Name ASAD ULLAH
1.2 Father's Name SAIF ULLAH
1.3 Roll. Number MC 14-060
1.4 Program Master of Commerce 3.5 years (18 Years)

Section 2: Particular of the Thesis

1.1 Title Impact of Corporate Governance on Financial
Performance of Commercial Banks: An empirical study
of Pakistan Stock Exchange (PSX) listed Banks
1.2 Supervisor's Name Prof. Dr. Muqqadas Rehman
1.3 Date of Completion

I do hereby solemnly declare that the above titled thesis submission by me in partial
fulfillment of degree program enumerated above:
a) is my original work, except where otherwise acknowledged in the text.
b) has not been published earlier and
c) shall not be submitted by me in future for obtaining any degree from this or other
university or institution.

3.1 Student's Full Signature

3.2 Date

Notes:
 Three copies of this Declaration must be provided by the student
 One copy will stay with the Controller of Examination
 The second copy will stay with the relevant Head of Department
 The third copy will be attached to the thesis when it is sent to the supervisor and/or for
External Assessors.

iii
 Hailey College of Commerce
University of the Punjab, Lahore, Pakistan
SUPERVISOR’S CERTIFICATE ON
THESIS SUBMITTED BY A STUDENT
Section 1: Particulars of the Supervisor
1.1 Full Name Prof. Dr. Muqqadas Rehman
1.2 Address Room, Old Building, HCC, PU

Section 2: Particulars of the Student

2.1 Full Name ASAD ULLAH
2.2 Father’s Name SAIF ULLAH
2.3 Registration Number 2012-sps-50
2.4 Program Master of Commerce (18 yrs)

Section 3: Particulars of the Thesis

3.1 Title Impact of Corporate Governance on Financial
Performance of Commercial Banks: An empirical
study of Pakistan Stock Exchange (PSX) listed
Banks

3.2 Date of Completion

I certify that:
a) The above-named student has completed the cited thesis under my guidance and
supervision.
b) I am satisfied with quality of the student’s research work, and
c) I consider it worthy of submission for external evaluation.
3.1 Supervisor’s Full Signature
3.2 Date

Notes:
Supervisors are requested to complete three copies of this form and send them, along with approved
thesis, to the relevant Head of the department. One copy will stay with the Head of the department.
Second copy should be sent for record of the Controller of Examination. Third copy should be attached to
the thesis before it is sent out for external evaluation.
iv
 Dedication

“I dedicate this study to my parents, my wife, and my beloved uncle Haji Sana
Ullah who always support me, words can never express my gratitude for the
invaluable advice and seed of challenging work and dedication to me. May Allah
Almighty

bless them a happy life.”

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 ACKNOWLEDGEMENT
The whole praise to Almighty Allah, the Creator of this universe, who makes us the superior

creature with broad knowledge and enabled me to accomplish this work.

I offer very special praise for our beloved HOLY PROPHET HAZRAT MUHAMMAD

(S.A.W.) who is the symbol of knowledge and guidance for humanity.

I wish to express my gratitude to my supervisor respected Prof. Dr. Muqqadas Rehman for his

constructive advice, directions, comments, support and professional guidance.

Thanks, and love in abundance to my parents, especially my father Saif Ullah and my uncle Sana

Ullah who always provided much support, both financial and emotional and sacrifice their

expensive time, happiness, health and many things for my success and bright future. Thanks for

their endless love and support that motivated me through the tough times when I was staying away

from home.

Least but not last, I am thankful to all teachers they contribute in my life. And I am also thankful

to my family and friends Hafiz Ghulam Murtaza, Muhammad Faisal, Muhammad Saddique and

Faisal Hayat whose prayers played a vital role in the completion of the thesis. Without their

support, it would have been impossible for me to write this thesis report.

Asad Ullah
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 Abstract

Effective management of every organizational possessions requires decent corporate

governance practices, predominantly, in banking industry where there is separation of ownership

and management. Since the introduction of corporate governance code in Pakistan after 2002,

corporate governance has attracted an extraordinary attention of researchers. As the sample size

and time span covered by previous investigations were considered insufficient to generalize the

findings. It is against this backdrop, this study examined the impact of corporate governance on

the financial performance of all money deposited banks which are listed in Pakistan over the period

of ten (10) years (2007 to 2016). In this study, Return on Assets (ROA) and Return on Equity

(ROE) are used for measuring the financial performance while Board Size (BS), Board

Composition (BC), Chief Executive Officer Duality (CD), Audit Committee (AC), Board

Meetings (BM) and Audit Committee Meetings (ACM) as indicators of corporate governance

along with FS (Firm Size) as a control variable. The panel data for the study were quantitatively

retrieved from the annual reports of those banks. Multicollinearity is tested through Variance

Inflation Factor (VIF) test. Ordinary Least Squares (OLS), Random Effect (RE) and Fixed Effect

(FE) models are regressed as panel data analysis techniques. It was found that larger board size,

greater portion of external directors and audit committee size contributes positively and

significantly to the financial performance of Commercial Banks in Pakistan. This study may be

useful for the regulatory bodies of the corporate governance practices as well as the administration

of the banking sector in Pakistan. This study, however, recommended that banks should increase

their board size but within the maximum limit set by the code of corporate governance. This study

further suggests that banks should avoid unnecessary meetings which influences negatively to the

financial performance.

Keywords: Corporate governance, Firm performance, Panel data techniques

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 Contents
CHAPTER 01 ................................................................................................................................ 1
INTRODUCTION......................................................................................................................... 1
1.0 Overview of the Chapter ....................................................................................................... 1
1.1 Background ........................................................................................................................... 1
1.2 Rationale of the study ........................................................................................................... 6
1.3 Significance of the Study ...................................................................................................... 6
1.4 Problem Statement ................................................................................................................ 7
1.5 Research Objectives of the study .......................................................................................... 8
1.6 Research Questions ............................................................................................................... 8
1.7 Structure of the Thesis .......................................................................................................... 9
1.7.1 Chapter 1 ................................................................................................................... 9
1.7.2 Chapter 2 ................................................................................................................... 9
1.7.3 Chapter 3 ................................................................................................................. 10
1.7.4 Chapter 4 ................................................................................................................. 10
1.7.5 Chapter 5 ................................................................................................................. 10
1.8 Chapter Summary........................................................................................................... 10
CHAPTER 02 .............................................................................................................................. 11
LITERATURE REVIEW .......................................................................................................... 11
2.1 Overview ........................................................................................................................ 11
2.2 Main Theories ................................................................................................................ 11
2.2.1 Agency Theory........................................................................................................ 11
2.2.2 Stewardship Theory ................................................................................................ 13
2.2.3 The Stakeholder Theory.......................................................................................... 15
2.3 Corporate Governance.................................................................................................... 16
2.4 Corporate Governance and Firm Performance............................................................... 17
2.4.1 Board size and Firm performance ........................................................................... 19
2.4.2 Board Composition (BC) and Firm performance ................................................... 21
2.4.3 Audit committee (AC) size and Firm Performance ................................................ 23
2.4.4 Board Meetings (BM) and Firm Performance ........................................................ 25
2.4.5 Audit Committee Meeting (ACM) and Firm Performance..................................... 28

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 2.4.6 CEO (Chief Executive Officer)/ Chairman Duality and Firm Performance........... 30
2.5 Summary of the Chapter ................................................................................................ 32
CHAPTER 03 .............................................................................................................................. 33
RESEARCH METHODOLOGY .............................................................................................. 33
3.1 Overview ........................................................................................................................ 33
3.2 Methodology .................................................................................................................. 33
3.3 Epistemology and Ontology ........................................................................................... 34
3.4 Theoretical research approach ........................................................................................ 34
3.4.1 Inductive approach .................................................................................................. 34
3.4.2 Deductive approach ................................................................................................ 35
3.4.3 Research approach taken......................................................................................... 35
3.5 Research philosophies .................................................................................................... 35
3.5.1 Post positivism approach ........................................................................................ 36
3.5.2 Interpretivism approach .......................................................................................... 36
3.5.3 Philosophical approach taken ................................................................................. 36
3.6 Research Design ............................................................................................................. 37
3.6.1 Data Source and Data collection ............................................................................. 37
3.6.2 Population and Sample Size.................................................................................... 38
3.6.3 Variables Specifications and its Measurements ...................................................... 40
3.7 Theocratical Framework ................................................................................................ 44
3.8 Data analysis technique .................................................................................................. 46
3.9 Ethical issues .................................................................................................................. 46
3.10 Summary of the chapter .................................................................................................... 46
CHAPTER 04 .............................................................................................................................. 47
ANALYSIS AND DISCUSSION ............................................................................................... 47
4.1 Chapter Overview ............................................................................................................... 47
4.2 Descriptive Statistics ...................................................................................................... 47
4.3 Pair-wise Correlation Matrix .......................................................................................... 50
4.4 Multicollinearity Test ..................................................................................................... 51
4.5 OLS Model, Random Effect Model (REM) and Fixed Effect Model (FEM) for ROA . 52
4.6 OLS Model, REM and FEM for ROE ........................................................................... 55
4.7 Final Regression Analysis for ROA and ROE ............................................................... 58
4.8 Hypothesis testing and discussion .................................................................................. 63
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 4.9 Comparison of the REM and FEM ................................................................................ 66
4.10 Summary of the Chapter ............................................................................................. 66
CHAPTER 05 .............................................................................................................................. 67
CONCLUSIONS AND RECOMMENDATIONS .................................................................... 67
5.0 Chapter Overview ............................................................................................................... 67
5.1 Conclusions of the Study .................................................................................................... 67
5.2 Recommendations ............................................................................................................... 68
5.3 Limitations .......................................................................................................................... 69
5.4 Future Directions ................................................................................................................ 69
5.5 Summary of the Chapter ..................................................................................................... 69
References .................................................................................................................................... 70
Appendixes................................................................................................................................... 79

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 CHAPTER 01

INTRODUCTION

1.0 Overview of the Chapter

This chapter gives the introduction of background of the study and main concept of the

research together with the justification of the study. After that, aims of the research and the

questions of the research are formulated and main purpose of research is discussed. In addition, an

overview of the upcoming chapters is given as well.

1.1 Background

Good corporate governance contributes to a sustainable economy develop by improving

business performance and increasing performance enter the external capital. In emerging markets,

good corporate governance services some objectives of the public policy. It lessens the financial

fragility emergency, reinforce property rights, reduce operation costs and investment costs and

principal to the expansion of the money market. Corporate governance involved management,

board of directors, minority shareholders and other stakeholders and control relations of

shareholders. In 2002, Securities and Exchange Commission of Pakistan (SECP) allotted a code

to the corporate regulations which was known as the Code of Corporate Governance (CCG)

publicly announcement the company has become a vital area of commercial investigation. In 2012,

the code of corporate governance was revised and amended with the name of the “Code 2012” and

further, it was replaced with the “Code of Corporate Governance 2017” which is currently being

implemented in Pakistan. The corporate governance system entails of a variety of practices and

1
accounting ethics and related pecuniary institutions revelation, executive reward, composition and

level of the business tip.

The corporate governance arrangement provides help to those who retain the company and

provide it the directions of economic rewards distributed among the shareholders, employees,

managers and the stakeholders. Therefore, the affairs of a country the governance system has

profound implications for business organization and employment system, commercial relationship

and capital market. Therefore, the changes in Pakistan, the corporate governance system may have

a substantial effect on the company structure and performance of national enterprises.

Broadly speaking, corporate governance is a group of complementary constitutional, social

and economic systems that protects the interests of the business owners. In Anglo-American

corporate governance system, these owners are shareholders. According to different researchers

(Berle & Gardiner, 1932; Jensen & Meckling, 1976) the thought of corporate governance

presupposes an essential tension between stockholders and corporate executives. While, the

corporate shareholders’ intention for maximum return on their financing, administrators may have

different aims, either dealing with the authority and status of a bulky and powerful group, or other

performing and other allowances. In this case, senior management’s access to internal information

and the relative weakness of many diverse shareholders and shareholders mean that executives are

predictable to advance the upper hand. The research scholars provide a variety of resolutions to

the agency problem which is existed between shareholders and managers, belonging to the class

of encouragement coordination, supervision and correction. Motivations for managers and

stakeholders can be adjusted by different practices such as stock options and by other arrangements

of market-based (Fama & Jensen, 1983). Monitoring by the self-governing directors and the board

of executives ensures that the available shares of the manager are in the finest welfares of the

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shareholder. Fama and Jensen (1983) CEOs who fail to achieve the goal of maximizing the

shareholder interest, can be detached by the board of directors, while companies that ignore the

value of shareholders are subject to market sanctions for hostile takeovers (Jensen & Ruback,

1983).

Since the establishment of Pakistan in 1947, the Indian Companies Act of 1913 was passed

by the enterprise until the promulgation of the Companies Ordinance in 1984. Pakistan legal

persons were mainly governed by the Ordinance. The Securities and Exchange Commission

(SECP) assumed the obligations and powers of the Law Authority Corporation in 1999. The

purpose of the SEC was to regulate the exchange of securities and the 1997 SECP Act, encourage

companies to adopt good business management practices to manage international business

challenges. The goal of the SEC was to encourage companies to adopt good business management

practices to manage international business challenges. Shareholders require managers with

technical abilities to maximize their wealth. Managers are people, people have personal goals, but

also business goals. If their own interests do not respond to shareholder interests, the value of the

business will not be maximized. Managers can spend too much time eating lunch, surfing the web,

etc. instead of focusing on the task. They can use resources for the benefit of themselves and not

for shareholders. Improve entrepreneurial performance by creating and maintaining a corporate

culture that motivates managers, executives and corporate culture.

SECP introduced corporate governance guidelines in early 2002. That was an important

step toward reforming the corporate governance practices in Pakistan. The Code of Corporate

Governance (CCG) included several suggestions are in contour with worldwide good practices.

Main area enforcement includes reforming the board to achieve this responsible for all the

shareholders and improved disclosure, counting internal improvement and outside audits of

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registered firms. Whatsoever, the limited terms of the code, the independence of the directors was

always voluntary and provided no indication internal control, risk administration and the Board’s

reimbursement policy. In 2012, SECP replaced the CCG (the Code 2002) by the new Code of

Corporate Governance with the name of the Code 2012. The new code was adopted by all the three

Stock Exchanges (Karachi Stock Exchange: KSE, Lahore Stock Exchange: LSE and Islamabad

Stock Exchange: ISE). The Code 2012 was adopted by all the Listed Companies for compliance.

In January 2016, all the three Stock Exchanges of Pakistan were merged into one with a new name

of Pakistan Stock Exchange (PSX). In 2017, Companies Ordinance 1984 was replaced by

Companies Act 2017, the Code of Corporate Governance 2012 was amended, revised and

substituted by the new Code of Corporate Governance (Code 2017) in which new requirements

and provision were added and some of previous provision were omitted.

The core purpose of this study is to examine the affiliation between them corporate

governance and corporate performance of entirely Money Deposited Banks listed on PSX.

Therefore, we try to find out the affiliation in middle of corporate governance indicators and

financial performance of listed money deposited banks in PSX. This highlights the status of legal

rules and the quality of law enforcement. In context to the Pakistan, with the habitually weak

distribution of the property is the main method to solve the problem of the agency. The problem

is the legal protection of some investor, the use of advice supervision of senior management and

active markets controlled by the establishment. At contrast through the characteristics of corporate

governance in developed market in Pakistan less dependent on capital markets and external

investors, but more dependent achieving efficiency among major investors and financial

institutions department of business, in this case, external (smaller) investor are at risk in the form

of transfer of wealth to expropriation of major stockholders.

4
 According to Shleifer and Vishny (1997), Corporate Governance instruments are legal and

economic systems that can be modified by political development. About the Governance Reforms

forcing companies to reduce costs, and in the context of minimizing costs adopt rules that include

corporate governance mechanism to enable them to improve. In the long run, the cost of external

capital is the lowest. Regarding the Evolutionary theory of economic change (Alchian, 1950;

Stigler, 1958) the rivalry will be prudent Corporate governance.

The Corporate governance from the point of view of agency theory is called “Separation

of ownership and Control” (Berle & Gardiner, 1932). There are the two most communal method

of corporate governance to shield the rights of investors. The first one is to provide depositors with

legal protection expropriation of manager. Safety of smaller rights and prohibition of the law

opposition to self-management is an example of such a mechanism. Second, the main method is

owned by a large investor (concentration of ownership): match a significant cash flow to the

RAND (Research and Development) control. The most common corporate governance

instruments used around the world including mass properties, relationships banking and even the

appropriation can be considered as samples of big stockholders who exercises their authority. We

confer how big investor reduce agency costs. Although the major stockholders still depend on the

official system imposed by the governing body, they do not consider it as much needed keep you

own interests as small investors. However, it can be the best to use together and focus the property

on its own is described as potentially expropriated by a large investor other small investor and the

stakeholders of the company (Shleifer & Vishny, 1997)

5
1.2 Rationale of the study

Abdulazeez, NdibeL, and Mercy (2016) conducted a study on money deposited banks in

Nigerian stock Exchange but data were collected only five years and its results were not

generalizable to other countries. Lubabah and Bawa (2013) investigated the study in which only

six banks were taken as a sample size. For this study, the sample size is increased from five years

to ten years. The focus of this study is the money deposited banks which are listed in Pakistan

Stock Exchange (PSX). Adeusi, Akeke, Aribaba, and Adebisi (2013) conducted the study in which

ten banks were considered and six years data. No study has been conducted in this area of research.

This study points out those factors of corporate governance which affects the performance of

banking sector in Pakistan. This study contributes the guidelines for the regulatory body for

making effective corporate governance rules and regulations for banking sector of Pakistan.

1.3 Significance of the Study

This investigation devotes to the several articles. At first, this study provides evidence

regarding the impact of corporate governance on the financial performance of listed money

deposited banks for a developing country like Pakistan. Compared to developed countries, banks

have different agency problems. Unlike the latter, when there is a battle of interest between the

manager and the shareholder.

Secondly, the research in this area has not been conducted and the study measures the

impact of corporate governance on the financial performance of Pakistani’s money deposited

banks. The governance mechanism is conducive to the development of the country and the

internationalization of companies. This research investigates the impact of corporate governance

on the financial performance of Pakistani listed banks.

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 Third, we use a larger dataset based on the sampling period and the number of banks than

existing research on Pakistan. Where our sample comprises twenty (20) banks listed in PSX for

the period of ten years from 2007 to 2016, other studies have used data for fifteen (15) banks or

fewer and for a period of up to six years.

Fourth, this study provides guidelines for the Pakistan banking sector to establish effective

regulatory regimes for corporate governance rules and regulations, and formulates an operative

corporate governance policy for the Pakistani banking sector.

1.4 Problem Statement

Due to the high concentration ownership, the corporate governance practices are very low

in Pakistan. The commercial banks in Pakistan are traditionally either unaware of the general

principles of good corporate governance, or work in a relatively less open environment. Promoting

basic principles of good governance for commercial Banks is crucial in supporting the

development of a strong economic sector. So, to check the effectiveness of corporate governance

practices in Pakistan, a comprehensive study in this area is the need of the day. Good corporate

governance does not lose the business’s chances but they are looking for opportunities for the

company and maximize shareholders wealth.

By keeping in view of the above discussed problem, the purpose of this is as follows:

Impact of Corporate Governance on the Financial performance of Commercial Banks

listed in Pakistan Stock Exchange.”

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1.5 Research Objectives of the study

The major objectives of this study are as under:

1. To identify the association between Board Size (BS) and the financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange.

2. To explain the relationship between Board Composition (BC) and financial Performance

of Money Deposited Banks listed in Pakistan Stock Exchange.

3. To investigate the impact of CEO (Chief Executive Officer) Duality on financial

Performance of Money Deposited Banks listed in Pakistan Stock Exchange.

4. To evaluate the impact of Audit Committee (AC) on financial Performance of Money

Deposited Banks listed in Pakistan Stock Exchange.

5. To identify the relationship between Board Meetings (BM) and financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange.

6. To identify the relationship between Audit Committee Meetings (ACM) and financial

Performance of the Deposited Banks listed in Pakistan Stock Exchange.

7. To identify the factors of corporate governance that affect the financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange.

1.6 Research Questions

1. Does board size (BS) have any association with financial performance of listed Money

Deposited Banks in Pakistan Stock Exchange?

2. What is the relationship amidst Board Composition (BC) and financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange?

3. has CEO (Chief Executive Officer) Duality (CD) any impact on financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange?

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 4. How does Audit Committee (AC) effect the financial Performance of Money Deposited

Banks listed in Pakistan Stock Exchange?

5. Is there any connection between Board Meetings (BM) and financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange?

6. Has Audit Committee Meetings (ACM) any relationship with the financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange?

7. What are the factors of Corporate Governance that influence the financial Performance of

Money Deposited Banks listed in Pakistan Stock Exchange?

1.7 Structure of the Thesis

1.7.1 Chapter 1

Chapter 1 introduces the subject and explains why it was chosen. This chapter also includes

the main research goals and objectives of this study. In addition, the subject is also studied through

research question. Furthermore, this chapter explains the methodology of this research, including

the different research means, philosophies, instruments and techniques for data collection and

analysis of the data.

1.7.2 Chapter 2

Chapter 2 is a literature on this subject. Much has been done on the topic of corporate

governance and its various impacts on the performance of the firms, therefore, extensive studies

have been done on the literature, in which attempts have been made to cover the work of all

researchers regarding the connection of corporate governance and firm performance topics.

9
1.7.3 Chapter 3

Chapter 3 contains details of the research means that were considered in this study. Some

of the theoretical underpinnings of this chapter are also used in research methods (inductive or

deductive) and philosophical (positivist and interpretive), of course, including methods and

philosophies and the logic and reason chosen for the study. In addition, this chapter of the study

also discusses research methods (qualitative and quantitative), sampling techniques and sample

size of twenty banks listed in Pakistan Stock Exchange, as well as data collection methods used.

In addition, ethical consideration in the conduct of this study is also discussed.

1.7.4 Chapter 4

This chapter discusses in detail the results found by in-depth analysis of the data by using

various statistical tools with the help of Stata13 (Statistical Software Packages).

1.7.5 Chapter 5

Finally, Chapter 5 focuses on research findings constructed on the goals and objectives of this

study, by considering, the main findings observed after data analysis. In addition,

recommendations are made based on a comprehensive analysis of studies, the limitations of

subsequent studies and future aspects of research.

1.8 Chapter Summary

This chapter highlights the background and rationality of this investigation and defines the

problem statement, objectives of the study, research questions and significance of the research

study. The research methods will also provide help to attain the goals and objectives of this

research. In addition, this chapter of the study also provides an overview of the upcoming chapters.

This will also be useful and redrawing to discover all applicable information and data analysis.

10
 CHAPTER 02

LITERATURE REVIEW
2.1 Overview

This chapter gives the detailed review of literature of previous studies similar this topic of

investigating the impact of corporate governance on firm’s performance by different researcher in

different span of time. In this chapter, different theories relevant to corporate governance have

been evaluated critically presented by different scholars in past. At the end of this chapter,

association of dependent variable which is performance of the firm and independent variables

which is corporate governance have also been discussed.

2.2 Main Theories

After gone through corporate governance in diverse points of view in addition to unique

hypothetical framework. There are the three main theories which are discussed in this study i.e.

Agency theory, Stewardship theory and Stakeholder theory perceived by the researchers to gain

improved sympathetic of corporate governance matters. Subsequently, with the culmination goal

of this investigation, these three theories are utilized as the theoretic framework to give better

understanding of corporate governance problems incurred in firms and their performances.

2.2.1 Agency Theory

Agency theory is defined as “the relationship between the principals, such as shareholders

and agents such as the company executives and managers”.

The agency theory is a view that clarifies the relationship between principals that usually

represent shareholders and agents which represent the managers in business. Agency theory is

concerned to remove or reduce the conflict of interests arise due to unaligned goals. The agency

11
theory considers shareholder to be the leaders (principal) and administration is considered as their

agents of any firms.(Abdulazeez, et al., 2016)

Sanda, Mikailu, and Garba (2010) clarified more that the existence of asymmetry

information regarding company affairs and operations can make mediators to instigate interests

that could be averse to the attention and interests of the owner (principal). The procedures of

adjusting these opposite to each other two interests that may provoke the conflict between these

opposite interest groups. Agency theory which shows the dissimilarity to the stakeholder theory

managers are the only who develop the goal and objectives of the principal.

The agency theory investors anticipate that the agents will turn and then make decision in

the best interest of their principal to enhance the performance of the organization. Unexpectedly,

the agents might not really take decision in the best interests of principal due to the main conflict

of the interests (Padilla, 2002). These kind of agency problem was first time introduced by Adam

Smith in the Eighteenth (18th) Century and similar to this way which was investigated by (Ross,

1973). The first comprehensive portrayal of agency theory in which in-depth discussion was done,

was displayed by (Jensen & Meckling, 1976). In fact, the thought regarding such kind of issues

emerging from the separation of ownership among stakeholders and controller in agency theory

has been affirmed by (Davis, Schoorman, & Donaldson, 1997)

The agency theory in which investors are those who are the proprietors(owners) or

principals of the organization, enlists the management (agents) which manage the operation of the

business on their behalf. Principals have authority to appoint the running of business to the

executives or managers who are known as the investors’ agents. (Clark, 2004)

12
 From the previous studies, agency theory basically clarifies to the corporate governance

and performance of organizations particularly in the banking industry where the fundamental

principles of corporate governance are to secure the benefits of truant proprietors (shareholders)

who are also categorized as the principal of the management (agents). On the premise, this

investigation receives agency theory which is closed by (Akingunola, Adekunle, & Adedipe, 2013;

Osuagwu, 2013; Sanda, et al., 2010) as the theoretic foundation for clarifying the corporate

governance and performance of the banks.

2.2.2 Stewardship Theory

Davis, et al., (1997) defined to the theory of stewardship “a steward protects and maximizes

the shareholders’ wealth through firm performance, because by so doing, the steward’s utility

functions are maximized”. As per the definition the steward protects and make profit for

shareholder by working for shareholders and work as administrator of company or by director of

a company. Dissimilar to agency theory, the stewardship theory which is not on the point of view

of independence, but rather on the part of best admiration being as stewards, coordinating their

objectives as a major aspect of association, stewards are feel confident and satisfactory when

organizational success is achieved according to stewardship perspective.(Donaldson & Davis,

1991)

Akingunola, et al., (2013) by exploring the concept of stewardship, clarified that manager

are great stewards who tirelessly work to accomplish the abnormal state of benefit and investors

profits. The theory recommend that administrators will be curious in order to realize the objectives

of the shareholder at any cost (Boyd, Haynes, & Zona, 2011). Manager are propelled by

accomplishment this theory is based on that assumption, Non- official executives on the board fill

this need better.

13
 Zábojníková (2016) described the stewardship theory and contends that agency theory

looks for economic benefits whether they look towards the employee or people which overwhelms

an individual own aspiration. Nonetheless, stewardship theory perceives the significance if

structures that engage the steward and offers great self- sufficiency based on trust (Donaldson &

Davis, 1991).

According to (Davis, et al., 1997) stressed on the place of representatives or officials to

perform more self-ruling so that the investors returns are expanding without a doubt and this can

border the expenditures went for checking and controlling practices.

Al Mamun, Yasser, and Rahman (2013) focused that with a specific end goal to secure

their notorieties for being leaders in association, official and executives are unfair to work for the

development of the business organization to expand the financial related execution and investors

benefits. In sense, it is trusted that the associations execution can directly affect individual

performance.

According to (Fama, 1980) the stewardship theory is contended due effective stewards in

their organization executives and higher board of company can build their career.

Morck, Shleifer, and Vishny (1988) represented that to establish a good notoriety manager

need to return back finance to investors, that’s way they can get chance to re-enter in marketplace

in forthcoming. Stewardship Model can have connecting or likeness in different nations like Japan.

Japanese specialists expect the share of agents and takes accountability for employments and work

at them constantly.

14
2.2.3 The Stakeholder Theory

The philosophy of stakeholder theory can be described in this perspective “any group or

individual who can affect or is affected by the achievement of the organization’s objectives”.

According to (Freeman, 1984), he explained the stakeholder theory, dissimilar to the

agency theory in which the administrators worked to serve the stakeholders, but stakeholder theory

guided that administrators of the firm has system that build the network of relationship to serve

like that suppliers, employees and business partners are included in this network. Furthermore, this

was contended that, this category of building system is essential apart from manager, owner and

servant relation in agency theory.

In management theory of stakeholder was added in 1970 and furthermore stakeholder

theory was developed. The criticism on the agency theory referred that the agency theory provides

only short term view and explanations regarding the objectives of the organization whereas long

term perspective of those objectives is ignored (Freeman, 1984). Stakeholder theory can also be

called as an alternate theory of the agency theory.

Jensen (2001) has understood that defenders of the Stakeholders Theory have been failed to

give practical arrangements and proper justification in the regard of the various conflicts of those

interests of the stakeholders that organizations necessity to secure. Jensen & Meckling (1976)

proposed a component of Stakeholder Theory in this manner which he alluded to as the

“enlightened Stakeholder Theory”. The researchers recommended that a corporate would not have

a capacity to achieve the firm goal of maximization of shareholders’ wealth if any of the

stakeholder is neglected or victimized. The Stakeholder theory has a pivotal role to control

components received by the organizations, such as board size, composition of board, meetings

15
held by board, the size of audit committee and the number of audit committee sessions to which I

am examining in my research work.

2.3 Corporate Governance

According to the Pakistan Institute of Corporate Governance (PICG), “Good corporate

governance is an essential prerequisite for the integrity and credibility of financial institutions,

stock exchanges, incorporated companies and the whole market economy. It builds greater

confidence and trust by ensuring transparency, fairness and accountability with respect to

shareholders and other stakeholders”.

Cadbury report describes the corporate governance is “a system in which companies are

directed and controlled”.

The board of director oversees the usage of corporate governance and the part of investors in

governance is to delegate the executives and the examiners, and guaranteeing that the directors

and examiners has run the fitting governance structure. While the auditor’s part in giving an

evaluation of the financial statements exhibited by administration.

According to (Cornett, Marcus, & Tehranian, 2008) Corporate governance instruments

incorporate institutional proprietorship in the organization, stock possession by directors and

official officers, directorate attributes, age and residency of the CEO, and the affectability of CEO

pay for performance.

Adeusi, et al., (2013) clarified the term of “Corporate Governance” as “a set of rule and

incentives through which the management of an organization is being directed and controlled”.

16
 This viewpoint was reached out by (Demaki, 2011) who elaborated that corporate governance

is an established plan which is used to check the over abundances of regulatory directors.

The entire crux of corporate governance as indicated by (Kajola, 2008) which is to

guarantee that the business is performing well in its operations and investors are getting a

reasonable return. A business is called to have watched corporate governance run the show on the

off chance that firm is made transparency, diligence, responsibility and accountability with the

purpose of maximization of shareholders' wealth.

Another researcher (Akingunola, et al., 2013) clarified that the corporate governance is a

key indicator which covers the universal components by which administration is directed to act as

the best interest of the organization proprietors.

Onakoya, Ofoegbu, and Fasanya (2012) depicts that corporate performance is an essential

idea which identifies with the what’s more, behavior in which the assets such as technical, financial

and intellectuals of an foundations are adequately used to accomplish the general corporate target

of a firm. What keeps relationship in business is essentially its capacity of wisely utilize its

accessible assets and ensure that the suppliers of financial assets and its manager commonly gain

from the utilization of the assets.

2.4 Corporate Governance and Firm Performance

A successful governance component can explain the agency problem. Suppliers of funds

need to guarantee that their cash is shrewdly put and used in a wise manner. The following is a

depiction of the experimental study on the topic of corporate governance and organizational level

performance variables used by different researcher in their studies

17
 Naimah (2017) concluded in her research that the principles of corporate governance have

positive result on firm’s profitability.

Javaid and Saboor (2015) discussed that good corporate governance builds the good

corporate presentation and availability of outside financing that also brings the practical monetary

development. It makes link among the stakeholders, board, management, controlling and the

minority shareholder.

According to Akbar (2014) conducted a research which revealed that corporate governance

regarding the firms included in the textile sector of Pakistan is affected to performance of those

firm positively and significantly. That’s why, those firms which are the part of the textile sector of

Pakistan, shall expand their corporate governance practices to uplift the performance of the

company financially and operationally.

Kim, Rasiah, and Tasnim (2012) assessed the connection between the corporate

governance and banks financial presentation during the pre and post Asian monetary crisis. Fixed

asset ratio, inventory to capital ratio and capital ratio were deployed as a proxy of corporate

governance while return on equity (ROE) was deployed as a proxy of banks financial performance.

Thus, the results of the quantitative examination reasoned that the corporate governance essentially

impacts performance of the banks in unique perspective in Malaysia.

Some researchers like Heenetigala and Armstrong (2011) concluded their study which was

conducted to discover the bond in the middle corporate governance and performance of the firm

in term of operations of the firms, in an unstable environment politically and economically in Sri

Lanka. When the firms adopted the code of corporate governance, there was observed a huge and

18
significant impact of those codes of corporate governance on the profitability of the firms as well

as market performance was also increased by those codes.

Another group of researchers, (Gompers, Ishii, & Metrick, 2003) tried to find out a solid

connection between corporate governance and return on investment from onward 1990 and the

researchers used Tobin’s Q as a proxy of measurement of the firm performance.

Exactly,(Wright, Shaw, & Guan, 2006) demonstrate that the protection of the right of the

investor is correlated with effective and strong corporate governance.

Khatab, Masood, Zaman, Saleem, and Saeed, (2011) also concluded that those business

firm which have effective corporate governance regulations accomplishes their objectives in a

better way than those firms which are experiencing an ineffective corporate governance.

2.4.1 Board size and Firm performance

The Board size can be defined as “the total number of directors on the board”. When we

study the literature, we discover mixed conclusions in literature regarding the effect of board size

on the performance of enterprises.

Abdulazeez, NdibeL, and Mercy (2016) conducted a study in which it was examined the

corporate governance effects on the financial performance of fifteen money deposited banks

which are listed in Nigeria for the period of seven years. The collected data tested through Pearson

correlation and Regression was used to analyze the data. They used board size as an explanatory

variable to and ROA and ROE were proxied as explained variables. They concluded that greater

the size of the board donates positive and significant relationship to the monetary performance of

listed banks in Nigeria.

19
 Akbar (2014) examined the bond amid board size and two firm performance proxies return

on equity (ROE) and return on Assets (ROA) in which he used a sample size of twelve (12) textiles

companies which were listed in Karachi stock exchange (KSE) in Pakistan for the period five years

from 2007 to 2011. The researcher included the size of the board as one of the explanatory

variables along with other explanatory variables and return on assets (ROA) and return on equity

(ROE) were used as explained variables for measuring the performance of the firm. Similar to

previous study, this study also found significant and positive affiliation between small size of board

and return on assets (ROA) while got different results in ROE. There was no significant

relationship found between size of the board and ROE.

Akola, Amudat, and Arulogun (2012) conducted the research on the topic for investigating

the impact of corporate governance on overall performance of banking sector of Nigeria banking

by utilizing the Pearson correlation and regression analysis to investigate the connection between

corporate governance factors and financial performance of banks in which the total number of

members including in the board is used as an independent variable in company with some other

independent in which a significant but adverse relationship was reported amidst board size and the

financial performance of the chosen banks casing a time of 5 years.

Lubabah and Bawa (2013) analyzed financial performance of banks in company with

corporate governance by using a sample size of twelve (12) banks in Nigeria casing five years as

a period for which data is collected and analysis is done from 2006 to 2010. They also discovered

negative affiliation between board size financial performance of banks.

Topak (2011) found a different type of results in his study regarding board size and firm

performance. He exposed the association of board size and performance of Turkish companies

insignificant as well as adverse.

20
 Weterings and Swagerman (2011) investigated the influence of board size on the value of

firms in which one hundred and fifty five property firms in company with real estate investment

trust listed in the different exchanges of different estates i.e. Malaysia, Singapore and Hong Kong.

An optimistic relationship was seen between board size and performance of those property firms

but an insignificant result was observed between board size and real estate investment trust.

Guest (2009) also tried to assess the effect of number of members in the board on the

performance of firms having such board size by means of sample of 2746 companies which have

a registered firm status. The data was collect for twenty-two years from the year 1981 to 2002. The

researcher finds out that the size of the board has strong negative influence on the variables used

as indicators of firm performance. Furthermore, the findings also exposed that firms having a

massive size are affected more in negative than those of firm having small size.

Garg (2007) explored in his study an inverse affiliation amid board size and performance

of the company similar to this topic.

Based upon the above discussed phenomenon, the succeeding hypothesis is developed.

HA: There is a significant and positive relationship between board size (BS) and financial

performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

2.4.2 Board Composition (BC) and Firm performance

Board composition (BC) means the proportion of non-executive directors in overall board.

Different studies were done and all those studies quoted different results regarding composition of

board and firm performance.

21
 Abdulazeez, et al. (2016) concluded that there is insignificant association in the middle of

composition of the board and performance, financially, of fifteen (15) money deposited banks

listed in stock exchange in Nigeria.

In any case, the discoveries of (Heenetigala & Armstrong, 2011) regarding twenty-nine

(29) banks in Nepal for a time period of six years by means of the utilization of regression study,

demonstrates that non-executive directors i.e. board composition have positive and substantial

result on the performance of bank.

There is also a different viewpoint regarding this study,(Ehikioya, 2009) concluded his

study with no evidence found in provision of the relationship in the middle board composition

(BC) and performance of enterprises.

According to (Kajola, 2008), he concluded his study regarding corporate governance and

its different influences on the performance of the some listed banks in Nigeria in the vicinity from

2000 to 2006. he found an insignificant association between composition and performance. These

result were additionally, consistent with the results of (Adeusi, et al., 2013; Bhagat & Black, 2001;

Kajola, 2008; Lubabah & Bawa, 2013) who additionally included that the performance of listed

banks has a tendency to be more awful when there would be more non-executive members in board

of directors.

According to (Brickley, Coles, & Terry, 1994), the external directors of the board when

contrasted with other dependent directors of the board take more understanding and information,

so, they can impact the corporate governance practices. The outcomes on positive level of external

directors of an organization, substitution to the board members and performance of a firm is

22
ambiguous. It was recommended that a positive affiliation occurs amidst the existence of the non-

executive directors in the board and stock exchange criticism.

Another research study conducted by (Klein, Shapiro, & Young, 2005) found no proof

regarding composition of board which influences the firm performance. In the organizations,

which are classified as family firms, an abnormal state of board independence improves

performance.

Chin, Vos, and Casey (2004) additionally asserted that the level of external directors have

a minor effect on general firm performance. In view of above mentioned arguments, mixed results

were found by different researchers in different span of time.

The following hypothesis can be generated:

HB: There is a significant and positive relationship between board composition (BC) and

financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

2.4.3 Audit committee (AC) size and Firm Performance

Investors’ concerns are secured over the exercise of audit committee (AC) since

administration may not generally move in the light of a legitimate concern for organization’s

proprietors. Studies regarding in support of a large audit committee (AC) set that when extra

individuals are engaged with inspection the exercises of supervisors, bad behaviors will be

diminished and performance will be improved.

Abdulazeez, et al.(2016) found that there is positive and important relationship amid the

size of audit committee (AC) and financial performance of money deposited banks listed in stock

exchange of Nigeria.

23
 Similar to the findings previous discussed researcher, (Kallamu & Saat, 2015) concluded

that an important and confident relationship amid audit committee (AC) size and firm performance

of thirty-seven (37) financial corporations which were registered in the central market of Bursa

Malaysia.

Nonetheless, different specialists like (Kajola, 2008) detailed that there is no positive

affiliation between size of audit committee (AC) and performance of the firm.

According to another researcher (Kyereboah-Coleman, 2008) investigated that positive

bond between audit committed (AC) size and firm performance is incorporated.

Adams, Burton, and Hardwick,(2003) revealed that no evidence found in support of any

kind of connection between AC size and firm performance.

Xie, Davidson III, and DaDalt, (2003) assessed that there is a positive association between

audit committed (AC) size and firm performance join.

From the previous studies, there occurred a diverse response regarding the relationship

between size of AC and firm performance. The situation of Prakash and Martin build up a sound

logic as the concentration of investors could be secured by various people who will be hard to

control particularly when they are substantial in number.

Some researchers established a positive and significant affiliation between audit committee

(AC) size and company’s performance. On the other side of this study could not establish any kind

of relationship between audit committee (AC) size and firm performance.

Therefore, the following hypothesis can be generated in the light of above described

literature:

24
HC: There is a significant and positive relationship between audit committee (AC) size and

financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

2.4.4 Board Meetings (BM) and Firm Performance

According to the requirement of the revised Pakistan CCG (2017), organizations are urged

to have consistent board meetings for releasing obligations and duties. It is essential for the board

to have at least four (4) meetings in a year. Likewise, it is compulsory for the board to reveal the

quantity of meetings by the board of directors which were held throughout in a year and facts about

the participation by each single director regarding meetings taken. The details of every meeting

such as number of meetings, attendance record etc. should be unveiled by the board in annual

reports of the firm.

Recurrence of board meeting is considered to be a vital method for the purpose of

enhancing the viability of the board (Conger & Lawler, 2009).It is contended that BM and

participation of such meetings are thought to be essential networks over with directors of the

companies acquire companies important information and arranged to satisfy their control part.

Makhlouf, Hidayah, Ali Basah, and Ainna Ramli (2017) explored the association amidst

the board of directors’ effectiveness and firm execution of one hundred and twenty (120) non-

financial companies registered in Amman Stock Exchange (ASE) over a spell of 5 years from 2009

to 2013. Five characteristics of the executives’ board were used to measure the effectiveness of

the panel such as panel size, panel composition, panel meetings, panel ownership and leadership

structure. The performance of the companies was measured with both market and accounting base

performance indicators i.e. Tobin’s Q and return on assets (ROA) and established that there is an

important and positive relationship in the middle of board meetings (BM) and company’s

performance.

25
 According to (Johl, Kaur, & Cooper, 2015) , by examining the impact of panel

characteristics and companies execution in which board characteristics were proxied as meetings

of the board, panel size, independence of the panel and board financial expertise at the same time

companies performance was measured with the help of ROA by using both commercial and non-

commercial data from annual report of the 700 registered public companies in Malaysia for the

year 2009. The researcher concluded that meetings of board are raised to have an adverse effect

on the performance of the companies.

An investigation led by (Francis, Hasan, & Wu, 2015) demonstrated that organizations

with indigent board participation in meetings execute significantly inferior than that board

whatever has more board meetings attendance during the period of financial crisis.

Ntim and Oseit (2011) led a study to test the impact of commercial board meetings on

corporate performance of one hundred and sixty nine (169) firms which are registered in South

Africa for the term of 2002 to 2009 by using the board meeting frequency as independent variable

and firm performance as an explained variable. Furthermore, concluded that study the similar

outcomes in the middle of panel meetings and performance of the companies, where the board that

meet extra generally influence to figure a sophisticated monetary performance.

Yasser (2011) carried out a study to inspect the effect of corporate governance on non-

family and family contained companies performance in context to Pakistan. In conducting this

study, the researcher used seven hundred and ninety-two registered companies in KSE as a sample

size which is now has been merged into Pakistan Stock Exchange (PSX) from the spell of five

years from 2003 to 2008. The research findings revealed a significant and positive linkage in the

middle of board meeting and companies’ performance which is counted by return on assets (ROA)

and Tobin’s Q method.

26
 There are some other analysts that consider that board meetings are not really valuable

because of the restricted time, external executives go through with the organization and consider

such time that could be better used for a higher important trade of thoughts with the administration

of the companies (Vafeas, 1999).

Additionally, frequent meetings include administrative time and increment traveling cost,

directors meeting remuneration and management support requirements. That may influence the

organizational actions inside the organization, as assets are being directed against less profitable

actions of the enterprises (Evans, Evans, & Loh, 2002).

Johl (2006) led an investigation in the UK among Financial Times Stock Exchange (FTSE)

100 firms and created that there was exist a negative association in the midst of panel meetings

and the performance of the business. Based upon the above discussed arguments, there have been

uncertain results regarding the frequency of panel meeting with performance of various firms

included in the study. What’s more there is a heavy convergence of existing studies on developed

countries like USA (United States of America), Russia, Germany and UK (United Kingdom)

which have various institutional context and corporate governance proceedings where the

effectiveness of board meeting on the performance of the companies that can be anticipated to be

different from the developing countries like Pakistan.

thus, the following hypothesis can be generated:

HD: There is a significant and negative relationship between board meeting (BM) and financial

performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

27
2.4.5 Audit Committee Meeting (ACM) and Firm Performance

The recurrence of AC meetings attributes “to the frequency by which the AC members

meet”. It is further anticipated that Audit committee (AC) which interacts with its members

frequently is more effective to monitor the managerial activities than those which conduct less

number of meetings with its members. In Pakistan, it is compulsory for AC to meet with its

members at least once in a year. Usually, chairman of the AC in consultation with secretary call

for more than one meeting in a year.

Different studies which were conducted on this topic revealed mixed findings. Different

researchers have their own viewpoints regarding the role of numbers of AC meetings on firm

performance.

Zábojníková (2016) conducted a study regarding the association amidst various AC

features equally AC size, total number of board session held in a year, economic expertise of AC

representatives and their autonomy, and the companies’ market performance was measured by

using Tobin’s Q and financial performance of the firm is measured with the help of ROE of

seventy-two (72) non-economic companies which were registered in London Stock Exchange

(FTSE 100) amid the period of five years from 2011-2015. The results showed the positive and

significant affiliation between the total of meetings held throughout the year. The market and

financial performances of the firms are measured by ROE and by Tobin’s Q.

Bansal and Sharma (2016) carried out a study on the character of AC individuality,

occurrence of meetings, promoter shareholding, CEO duality, board size board composition as

proxies of corporate governance and ROA, ROE for financial performance whereas Tobin’s Q for

market funding as proxies of companies performance. By using a sample size of two hundred and

thirty-five (235) non-economic public companies which were listed in National Stock Exchange

28
(NSE) 500 of India for the period of ten years from 2004 to 2013. Findings of this study did not

reveal any significant result of the frequency of AC meetings on the fiscal performance of Indian

listed firms.

Hsu and Petchsakulwong (2010) evaluated the association amidst of corporate governance

and adaptability performance of public non-life insurance corporations in Thailand for the term

of 2000 to 2007. The results also showed a negative relationship which is existed between audit

committee meeting (ACM) and efficiency execution of non-life insurance companies.

Khanchel (2007) assessed the relation in the middle of corporate governance and execution

of six hundred and twenty-four (624) US (United States) listed non-commercial organizations for

the time of nine years from 1994 to 2003 by using Tobin’s Q as firm market performance indicator.

The results of the study revealed that there was a positive affiliation between ACM and the

performance on non-financial firms of United States (US).

Kyereboah-Coleman,(2008) analyzed the relation amid corporate governance and

performance of one hundred and three (103) registered firms which were drawn from different

countries i.e. South Africa, Ghana, Nigeria and Kenya for the time of five (5) years from 1997 to

2001 by using Tobin’s Q as a proxy of firm performance. The outcomes concluded that there was

a positive connection shown in the middle of ACM and the performance of the firms.

By dint of above discussed arguments, a mixed relationship is established between the audit

committee meetings (ACM) and firm performance. Hence, the successive hypothesis can be

expected:

HE: There is a significant and positive relationship between audit committee meetings (ACM)

and financial performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

29
2.4.6 CEO (Chief Executive Officer)/ Chairman Duality and Firm Performance

Arslan, Zaman, Malik, and Mehmood (2014) defined the term “CEO Duality” as a person

who holds both the position Chairman of Board as well as the CEO in an organization.

According to (Finkelstein & D'aveni, 1994) the term “Duality” portrays the corporate

authority construction in which one individual holds the both places of CEO what’s more,

Chairman board in an association.

As per the revised CCG under the companies Act 2017 of Pakistan the place of Chief

Executive Officer (CEO) and the Chairman of board should be dissimilar from one another.

It was discovered an insignificant relation between CEO Duality and ROA and ROE which

were the indicators for measuring the firm performance (Abdulazeez, et al., 2016).

Another researcher (Akbar, 2014) also tried to explore the corporate governance influence

on firms performance in the textile sector of Pakistan by using 12 textile companies which were

listed in KSE for the term of four (4) years (2007-2011). The corporate governance is calculated

by explanatory variables i.e. concentration of ownership, panel size and CEO/Chair duality.

Whereas ROE and ROA were adopted as proxies for the measurement of performance of the

companies. The findings showed that CEO duality affected both ROA and ROE positively and

significantly.

Chen, Lin, and Yi (2008) assessed the impression of CEO/Chairman duality on firm

performance after monitoring the essential proxies such as characteristics of the firms, CEO

remuneration, ownership structure and activity cost. The findings could not reveal any significant

bond between CEO/Chair duality and performance of the companies.

30
 According to the study of (Harjoto & Jo, 2009) in which the impact of corporate

governance was investigated and checking instruments for the choice of board structure, the

performance along with the value of a firm by utilizing a vast and broad sample size for the period

of ten year from 1995 to 2005. The empirical evidences revealed that CEO Duality effect the firm

performance positively at initial phase of the firm during which it negatively effects the value of

the company and operational performance in later periods.

In addition, (Sridharan & Marsinko, 1997) also investigated this wonder in the paper and

forestry item industry of United States of America (USA). The outcomes demonstrated that

organizations with double part of CEO makes well as they improve usage of advantage and creates

more prominent net revenues as imitated by sophisticated market estimation of these organizations.

Also, the double part of CEO will empower the official to appropriate extra independence and

influence in dealing with the firm happenings and tactical decision making, consequently, the firm

presentation will be enhanced.

Bawa and Lubabah, (2012) placed that CEO duality is not supported for an effective

communication in the middle of CEO and board. In this way, the purpose of increasing

performance, the dual part of CEO should be demoralized in its total. The researcher found

significant but positive relation amid CEO duality and performance of the firm.

On the other side, some researcher found no significant connection amid CEO duality and

companies’ performance. Furthermore, (Rhoades, Rechner, & Sundaramurthy, 2001) revealed that

an insignificant association amid CEO duality and firm performance (FP).

31
 In the light of above discussed arguments, this is assessed that there is a mixed relationship

between audit CEO duality and firm performance. Hence, the coming hypothesis can be

developed:

HF: There is a significant and positive relationship between board size and financial

performance of the Money Deposited Banks listed in Pakistan Stock Exchange.

2.5 Summary of the Chapter

In this chapter, different studies of the different researchers are critically evaluated along with

their findings in a summarized way. Hypotheses are also developed on the basis of the reviewed

literature.

32
 CHAPTER 03

RESEARCH METHODOLOGY
3.1 Overview

This chapter will exhibit a detailed discussion regarding the strategies and techniques that

are utilized to achieve the main targets of this study. The importance of the methodology is concise

on the part of the past research with the objective that its significance can be figured it out. So, in

such manner, different theoretical research philosophies and approaches have been talked about in

detail along with that research methods and approach which is selected for this study. Each study

needs to manage certain moral issues which have an influence on the results of the study and

ethical issues identified with current study are additionally abridged in this chapter. Moreover, the

techniques which are used in this study and the selected sample size which will provide a major

help to the reader in measuring the techniques which are used for the current study. Data collection,

one of the key elements of the investigation is also explained in this chapter.

3.2 Methodology

The main purpose of conducting this research in quantitative measure is to conclude the

role of corporate governance on financial performance of Money Deposited Banks listed in

Pakistan Stock Exchange (PSX). So, there is a need to apply some quantitative techniques or to

use statistical methods for the subject of obtaining empirical results as evidence. This kind of

approach is called the deductive approach in research. In this research, the impact of corporate

governance is identified by investigating the variety of aspects of corporate governance and

summarized accordingly. The significant impact of corporate governance on firm performance is

authenticated on the part of extensive literature discussed in the previous chapter.

33
 Different elements of corporate governance are explained and their impact is observed with

the help of the literature for supporting the idea of this study. Particularly, this study is conducted

on Money Deposited Banks listed in Pakistan Stock Exchange. For the listed banks in Pakistan

Stock Exchange, there are some important prudential regulations that must be fulfilled by the banks

regarding corporate governance.

3.3 Epistemology and Ontology

Creswell (2014) sum up different views and debates into four assumption ontology,

epistemology, axiology and methodology , the two most important assumption are taken into

consideration i.e. ontology and epistemology. Ontology depicts the nature of reality about the idea

of knowledge whereas epistemology deals with how we know about the concept of knowledge and

what we know about any reality or truth (Lincoln, Lynham, & Guba, 2011).

In positivism worldview with respect to ontology and epistemology, there is a singular truth

which develop a sense in form of objective and researcher remain impartial regarding the collection

of data about that reality which is further analyzed through different statistical tools.

3.4 Theoretical research approach

There are two types of overall approaches i.e. inductive and deductive approach.

3.4.1 Inductive approach

In inductive approach, the new theory is generated in the body of knowledge while an

existing theory is verified and tested in deductive approach (Crotty, 1998). Cresswell (1998)

Expressed the induction approach as a relationship between human subjects meaning and actions

are utilized as observation and then analyzed. In inductive approach, there is no creation of prior

assumptions but provision of deep understanding regarding logic and human actions.

34
 This method is recommended by (Creswell, 2014) for qualitative study in which new

knowledge is generated.

3.4.2 Deductive approach

Thomas (2006) defined the deductive approach as “the general inductive approach provides

an easily used and systematic set of procedures for analyzing qualitative data that can produce

reliable and valid findings”. Deductive approach is used to test the set objectives in form of

hypothesis and to analyze the data which support the existing theory. This method is recommended

by (Creswell, 2014) for quantitative study in which researchers set certain assumptions and then

try to verify that kind of study.

3.4.3 Research approach taken

In this study, the researcher is assuming there is an influence of corporate governance on

financial performance of money deposited banks listed in Pakistan Stock Exchange (PSX). That’s

why we have selected deductive approach for our study to assess the diverse theories of corporate

governance with the aim of testing the pre-set assumptions.

3.5 Research philosophies

Different researcher gave the different names to the philosophical assumptions Guba

(1990) defines it as “a basic set of beliefs that guide action”. While Creswell (2014) termed them

as “Worldviews” and divided into four categories i.e. post positivism, constructivism,

transformative and pragmatism, (Guba, 1990; Lincoln, et al., 2011) explained them as paradigms

and (Crotty, 1998) named it as epistemology.

The most widely used and discussed approaches are discussed here one is post positivism

and second one is constructivism worldview.

35
3.5.1 Post positivism approach

The followers of the post positivism worldview consider it as a traditional form of research

(Creswell, 2014). They believe that the absolute truth can be obtained by means of observation

and experiments (Guba, 1990; Lincoln, et al., 2011). Sometimes, it is termed as doing scientific

research or scientific method of research. There are some other terms are also used in place of post

positivism such as empirical science, positivist and post positivist research. In post positivism or

positivism approach determines causal-effect relationship among various elements of reality with

the help of observations and experiments (Phillips & Burbules, 2000). It is typically seemed as an

approach which is used for quantitative research.

3.5.2 Interpretivism approach

The supporters of the interpretivism have opposite beliefs against positivism, they believe

that knowledge can only be acquired by means of having good understanding of the concept of the

knowledge and exploring it in the world where they work and live. Interpretivism is also called as

constructivism or social constructivism (Creswell, 2014). It is purely used as an approach of

qualitative research.

3.5.3 Philosophical approach taken

In this study author, has not chosen the interpretivism approach because sufficient

knowledge is available in literature regarding corporate governance and firm performance.

Therefore, theory can be verified instead of generating new theory by taking prior assumptions of

singular reality rather than multiple realities. Such kind of studies are taken into consideration by

adopting positivism, so, positivism is selected as philosophical approach for this study.

36
3.6 Research Design

Research design is the roadmap to effectively address the research problem. It is the set of

strategies to align the whole research process. Research design is the whole picture of collection,

measurement and analysis of data. In this study, the ex post facto research design is selected, which

examined, how independent variable affects the dependent variable without random placement of

participants by using panel data for the period of ten years from 2007 to 2016 as it takes into

consideration for the collection of multi-dimensional and past data which give premise to the full

foundation of the relationship between corporate governance and the financial performance of

Listed Commercial Banks in Pakistan.

3.6.1 Data Source and Data collection

There are two types of data sources one is called the primary data source and the other is

known as the secondary data source.

The data which is collected by the researcher for some specific purpose is called primary

data. i.e. observations, interviews, questionnaires etc. While data which is collected by someone

other and utilized in research for specific purpose is known as secondary data. i.e. documents,

newspapers and reports etc.

In this study, the secondary data source is used which is collected through the annual

reports of the Money Deposited Banks listed in Pakistan Stock Exchange. All the data is collected

on the official websites of those listed banks.

37
3.6.2 Population and Sample Size

Population is the set of elements i.e. objects or things having similar qualities,

characteristics or attributes whereas the sample is the subset of the population

In this study, all the money deposited banks are selected as population which are listed in

Pakistan Stock Exchange. There are twenty banks which are listed in Pakistan Stock Exchange.

These listed banks are chosen because only these can be termed as public banks and can be

expected to comply fully with the requirements of the corporate governance set by the PICG. which

that are as under:

38
 Table 3.1: List of Banks

Serial number Symbol Name of the Bank

1. ABL Allied Bank Limited

2. AKBL Askari Bank Limited
3. BAFL Bank Al-Falah Limited
4. BAHL Bank Al-Habib Limited
5. BOK Bank of Khyber Limited
6. BOP Bank of Punjab Limited
7. BIPL Bankislami Pakistan Limited
8. FABL Faysal Bank Limited
9. HBL Habib Bank Limited
10. HMB Habib Metropolitan Bank Limited
11. JSBL JS Bank Limited
12. MCB MCB Bank Limited
13. MEBL Meezan Bank Limited
14. NBP National Bank of Pakistan
15. SBL Samba Bank Limited
16. SILK Silkbank Limited
17. SNBL Soneri Bank Limited
18. SCBPL Standard Chartered Bank Limited
19. SMBL Summit Bank Limited
20. UBL United Bank Limited
https://www.psx.com.pk

The employed population of this study is composed of twenty listed banks in Pakistan.

Whatsoever, these banks are also selected as the sample size for this study as well. Aside from the

way that the compulsory data for all the foretasted banks are accessible. The main reason behind

of this is to give more scope to generalizing the results and findings as past studies regarding to

39
this area covered less bank and short span of time. Practically. WP = n, where WP is equals to the

working population and n is equal to the sample size. In past, (Abdulazeez, et al., 2016; Lubabah

& Bawa, 2013) had also used in their working population as a sample size.

3.6.3 Variables Specifications and its Measurements

In this study, basically, there two variables and one control variable is used. Corporate

governance is utilized as an independent variable and financial performance of banks is used as a

dependent variable. The size of the firm is used as a control variable in this study which is proxied

by the total assets of the banks

Dependent Variable and its Measurements

The performance of the banks is used as an explained variable in this study for which two

proxies for the measurements of the banks performance are used one is ROA and second one is

the return ROE.

Return on Assets (ROA)

ROA is one of the main predictor of firm performance and profitability. ROA is calculated

by dividing the net profit after tax by the total assets of the banks to investigate that how

productively the assets of the banks have been used to generate maximum wealth.(Abdul Rahman

& Haneem Mohamed Ali, 2006; Hamid & Aziz, 2012)

ROA = Net Profit after Tax/Total Assets

40
Return on Equity (ROE)

Return on equity (ROE) is calculated by dividing the net profit after tax by the total equity

of the shareholders of the banks which indicates the profitability and financial performance of the

banks. This method for measuring the financial performance of banks is used by (Abdulazeez, et

al., 2016; Akpan & Riman, 2012)

ROE = Net Profit after Tax/Total Equity

Independent Variables and Its measurements

Corporate governance is the explanatory variable along with the following proxies and

measurements.

Corporate governance is used as explanatory (independent) variable which is counted and

proxied by the following indicators

Board Size (BS)

Board size represents the total number of directors in the board of a certain bank. There

should not be more than twenty (20) members in the board of directors as stated by the code of

corporate governance. This study assesses the degree of which banks’ performance will be affected

due to the board size

Board Composition (BC)

PICG focuses that there must be sufficient mix of board member. One third of the total

members of the board must be non-executive director. This is the number of external (non-

executive) directors in board. BC is counted by the percentage of external directors (non-executive

directors) to the total board members.

41
CEO/Chairman Duality (CD)

CEO duality occurs when single individual grips both the positions i.e. Chairman and CEO

of the company. CEO duality is used as a binary variable. For banks with one (1) value is assigned

if CEO and Chairman of the banks are separated and zero (0) value is assigned otherwise.

According to the PICG (2017) there should be two different offices for the post of the chairman

and CEO of the banks.

Audit Committee (AC)

According to the necessities of the CCG (2017), there should be at least three member in

AC. AC is measured by the total members in AC. Further, it is anticipated that the higher the

number of members in accord with the set limit by CCG, the healthier the performance of the

banks.

Board meetings (BM)

According to the prerequisite of the revised Pakistani CCG (2017), organizations are urged

to have consistent board meetings for releasing obligations and duties. It is essential for the board

to arrange at least four (4) sessions during the calendar year. BM is the total number of meeting

detained by any bank within a year.

Audit Committee Meetings (ACM)

Investors’ benefits are secured over the exercise of audit committee since organization may

not generally perform in the light of a legitimate concern for organization’s proprietors. Studies

regarding in support of a large audit committees, stated that when more individuals are engaged

with checking the exercises of supervisors, bad behaviors will be diminished and performance will

be improved. ACM frequency means the total number of audit committee meetings which are

conducted during the year.

42
Control variable

The size of the banks is taken into consideration as a control variable in this investigation

which is counted by the total assets of every bank. The natural logarithm was occupied for reducing

the large values of the banks’ total assets due to reason of large values of the total assets of the

banks. Which could create difficulty at the time of running the regression analysis for data.

Performance might be affected due to some supplementary factors which are not captured in the

explanatory variables (independent variables). So, size of the firm (FS) is utilized as a control

variable in this study of financial performance of the banks.(Abdulazeez, et al., 2016)

Table 3.2 Summary of Variables

Names of Variable Symbol Definition

Dependent variable

Return on Asset ROA Calculated by dividing the net profit after tax to total

Assets of the Banks

Return on Equity ROE Counted by dividing the net profit after tax to total

Equity of the Banks

Independent Variables
Board size BS Total number of members in board of directors
Board Composition BC Proportion of non-executive (external) directors in
board
CEO Duality CD One (1) value is assigned if CEO and Chairman are
Separated and zero (0) for the same.
Audit Committee AC Total number of members in audit committee
Audit Committee Meetings ACM Total number of audit committee meetings held in a
year
Board Meetings BM Total number of audit board meetings held in a year
Control variables
Firm size FS Natural logarithm of the total net assets of the banks

43
3.7 Theocratical Framework

Independ Variables

Dependent Variables
Corporate Governance
 Board Size
 Board Composition
 CEO Duality
 Audit Committee
size
 Audit Committee
Meeting Firm Performance
 Board Meeting

 Return on Assets
 Return on Equity

Control Variables
 Firm Size

Figure 3.1: Theoretical Framework

44
Model Specification

This study implements and adjusts the econometric model which is also used by

(Abdulazeez, et al., 2016; Adeusi, et al., 2013) which is given as under:

Yit = a0 + b1CGit + b2Cit + eit

This model is modified into the following two models:

Model (1)

ROAit = a0 + β1BSit + β2BCit + β3CDit + β4ACit + β5BMit + β6ACMit + β7FSit + eit

Model (2)

ROEit = a0 + β1BSit + β2BCit + β3CDit + β4ACit + β5BMit + β6ACMit + β7FSit + eit

Y = Performance of the banks

I = with respect to individual

t = time

a0 = constant term

CGit = vector term for corporate governance

BS = Board size

BC = Board composition

CD = CEO Duality

AC = Audit Committee size

BM = Board meetings

ACM = Audit committee meetings

FS = Firm Size

ROA = Return on Assets

45
ROE = Return on Equity

3.8 Data analysis technique

All the data is collected through the annual audited reports of the listed banks. Annual audit

reports are downloaded from their official websites. The collected data is entered in Statistical

software STATA 13 for performing different data analysis. Different pre-and post-statistical

analysis are done with the help of these software i.e. descriptive analysis, correlation analysis,

regression analysis and multicollinearity tests to strengthen the study. The details of all the analysis

and tests is given in the next chapter 4.

3.9 Ethical issues

In this research, some ethical issues are taken into consideration. Firstly, all the data are

collected with complete honesty and analysis of the data are done because of data collected.

Researcher did not show any personal biasness in the study so that the objectives of the study can

be achieved. Seriousness and great care is shown by the researcher while collecting the data and

applying different analysis and their interpretations. For the acknowledgment to the researcher,

proper citation and End list referencing have been made. All the results depend on the data given

on the annual audit reports of all the listed banks.

3.10 Summary of the chapter

In this chapter, main viewpoints, tactics and different approaches of the research has been

discussed with the proper justification of chosen the relevant philosophy, suitable approach and

supported methods for this study. Furthermore, research design, brief introduction of analysis,

model specification and ethics are also discussed in this chapter.

46
 CHAPTER 04

ANALYSIS AND DISCUSSION

4.1 Chapter Overview

In this chapter, to evaluate the impact and relationship between corporate governance and

financial performance of the banks, quantitative data technique is used. The performance of the

listed banks is counted by means of ROA and ROE as dependent variables and different

independent variables along with control variable. Based on secondary data, analyze some

descriptive tests. Analytical Techniques begin with descriptive tests and use different regression

model estimates to get the effect of dependent variables on the explanatory (independent)

variables. OLS model, lag range multiplier, multicollinearity test and Pair wise correlation analysis

for the relationship between variables. The research section describes the analysis of this study.

4.2 Descriptive Statistics

The table 4.1 describes the results of a statistical sample by calculating the basic statistical

parameters. The descriptive examination of the study reveals that the sum of observations, mean

values, standard deviation, minimum values and maximum values of the data.

47
 Table 4.1: Descriptive Statistics

Variables Observations Mean SD Minimum Maximum

ROA 200 .007023 .0178413 -.092 .0438
ROE 200 .055607 0.3163617 -1.989 .3766
BS 200 8.62 1.735123 4 13
BC 200 .618644 0.227359 .121 .954
CD 200 .965 0.1842409 0 1
AC 200 3.92 .9686545 2 7
BM 200 6.51 2.024945 3 17
ACM 200 5.565 3.556546 3 28
SIZE 200 12.42231 1.152441 9.578173 14.73467

4.2.1 Interpretation of Descriptive Statistics

The descriptive analysis of the study represents that ROA has the number of the

observations is 200, the mean value is .007023 that shows the average ROA is 0.07% annually

and the standard deviation of ROA is .0178413 which represents the variance and deviation from

mean in data and minimum and maximum values of ROA are -.092 and .0438 respectively.

The mean value of ROE is .055607 that defines the banks give the return on equity 5% per

anum and the standard deviation value is .3163617 that depicts the variance of the data. -1.989 and

.3766 are the minimum and maximum values of the data with respect to ROE. Comparatively,

ROE has the greater standard deviation which represents ROE is riskier than ROA.

Likewise, the Average value of BS is 8.62 which displays that approximately 9 members

are included in the Board of directors in average and the deviation in BS is 1.735123. 4 and 13 are

the lower and upper boundaries of the members in the board of directors.

48
 The average value of BC is .618644 which explains that about 61.8 % of the total members

of the board are the external (non-executive) directors. The value of standard deviation is 0.227359

which represents the expected change in the composition of board. The maximum value of BC is

.954 which represents the maximum portion of non-executive members in board.

The CD mean value .965 explains that 96.5% of the banks are those which have separate

positions of CEO and Chairman of the board.

AC average value is 3.92 which defines that there are about 4 members in audit committee

on average and .9686545 shows the standard deviation. Audit committee of banks contains

minimum 2 and maximum 4 members.

The mean value of BM 6.51 which displays the normal number of BM held during the year.

There was minimum 3 and maximum 17 sessions held throughout the year by board.

The mean value of ACM 5.565 which shows the average figure of audit committee

meetings detained in a year. There was minimum 3 and maximum 28 meetings held in a year by

board.

The average value of size 12.42231 that represents the average log of total assets of the

banks with an expected deviation of 1.152441.

49
4.3 Pair-wise Correlation Matrix

Correlation analysis portrays the relationship among different variables. The table 4.2

shows the pair-wise correlation among variables.

Table 4.2: Pair-wise correlation Matrix

Variables BS BC CD AC BM ACM size

BS 1.0000

BC 0.1659 1

CD 0.1783 -0.1489 1

AC 0.2389 0.5480 -0.1002 1

BM -0.0289 -0.1245 -0.2752 0.1541 1

ACM -0.0929 0.1663 -0.7672 0.2991 0.2368 1

SIZE 0.0958 0.3501 -0.2477 0.2514 0.1978 0.2899 1

4.3.1 Interpretation of Pair-wise Correlation matrix

The results of analysis show that there is a positive and but not too strong because their

value is less than 0.50 except one pair of variable among BS (board size) and BC (board

composition) with the value of .1659, BS and CD (CEO Duality) having the value of .1783, BS

and Size, BC and AC (audit committee), BC and ACM (audit committee meetings), BC and size,

AC and BM, AC and ACM, AC and Size, BM and ACM, BM and Size, and ACM and Size with

the values of .2389, .0958, .5480, .1663, .3501, .1541, .2991, .2514, .2368, .1978 and .2899

respectively.

50
 There is negative relationship is found but not too strong among different pairs of variables

such as BS and BM, BS and ACM, BC and CD, BC and BM, CD and AC, CD and BM, CD and

ACM, CD and size having the values of -0.0289, -0.0929, -0.1489, -0.1245, -0.1002, -0.2752, -

0.7672 and -0.2477 orderly.

4.4 Multicollinearity Test

When the predictors are multiple, there is a chance of multicollinearity. The existence of

multicollinearity does not matter but its severity is. According to Gujarati (2009) predictors are

very relevant if the VIF of the variables is greater 10 and the TV is less than 0.10, if the VIF is

greater than 5 but less than 10, there exists mild multicollinearity which is ignorable. If the VIF is

less than 5 it shows no multicollinearity exists between the variables. The table represents the

outcomes of multicollinearity test.

Table 4.3: Multicollinearity Results

Variables Variance Inflation Factor (VIF) 1/VIF
BS 1.12 0.891451
BC 1.79 0.557905
CD 2.82 0.355202
AC 1.84 0.544325
BM 1.26 0.791808
ACM 2.88 0.347222
Size 1.12 0.780911

Mean VIF 1.86

51
4.4.1 Interpretation of Multicollinearity

The above results show that VIF values of all predictors is less than 10 and TV is also

greater than 0.10. In addition, mean value of VIF of all the variable which is 1.86 also less than 10

that concludes that there is no multicollinearity among the predictors of the study.

4.5 OLS Model, Random Effect Model (REM) and Fixed Effect Model (FEM) for ROA

There are three models are regressed on our panel data that is OLS model, Random effect

model and Fixed effect model and results are as under as follows:

Table 4.4 Regression Results: ROA

Ordinary least Square Random Effect Model Fixed Effect Model
Variable Coeff. t-Stat. Variable Coeff. t-Stat. Variable Coeff. t-Stat.
C -.069208 -4.89** C -.078257 -4.43*** C -.089856 -3.70***
BS .001181 2.14*** BS .001443 1.85* BS .002327 1.85*
BC .027762 5.21*** BC .028013 4.83*** BC .026911 3.98***
CD -.008020 -0.97 CD -.006210 -.75 CD -.004491 -0.52
AC .002379 1.88* AC .002576 1.95* AC .002542 1.76*
BM -.002420 -4.82*** BM -.001943 -3.28*** BM -.001486 -2.04**
ACM -.000162 -0.38 ACM -.000291 -.62 ACM -.000391 -0.72
Size .005148 5.80*** Size .005287 4.61*** Size .005344 3.18***
2
F-Stat 28.18 Wald-x 120.61 F-Stat 10.85
2 2 2
R 0.5068 R within 0.3005 R within 0.3050
2
Adjs. R 0.4888 Between 0.7526 Between 0.6978
Overall 0.5021 Overall 0.4797
Significant at the level of 1% shown ***
Significant at 5% shown **
Significant at 10% shown *

4.5.1 Interpretation of models

By using ROA as a proxy for the measurement of performance, we run regression by using

the three models i.e. OLS, FE and RE model. By using OLS model, RE (random effect) model and

FE (fixed effect) model, we obtain the results which show that Board size, Board composition,

52
Audit committee and Board meetings impact on ROA significantly while CEO Duality and Audit

committee meetings are insignificant.

4.5.2 Selection of Appropriate Model for ROA

LM Test

Breusch and Pagan Lagrangian multiplier test for the selection of better model between

OLS and random effect model

H0: OLS model is good fit

H1: Random Effect model is good fit

Results

chibar2(01) = 11.67

Prob > chibar2 = 0.0003

So, the researcher rejected the null hypothesis which shows that Random Effect model is

good fit.

F restricted test

F restricted test is applied for the chosen of appropriate model between OLS and Fixed

Effect model.

H0: OLS model is good fit

H1: Fixed Effect model is good fit

53
Results

F= 10

So, the researcher rejected the null hypothesis which recommends that FE model is good

fit.

Hausman Test

By applying the Hausman test, the researcher tested the following hypothesis for the

selection of most appropriate model

H0: RE model is best.

H1: FE model is best

Results

The researcher got the results chi2 = 3.25 while Prob > chi2 = 0.8607. However, the

researcher failed to reject the null hypothesis that shows the RE model is most appropriate for the

regression analysis based on ROA model.

54
 4.6 OLS Model, REM and FEM for ROE

There are following three models are regressed on our panel data that are OLS, RE and FE

models and results are shown as under:

Table 4.5 Regression Results: ROE

Ordinary least Square Random Effect Model Fixed Effect Model

Variable Coeff. t-Stat. Variable Coeff. t-Stat. Variable Coeff. t-Stat.
C -.9638387 -3.53** C -1.191843 -3.48*** C -1.378438 -3.22***
BS .0096846 0.91 BS .0329681 2.13** BS .0769329 0.065*
BC .3801685 3.70*** BC .3285573 3.02*** BC .2207765 1.85*
CD -.0232216 -0.15 CD -.0127576 -0.08 CD .0249813 0.16
AC .0660309 2.71*** AC .060279 2.46*** AC .0532653 2.09**
BM -.0533226 -5.51*** BM -.0276357 -2.45*** BM -.0098795 -0.77
ACM .0061402 0.74 ACM .0011143 0.13 ACM -.0020115 -0.21
LnSIZE .0625731 3.66*** LnSIZE .0571335 2.55*** LnSIZE .038391 -3.22***
F-Stat 19.64 Wald-x2 72.44 F-Stat 8.23
R2 0.4173 R2within 0.2229 R2within 0.2499
Adjs. R2 0.3960 Between 0.5358 Between 0.1923
Overall 0.3746 Overall 0.2095
Significant at the level of 1% shown ***
Significant at 5% shown **
Significant at 10% shown

Explanation

By using ROE as a proxy for the measurement of performance of banks, the researcher run

regressions by using the three models i.e. OLS, FE and RE model. By using OLS model, RE

(random effect) model and FE (fixed effect) model, he obtained the results which show that Board

size, Board composition, Audit committee and Board meetings impact on ROA significantly while

CEO Duality and Audit committee meetings are insignificant.

55
4.6.1 Selection of Appropriate Model for ROE

LM Test

Breusch and Pagan Lagrangian multiplier test for the selection of better model between

OLS and random effect model

H0: OLS model is good fit

H1: Random Effect model is good fit

Results

chibar2 = 29.19

Prob > chibar2 = 0.0000

So, the researcher rejects the null hypothesis which shows that Random Effect model is

good fit.

F restricted Test

F restricted test is applied for the chosen of appropriate model between OLS and Fixed

Effect model.

H0: OLS model is good fit

H1: Fixed Effect model is good fit

Results

F= 13

So, the researcher rejects the null hypothesis which recommends that FE model is good fit

56
Hausman test

By applying the Hausman test, the researcher tested the following hypothesis for the

selection of most appropriate model

H0: RE model is best.

H1: FE model is best.

Results

The researcher got the results chi2 = 19.14 while Prob > chi2 = 0.0078. However, the

researcher rejects the null hypothesis that represents FE model is most appropriate for the

regression analysis because of ROE model.

57
4.7 Final Regression Analysis for ROA and ROE

Table 4.6 REM and FEM

Model 1 for ROA Model 2 for ROE

Variables Coefficient t-Stat. Variables Coefficient t-Stat.
C -.0782579 -4.43*** C -1.378438 -3.22***
BS .0014434 1.85* BS .0769329 3.48*
BC .0280132 4.83*** BC .2207765 1.85*
CD -.0062105 -.75 CD .0249813 0.16
AC .0025767 1.95* AC .0532653 2.09**
BM -.0019436 -3.28*** BM -.0098795 -0.77
ACM -.0002915 -.62 ACM -.0020115 -0.21
SIZE .005287 4.61*** SIZE .038391 -3.22***
F-Stat 120.61 F-Stat 8.23
P-value 0.000 P-value 0.0000
R2within 0.3005 R2within 0.2499
Between 0.7526 Between 0.1923
Overall 0.5021 Overall 0.2095
Significant at the level of 1% shown ***
Significant at 5% shown **
Significant at 10% shown

4.7.1 Interpretation of Results

According to the results of Hausman test for both performance measures i.e. ROA and

ROE, RE model is chosen for ROA and FE model is suitable for measuring the performance by

means of ROE.

Interpretation of intercept

For model 1, C is the constant term, the coefficient value of C is -.0782579 which represent

that the performance in term of ROA will be equal to -.0782579 units by keeping all other

independent variables to be constant.

58
 While for model 2, coefficient value of C is -1.378438 that represents that performance of

the banks in term of ROE is equal to -1.378438 units by keeping all other variables to be constant.

Interpretation of BS

According to model 1, coefficient value of BS is .0014434 that shows that one-unit increase

in BS will bring .0014434 units increase in performance of Pakistani listed banks in terms of ROA

on average by keeping all other explanatory variables constant. T-statistics is 1.85* with one steric

which represent at 5% level of significance BS has a positive and committed relationship with

performance of listed banks in Pakistan in terms of ROA.

While in model 2, coefficient value of BS is .0769329 that shows that one-unit increase in

BS will bring .0769329 units increase on average in performance of the banks with respect to ROE

while keeping all other explanatory variables constant. 3.48* is T-statistics with one steric which

represent at 5% level of significance BS has a positive and significant relationship with

performance of banks in terms of ROE.

Interpretation of BC

In model 1, .0280132 is the coefficient value of BC that defines that one-unit increase in

BC will bring .0280132 units increase in performance of registered banks in PSX in terms of ROA

on average by keeping all other explanatory variables constant. T-statistics is 4.83*** with three

steric which represent at 1% level of significance BC has a positive and significant relationship

with performance of banks in terms of ROA.

While in model 2, coefficient value of BC is .2207765 that shows that one-unit increase in

BC will bring .2207765 units increase on average in performance of the banks with respect to ROE

while keeping all other explanatory variables constant. 1.85* is T-statistics with one steric which

59
represent at 10% level of significance BC has a positive and significant relationship with

performance of banks in terms of ROE

Interpretation of CD

Coefficient value of CD in model 1 is -.0062105 which shows that one-unit increase in CD

will bring -.0062105 units decrease in performance of PSX listed money deposited banks in terms

of ROA on average by remaining all other independent variables as constant having very low T-

statistics i.e. -.75 with no steric which represents that CD has negative but insignificant relationship

with performance of banks in terms of ROA.

Coefficient value of CD in model 2 is .0249813 which explains that one-unit increase in

CD will bring .0249813 units increase in performance of listed banks in terms of ROE on average

by remaining all other independent variables as constant having very low T-statistics i.e. 0.16 with

no steric which represents that CD has no significant relationship with performance of banks in

terms of ROE.

Interpretation of AC

In model 1, AC has the coefficient value of .0025767 that describes one-unit increase in

AC will bring .0025767 units increase in performance of Pakistani listed banks in terms of ROA

on average by remaining all other independent variables as constant having T-statistics i.e. 1.95*

with one steric which represents that at 10% level of significance, AC has a positive and significant

relationship with performance of banks in terms of ROA.

Whereas in model 2, AC has the coefficient value of .0532653 that describes one-unit

increase in AC will bring .0532653 units increase in performance of the banks by using ROE as a

proxy measure on average by remaining all other independent variables as constant having T-

60
statistics i.e. 2.09** with two steric which represents that at 5% level of significance, AC has a

positive and sincere relationship with performance of banks in terms of ROE.

Interpretation of BM

In model 1, BM has the coefficient value of -.0019436 that shows one-unit increase in BM

will bring -.0019436 units decrease in performance of banks in Pakistan with respect to ROA on

average by putting all other independent variables as constant having T-statistics i.e. -3.28*** with

three steric which represents that at 1% level of significance, BM has a negative and significant

relationship with performance of banks in terms of ROA.

Whereas in model 2, the coefficient value of BM is -.0098795 that describes one-unit

increase in AC will bring -.0098795 units increase in performance of the banks by using ROE as

a proxy measure on average by remaining all other independent variables as constant having T-

statistics i.e. -0.77 with no steric which specifies that BM has a negative but insignificant

relationship with performance of banks in terms of ROE.

Interpretation of ACM

In both models, coefficient values of ACM are -.0002915 and -.0020115 respectively with

very low T-statistics i.e. -.62 and -0.21 that explains ACM has neither relationship with ROA nor

ROE.

61
Interpretation of Size

In both models, coefficient values of Size are .005287 and .038391 respectively. T-

statistics values are 4.61*** and -3.22*** with three steric that represents firm size has and

significant and positive relationship at 1% level of significance with ROA while in case of ROE

Size of the banks has a negative but highly meaningful relationship with the performance of the

banks.

Interpretation of F-statistics, R-Squared and Probability Value

According to the hausman test RE model is good fit for measuring the performance of the

banks by using the ROA while in case of ROE, FE model is good fit for our study. Overall R

squared depicts the descriptive power of the model. In model 1, the value of overall R squared is

50.21% as given in the table 4.8. R-squared displays that change in dependent variable

(Performance) is 50.21% due to independent variable while the rest of the change in performance

due to other factors such as control variable and error term.

Whereas in model 2, overall value of R-squared is 20.95% as given in the table 4.8. R-

squared portrays that change in dependent variable (Performance) is 20.95% due to explanatory

variables while the rest of the change in performance due to other factors such as control variable

and error term.

62
4.8 Hypothesis testing and discussion

After conducting regression analysis by using random effect model for ROA which is used

as a proxy for performance of the banks whereas fixed effect model is used for measuring the

performance of the banks in which ROE is taken as an indicator for the assessment of the

performance of listed banks. The hypothesis discussed in the Chapter 2 will be accepted or rejected

finally in this section.

4.8.1 BS and Firm Performance

The first hypothesis of this study HA defines that there is a significant and positive

relationship between board size and firm performance calculated by using ROA and ROE. The

results of the random effect panel data regression are consistent with this hypothesis. So, the

researcher rejects our null hypothesis against this hypothesis. It means that BS can influence the

performance of the money deposited banks listed in PSX. this study is also supporting the findings

of (Abdulazeez, et al., 2016; Adeusi, et al., 2013; Akbar, 2014), all of them established that greater

board size donates more in the performance of the banks than lesser size of the board of directors.

Furthermore, our study is inconsistent with the study of the (Akola, et al., 2012; Akpan & Riman,

2012; Bawa & Lubabah, 2012; Osuagwu, 2013; Topak, 2011) those recommend the smaller board

size has more contribution in the performance of banks than bigger size of the board.

4.8.2 BC and Firm Performance

The second hypothesis HB indicates that BC has a positive and significant impact on

performance of the firm counted by ROA and ROE. The outcomes of our regression analysis

confirm that there is a positive and highly significant relationship between BC and performance of

the money deposited banks listed in PSX which indicates more number of external (non-executive)

63
members in the board play a significant role in the performance of the banks. So, the researcher

rejects the null hypothesis against BC. The results of our study are consistent with the study of

(Heenetigala & Armstrong, 2011) who also found a strong relationship between board composition

and financial performance measured by ROA and ROE.

4.8.3 CD and Firm Performance

The third hypothesis of this study HF represents that CD has a significant relationship with

the performance of the banks. We investigate no association between CD and performance of the

banks measured with the help of ROA and ROE. Thus, the failed to reject the null hypothesis

against H33. It means CD does not matter in the performance of banks in Pakistan. The findings of

this study are consistent with the results of (Abdulazeez, et al., 2016) who also identified an

insignificant relationship between CD and performance of the banks by using ROA as a

performance indicator. On the other hand, this study is inconsistent with the study of (Akbar, 2014;

Lubabah & Bawa, 2013) who concluded that a significant impact of CD on firm financial

performance.

4.8.4 AC and Firm Performance

The fourth hypothesis HC predicted that there is a positive and significant relationship

between AC size and financial performance of the listed banks in Pakistan. Since the outcomes of

regression analysis, the researcher found a significant and positive relationship between AC size

and the performance of the banks which shows that AC size can positively influence the

performance of the banks in Pakistan. this study also proves the study of (Mollah & Talukdar,

2007; Zábojníková, 2016) who also investigated a positive and significant impact of AC on the

financial performance. On the other side, our results are incompatible with the results of (Kajola,

64
2008; Mak & Kusnadi, 2005) who discovered a negative and insignificant association between AC

and financial performance of the firm.

4.8.5 BM and Firm Performance

The fifth hypothesis HD which anticipates a significant impact of board meeting and

financial performance of money deposit banks in Pakistan. The results obtain by regression

analysis represents a negative but significant association between BM and financial performance

of banks by using ROA. The findings of this are similar with the findings of (Conger & Lawler,

2009; Francis, et al., 2015; Johl, 2006). In case of ROE, the researcher could not find any

substantial impact of BM on performance of the banks in Pakistan which in accord with the results

of (Francis, et al., 2015; Johl, 2006)

4.8.6 ACM and Firm Performance

The last hypothesis HE predicts that ACM have a significant impact on financial

performance of the banks in Pakistan but in our regression analysis the researcher finds that there

is insignificant impact of ACM on the performance. So, the researcher failed to reject the null

hypothesis against H66. It implies that there is negative but minor impact of audit committee

meetings on the performance of the banks in Pakistan. These results are similar to the results of

(Bansal & Sharma, 2016) who also found an insignificant impact of ACM on financial

performance calculated by ROA and ROE.

Firm size is taken as a control variable which shows the significant and positive connection in

case of ROA while and negative relationship is found in term of ROE.

65
4.9 Comparison of the REM and FEM

According to hausman test, REM is chosen for measuring the performance in term of ROA

and FEM is selected for the measurement of performance by using ROE as an indicator. In both

model BS, BC, AC are significant but BM is significant is model 1 but BM is insignificant in

model 1. Whereas CD and ACM are insignificant in both models.

4.10 Summary of the Chapter

In this chapter, different analysis is done. At start, descriptive analysis and pair-wise

correlation matrix analysis is done. After that three models of regressions are presented along with

the explanation. At the end, hypotheses are tested and results are explained.

66
 CHAPTER 05

CONCLUSIONS AND RECOMMENDATIONS

5.0 Chapter Overview

This chapter provides a comprehensive summary about the impact of corporate governance

on the financial performance of the banking sector of Pakistan and provides recommendations on

the basis of empirical findings and analysis that may provide guidance to the regulatory body of

banking sector in Pakistan for improvement of financial performance of the banking sector. Main

results of this study are discussed. Finally, the limitations and future recommendations are

discussed.

5.1 Conclusions of the Study

In the business context, corporate governance is an essential factor that affects a company’s

performance because owners and managers are two different things. In recent years, the area of

corporate governance has grown in importance by cause of the increasing number of administrative

frauds like Enron and WorldCom. Numerous studies have been led in developed countries to

examine the perceived connection between corporate governance gears and corporate

performance. This study also examines a similar phenomenon in context to banking sector in

Pakistan. A comparative analysis of regression estimates, random effects and fixed effects on the

extent to which Pakistani banks adopt a corporate governance structure in line with corporate

governance guidelines from 2007 to 2016. The value of data depends upon the twenty Money

Deposited Banks listed in PSX for the period of ten years from 2007 to 2016. Corporate

governance is measured by different variables such as Board Size (BS), Board Composition (BC),

CEO Duality (CD), Audit Committee (AC) size, Board Meetings (BM) and Audit Committee

Meetings (ACM) while ROA and ROE are taken as indicators for measuring the performance of

67
the banks by using Firm Size as a control variable which is proxied by the total assets of every

listed bank in Pakistan.

The outcomes of regression analysis represent that board size has a significant and positive

relationship with ROA and ROE. The results of the descriptive statistics express that the average

size of the board of banks in Pakistan is approximately 9 members. The regression analysis reveals

that banks having bigger board size impact performance of the banks more than those having small

board size. Furthermore, when the BS is large, it’s hard for a person (probably Chief Executive

Officer) leading the board, the board made the decision seems to be derived from strong and

constructive arguments. Board Composition and Audit Committee size are also significant

positively. Whereas Board Meetings is negatively significant with the performance of banks with

respect to ROA while Board Meetings is insignificant in ROE.

5.2 Recommendations

It is recommended that the board size of the banks should be large because it is directly

impact the performance of the banks but the maximum figure of members in board should not be

more than the specified by Pakistan Institute of Corporate Governance (PICG).

It is further recommended that while there should be more external (non-executive)

members in the board because they are experts people and having diversified experiences in

business. Their expertise are positively affects the performance of the banks in Pakistan.

The banks should avoid unnecessary board meetings because they have negative impact on

performance of banks in Pakistan. It may be due to heavy expenses occurred on conducting the

unnecessary board meetings.

68
5.3 Limitations

The scope of this research study is focused to limitations on sample size. Sample size is

consisted of 20 money deposited banks which listed in PSX. These registered banks are nominated

on the basis of availability of data.

The findings of this study are generalizable only to the listed banks in Pakistan. The size

of the sample is very small, prohibiting an in-detail study of the relationship between the variables.

The results may vary if the sample size is large. The study period includes the period from

2007 to 2016 and the data are collected from the banks’ annual reports as a secondary source of

data and results are based on the available information in annual reports.

Due to time and data limitations, non-listed banks are not involved in this study.

Despite the result and the methods used in this study, the results and comments may be biased due

to manipulation of financial statements of banks or other means.

5.4 Future Directions

In this study, due to the different limitations, only listed banks are included while in future

the study on this topic can be conducted by taking a comparison with non-listed banks or with

another sector. The new variables can be added regarding board of directors i.e. their qualifications

and experiences etc. to explore this study.

5.5 Summary of the Chapter

This chapter presents the broad conclusions and recommendations which are based on

findings and results of this study. In addition, this chapter also discusses the limitations and future

research directions.

69
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 Appendixes
Appendix A: List of Tables
Sr. No. Name of tables

1 3.1 List of Banks

2 3.2 Summary of Variables

3 4.1 Descriptive Statistics

4 4.2 Pair Wise Correlation Matrix

5 4.3 Multicollinearity Test

6 4.4 Regression Results for ROA

7 4.5 Regression Results for ROE

8 4.6 Conclusive Results

Appendix B: List of Abbreviations

Abbreviation Meaning of Abbreviation

ROA Return on Assets

ROE Return on Equity

BS Board size

BC Board Composition

CD CEO Duality

AC Audit Committee

BM Board Meetings

ACM Audit Committee meetings

FS Firm Size

79
PSX Pakistan Stock Exchange

KSE Karachi Stock Exchange

LSE Lahore Stock Exchange

ISE Islamabad Stock Exchange

ASE Amman Stock Exchange

FTSE Financial Times Stock Exchange

NSE National Stock Exchange

SEC Securities and Exchange Commission

SECP Securities and Exchange Commission of Pakistan

PICG Pakistan Institute of Corporate Governance

CCG Code of Corporate Governance

OLS Ordinary Least Squares

FEM Fixed Effect Model

REM Random Effect Model

CEO Chief Executive Officer

80