You are on page 1of 12

Corporate Governance: The International Journal of Business in Society

Corporate governance and firm value: a comparative analysis of state and non-state owned companies in
the context of Pakistan
Kalim Ullah Bhat, Yan Chen, Khalil Jebran, Niaz Ahmed Bhutto,
Article information:
To cite this document:
Kalim Ullah Bhat, Yan Chen, Khalil Jebran, Niaz Ahmed Bhutto, (2018) "Corporate governance and firm value: a
comparative analysis of state and non-state owned companies in the context of Pakistan", Corporate Governance: The
International Journal of Business in Society, Vol. 18 Issue: 6, pp.1196-1206, https://doi.org/10.1108/CG-09-2017-0208
Permanent link to this document:
https://doi.org/10.1108/CG-09-2017-0208
Downloaded on: 22 November 2018, At: 06:40 (PT)
References: this document contains references to 34 other documents.
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

To copy this document: permissions@emeraldinsight.com


The fulltext of this document has been downloaded 196 times since 2018*
Users who downloaded this article also downloaded:
(2017),"Corporate governance and firm performance in Malaysia", Corporate Governance: The international journal of
business in society, Vol. 17 Iss 5 pp. 896-912 <a href="https://doi.org/10.1108/CG-03-2016-0054">https://doi.org/10.1108/
CG-03-2016-0054</a>
(2018),"Governance structures, cash holdings and firm value on the Ghana Stock Exchange", Corporate Governance:
The international journal of business in society, Vol. 18 Iss 4 pp. 671-685 <a href="https://doi.org/10.1108/
CG-07-2017-0148">https://doi.org/10.1108/CG-07-2017-0148</a>

Access to this document was granted through an Emerald subscription provided by emerald-srm:608971 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication
Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.


Corporate governance and firm value:
a comparative analysis of state and
non-state owned companies in the
context of Pakistan
Kalim Ullah Bhat, Yan Chen, Khalil Jebran and Niaz Ahmed Bhutto
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

Kalim Ullah Bhat is Doctoral Abstract


Student at the School of Purpose – The purpose of this paper is to examine how corporate governance instruments impact firm
Accounting, Dongbei value in the context of Pakistan. This paper considers state- and non-state-owned enterprises and
University of Finance and examines whether the influence of corporate governance on firm value varies across firms having
Economics, Dalian, China. different nature of ownership.
Yan Chen is Professor and Design/methodology/approach – This study opts for an unbalanced sample of state- and non-state-
owned enterprises for the period 2010-2014. Panel data regression is adopted for estimation of main results.
Khalil Jebran is Doctoral
The suitable model, i.e. fixed and random effect model, is selected using Hausman specification test.
Student, both at the
Findings – The notable findings show that board independence has a significant and positive
Dongbei University of
relationship with firm value only for state-owned companies. Furthermore, the results show that market
Finance and Economics, capitalization and return on assets have a significant and positive association with firm value for both
Dalian, China. Niaz Ahmed state- and non-state-owned enterprises. All other variables are found insignificant for both state- and non-
Bhutto is Professor at the state-owned companies, but the results are consistent with those reported in previous studies.
Sukkur Institute of Business Practical implication – The findings of the study suggest that fair induction of independent directors,
Administration, Sukkur, appropriate board size and cost-benefit analysis to conduct frequent meetings can help corporations to
Pakistan. improve their performance.
Originality/value – This study is adding to the current literature by providing new insights and shows that
the impact of corporate governance on firm value varies across firms of different types of ownership, i.e.
state- and non-state-owned enterprises.
Keywords Board size, Board independence, Board meetings, TobinQ
Paper type Research paper

1. Introduction
In developed countries, there is vast literature on the investigation of the relationship
between corporate governance and firm value, and researchers have made big debates in
specific areas (Coles and Hesterly, 2000; Pass, 2004). It is also noticed that researchers
have contributed to the literature in emerging countries where big discussions are made on
the role of corporate governance on firm performance for instance by Arora and Sharma
(2016). The need to discuss corporate governance arises as a result of some scams and
collapses in the corporate sector. Anomalies result from having a weak structure of
corporate governance, which gives rise to need for reforms to improve the corporate
Received 7 September 2017
Revised 28 March 2018
governance system (Arora and Sharma, 2016), and it can ultimately help in reducing
21 April 2018 inefficiencies in the corporate sector. Ineffective corporate governance systems play a vital
7 May 2018
30 May 2018
role in the occurrence of accounting scams; thus, corporations having weak governance
Accepted 4 June 2018 are more inclined to anomalies (Berkman et al., 2009).

PAGE 1196 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018, pp. 1196-1206, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-09-2017-0208
Firms having a weak structure of corporate governance are keen to perform poorly because
of the principal and agent conflict; hence, agents of certain firms are more benefited (Core
et al., 1999). From the perspective of agency theory, there is a conflict of interest between
the board of members and shareholders (Letza et al., 2004). It is also suggested in the
agency theory that the objective of corporate governance is to assure the shareholders of
the company that agents are doing their best to maximize the wealth of shareholders
(Shleifer and Vishny, 1997).
From the perspective of stewardship theory, bigger boards can have a positive effect on
firm value by using diverse expertise from large members of a board (Rashid and Islam,
2013). However, companies having bigger board size are supposed to bear huge cost to
coordinate and process problems; thereby, high costs can reduce efficiency (Anderson
and Reeb, 2003; Coles et al., 2008). On the other hand, in case of smaller board size, cost
is reduced and inhibits free-riding and ultimately leads to better performance (Eisenberg
et al., 1998; Yermack, 1996).
Board consisting of independent directors reduces the agency cost which arises as a result
of conflict between principal and agent; on the contrary, it is argued that the limited time
which independent directors spend together may not be meaningful for the interest of
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

organization (Vafeas, 1999). However, frequent meetings of the board of directors possibly
lead members of a board to act by shareholders’ interest and ultimately can yield better
performance (Conger et al., 1998). There is a consensus among researchers that return on
assets and market capitalizations have a positive impact on firm performance.
In recent past, the relationship between corporate governance and firm performance has
been highly investigated, and most of the research on specific topics has been done in
developed countries (Barnhart et al., 1994; Bauer et al., 2004; Guest, 2008; Hermalin and
Weisbach, 1991; Judge et al., 2003; Kang and Shivdasani, 1995; Pass, 2004). However, in
the context of developing countries, the empirical work is at infancy level; this is most
probably because of lack of availability of data or because corporate governance is least
practiced in the organizations. There are many studies conducted to investigate the
relationship between corporate governance instruments and firm performance in emerging
economies, for instance (Arora and Sharma, 2016; Nadeem and Zongjun, 2012;
Ramachandra and Rathish, 2017). Although Sarkar and Sarkar (2000) argue that because
of big amount of institutional debt in emerging economies, it is hard to calculate the correct
value of its replacement. Replacement value of institutional debt is not calculated in a proxy
that was recently used in the context of Malaysia for value of a firm (Rashid and Islam,
2013), and authors of the current study adopted the same proxy of TobinQ, which is
appropriate for an emerging economy.
The main objective of Corporate Governance Code 2002 in Pakistan is to bring
transparency and accountability in reporting financial and other corporate matters for both
state-owned enterprises (SOEs) and non-state-owned enterprises (NON-SOEs) (SECP,
2002). Because of government intervention, the implementation of corporate governance
standards in SOEs in Pakistan is doubtful, and the weak performance of public
organizations such as Pakistan International Airlines is linked with inefficient governance.
Empirical evidence can help us to find out how effectively the reforms in corporate
governance are affecting both state- and non-state-owned companies. On the basis of
above discussion, it is concluded that there is a need to have a comparative analysis of how
corporate governance instruments affect the firm value of both SOEs and NON-SOEs in the
context of Pakistan. Hence, the objectives of studies are as follows:
n to investigate the impact of corporate governance instruments on firm value by using an
appropriate proxy of TobinQ for an emerging economy; and
n to examine how corporate governance instruments affect the firm value of both state-
and non-state-owned companies.

VOL. 18 NO. 6 2018 j CORPORATE GOVERNANCE j PAGE 1197


Security Exchange Commission of Pakistan took a major step in 2002 to bring reforms in
corporate governance; hence, as a result of the efforts of Security Exchange Commission,
the corporate governance system of Pakistan is in line with international standards. The
main objective of the Corporate Governance Code 2002 is to bring transparency and
accountability in reporting financial and other corporate matters for both SOEs and NON-
SOEs (SECP, 2002). However, there is a unique corporate governance challenge for SOEs
as compared to their competitors in private sector: SOEs are always monitored by
transparent media organizations even then their performance is unsatisfactory. In Pakistan,
there is a possibility of government intervention in the induction process or removal of the
board of members irrespective of their performance; thus, compensation policy is not very
clear, which is a hindrance for SOEs to hire talent from the market (Iftikhar, 2014).
The current study makes several contributions to the literature. It provides evidence of how
corporate governance affects firm value by using an appropriate proxy of TobinQ.
Furthermore, it makes a comparative analysis of how corporate governance instruments
impact the firm value of SOEs and NON-SOEs in the context of Pakistan. Thereby, it
provides new empirical evidence and shows that the influence of corporate governance on
firm value varies across firms of different types of ownership. The study also suggests that
independent directors reduce the agency cost and protect shareholders’ interest; hence
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

improving the firm performance of SOEs. Empirical evidence can help decision-makers to
incorporate findings in the recommendations of decision-making for both SOEs and NON-
SOEs within the framework of corporate governance.
The rest of the paper is organized as follows: Section 2 reviews the literature. Section 3
discusses the data and methodology. Section 4 presents and discusses the results. Section
5 presents the recommendations.

2. Literature review
Many studies have investigated the relationship between corporate governance
instruments, such as board tasks, executive compensation, board size and board
independence, and firm performance in developed countriesfor instance, (Coles and
Hesterly, 2000; Dalton et al., 1999; Elsayed, 2007; Jensen, 1993; Yermack, 1996). However,
in developing countries, some studies have been conducted in recent past to investigate
the impact of corporate governance instruments on firm value, such as the study by Arora
and Sharma (2016). To address the objectives of the current study, we further discuss the
related literature and hypothesis development process in the following section.
It is highly debated in the literature to address in the literature to address the issue that what
should be an appropriate board size for better firm performance (Dalton et al., 1999;
Jensen, 1993; Van den Berghe et al., 2011; Yermack, 1996). Some studies lend support for
a small number of board members (Jensen, 1993; Yermack, 1996). But, there is a contrary
view that favors bigger board size, as it is helpful in monitoring process and leads to
effective decision-making (Anderson and Reeb, 2003; Coles et al., 2008; Klein, 1998).
Jensen (1993) suggests that small board size leads to better decision-making because of
better communication and effective monitoring. Although firms having diversified portfolios
require expert opinions from many experts, for effective decision-making, a bigger board is
preferred (Yermack, 1996). Political influence causes the board size to increase because of
the inclusion of outsiders in the board, and this is one of the reasons a bigger board size
does not affect firm performance positively (Agrawal and Knoeber, 1996). On the basis of
preceding discussion, the following hypothesis is developed:
H1. Board size has a positive impact on firm value.
After the rise of scams in the corporate sector, there is a significant trend of independent
directors in the board of governance. The relationship between the ratio of independent
directors and reaction of stock markets is investigated, where the findings of a study show a

PAGE 1198 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018


positive link between the two (Brickley et al., 1994). On the other hand, it is noticed that
there is no significant relationship between outside directors of a board and firm
performance (Yermack, 1996). Induction of independent directors in corporations is done to
improve their performance; therefore, we are expecting a positive effect of board
independence on firm value:
H2. Board independence has a positive impact on firm value.
Board meetings play a vital role in effective processes of the board (Zahra and Pearce,
1989). However, frequent meetings of board members require huge cost such as director’s
fee, travel expense and managerial time (Vafeas, 1999). Limited time directors spent in the
meeting may be insufficient for healthy discussions among board of directors (Jensen,
1993), although in the frequent meetings held among board of directors, the most relevant
issues are discussed. It leads to effective monitoring of the management, which ultimately
makes managers to work in line with the interest of shareholders. The above discussion
leads to the development of the following hypothesis:
H3. Board meetings have a positive impact on firm value.
Control variables in the current study are return on assets and market capitalization. There
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

is a consensus in the literature that both variables, i.e. return on assets and market
capitalization, have a positive and significant relationship with firm performance. Many
studies have used return on assets and market capitalization as control variables while
examining the effects of corporate governance instruments on a firm performance (Black
et al., 2006; Rashid and Islam, 2013):
H4. Market capitalization has a positive impact on firm value.
H5. Return on assets has a positive impact on firm value.

3. Data and methodology


The current study empirically investigates the relationship of corporate governance
instruments with firm performance. The model used in this study is adopted from one of the
previous studies (Rashid and Islam, 2013). Data are collected for the time period of five
years from 2010 to 2014. KSE 100 index firms are selected as a sample for the study;
because of the limited availability of data, the author could only include 76 firms, of which 9
are state-owned firms and remaining are non-state-owned firms. The data are collected
from both the Bloomberg and annual reports of organizations.

3.1 Measurements of variables and data sources


Measurement of variables and symbols is given in Table I. The equation for the relation of
instruments of corporate governance with firm value is as follows:

Tobinqi ;t ¼ b 0 þ b 1BSi;t þ b 2B METi;t þ b 3IND Di;t þ b 4LCAPi;t þ b 5RET Ai;t þ ut

3.2 Statistical analysis


Many econometric techniques are applied in the current study. To check the perfect
multicollinearity among the explanatory variables, a multicollinearity analysis is conducted,
which has been previously used in many studies, for instance by Rashid and Islam (2013).
Panel ordinary least square with random effects and fixed effects is applied on two data
sets to investigate the relationship between dependent and independent variables. Suitable
panel regression for both data sets is determined on the basis of Hausman random effect
test and redundancy fixed effect test. Econometric models used in current study have been
used in many previous studies such as by Arora and Sharma (2016).

VOL. 18 NO. 6 2018 j CORPORATE GOVERNANCE j PAGE 1199


Table I Variables, symbol and measurement
Proxies used in previous
Variables Symbol Measurement studies

Tobin’s Q TOBINQ (Total assets þ market capitalization  Rashid and Islam (2013)
book value of equity)/total assets
Board size BS Number of directors in the board Rashid and Islam (2013)
Board IND_D Ratio of independent directors to the total Arora and Sharma (2016)
independence number of directors on board
Board meetings B_MET Frequent meetings Arora and Sharma (2016)
Return on RET_A Earnings before interests and taxes scaled Rashid and Islam (2013)
assets by total assets
Market LCAP Total value of shares in the market Black et al. (2006)
capitalization

4. Results
4.1 State-owned organizations
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

4.1.1 Descriptive analysis. Descriptive statistics of the variables for state-owned companies
are reported in Table II. The mean value of TOBINQ is 1.331, mean value of board size (BS)
is 9.28, mean value of board meeting (B_MET) is 8.755, mean value of Independent
directors (IND_D) is 40.04 per cent, mean value of return on assets (RET_A) is 7.013 and
mean value of Log of market capitalization (LCAP) is 4.603.
4.1.2 Multicollinearity. Multicollinearity analysis is conducted in the study to examine
whether there is perfect multicollinearity. If multicollinearity is found to exist, then some
remedial measures can be taken for robustness of results. Variance inflation factor (VIF)
analysis is run in SPSS 18 to detect the perfect multicollinearity.
Multicollinearity analysis results are mentioned in Table III. In the results, it is found that VIF
of board size (BS) is 1.252, VIF of ratio of independent board of directors (IND_D) is l
[0].408, VIF of board meetings (B_MET) is 1.270, VIF of return on assets (B_MET) is 2.344
and VIF of market capitalization (LCAP) is 2.137. Hence, VIF of all variables is less than 5,

Table II Descriptive statistics of state-owned enterprises


Variables Mean Median SD Minimum Maximum

TOBINQ 1.33163 0.99446 0.6688 0.64762 3.41272


BS 9.28889 8 3.67808 5 17
B_MET 8.75556 8 3.45198 4 19
IND_D 40.0471 41 12.7966 16 57
RET_A 7.01318 2.5429 9.80605 5.7768 32.2966
LCAP 4.60321 4.67938 0.84002 2.71687 6.07504

Table III Results of VIF test


Variables Tolerance VIF

BS 0.799 1.252
IND_D 0.710 1.408
B_MET 0.787 1.270
RET_A 0.427 2.344
LCAP 0.468 2.137

PAGE 1200 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018


and thus, the results reveal that there is no perfect multicollinearity among independent
variables.

4.1.3 Random effects-Hausman test. To examine which model is more appropriate, we


applied Hausman Test on the data set of state-owned corporations. As results are
mentioned in Table IV, it is found that null hypothesis is accepted and that there is no
random effect in the data set. This indicates that panel regression with random effects is not
an appropriate model for robust results.

4.1.4 Redundant fixed effect test. To investigate that whether panel ordinary least
square (OLS) with fixed effects is appropriate in the current study for accuracy of
results, redundant fixed effect test is applied in the study. As mentioned in Table V, it
is found that p = 0.000, so null hypothesis is rejected here that there are no fixed
effects in the data. Results support the argument that OLS with fixed effects is an
appropriate model to investigate the relationship between independent and
dependent variables.
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

4.1.5 Panel least square. Panel least square with fixed effects is applied in the study to
investigate the causal relationship between independent and dependent variables, and
results of the panel least square are mentioned in Table VI. It is found in the results that
board of independence (IND_D) has a positive and significant relationship with firm value
(TOBINQ) at 0.000 significance level. However, board size (BS) has an insignificant positive
relationship with firm value, and board meetings (B_MET) also has an insignificant positive
relationship with firm value. Control variables return on assets (RET_A) and market
capitalization (LCAP) have a positive and significant relationship with firm value, where p-
value for return on asset is 0.06 and p-value for market capitalization is 0.02.

Table IV Results of Hausman test


Test summary x 2. statistic x 2 df Prob.

Cross-section random 5.497177 5 0.3583

Table V Results of redundant fixed effect test


Effects test Statistic df Prob.

Cross-section F 9.490981 (8,31) 0.0000


Cross-section x 2 55.717520 8 0.0000

Table VI Results of panel least square regression model


Variable Coefficient Std. error t-Statistic Prob

C 3.385436 1.346321 2.514584 0.0173


IND_D 0.024731 0.005167 4.786706 0.0000
BS 0.044126 0.032534 1.356310 0.1848
B_MET 0.022562 0.032961 0.684515 0.4987
RET_A 0.031860 0.016886 1.886813 0.0686
LCAP 0.629080 0.261807 2.402844 0.0224
R2 0.850771 Adjusted R2 0.788191

VOL. 18 NO. 6 2018 j CORPORATE GOVERNANCE j PAGE 1201


4.2 Non-state-owned organizations

4.2.1 Descriptive analysis. Descriptive statistics of the variables for non-state-owned


companies are reported in Table VII. The mean value of TOBINQ is 1.606, mean value of
board size (BS) is 8.778, mean value of board meeting (B_MET) is 6.94, mean value of
Independent directors (IND_D) is 27.273 per cent, mean value of return on assets (RET_A)
is 7.819 and mean value of Log of market capitalization (LCAP) is 4.242.
Results of multicollinearity analysis of the data set of non-state-owned organizations are
mentioned in Table VIII. Results reveal that VIF of board size (BS) is 1.172, VIF of ratio of
independent board of directors (IND_D) is l[0].028, VIF of board meeting (B_MET) is 1.210,
VIF of return on assets (RET_A) is 1.018 and VIF of Log of market capitalization (LCAP) is
1.094. Hence, VIF of all variables is less than 5, so findings reveal that there is no perfect
multicollinearity among independent variables.
4.2.2 Multicollinearity. To examine which model is more appropriate, the author applied
random effects-Hausman Test on the data set of non-state-owned corporations. Results are
mentioned in Table IX; it is found that null hypothesis is rejected and that there are no
random effects in the data set, and the alternative is accepted that there is random effect in
the data set. This indicates that panel regression with random effects is the most
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

appropriate model for obtaining robustness of results.


4.2.3 Random effects-Hausman test. The results of the Hausman test are illustrated in Table IX.
4.2.4 Panel least square. Panel least square with random effects is applied on the data set
of non-state-owned organizations to investigate the causal relationship between
independent and dependent variables; results of the panel least square are mentioned in
Table X. It is found in the results that board independence (IND_D) has a positive and

Table VII Descriptive statistics of non-state-owned organizations


Variables Mean Median SD Minimum Maximum

TOBINQ 1.606605 1.034904 1.914807 2.11103 13.39957


BS 8.778378 8 2.238991 6 14
B_MET 6.940541 5 4.548651 4 24
IND_D 27.27391 25 12.43421 7.142 55
RET_A 7.819584 6.517 7.347074 7.1857 30.443
LCAP 4.242653 4.225592 0.560958 2.612573 5.615614

Table VIII Results of VIF test


Variables Tolerance VIF

BS 0.853 1.172
IND_D 0.972 1.028
B_MET 0.826 1.210
RET_A 0.982 1.018
LCAP 0.914 1.094

Table IX Results of Hausman test


Test summary x 2. statistic x 2 df Prob.

Cross-section random 15.615915 5 0.0080

PAGE 1202 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018


Table X Results of panel least square regression model
Variable Coefficient Std. error t-statistic Prob.

C 4.816919 0.733956 6.562957 0.0000


IND_D 0.000753 0.004067 0.185180 0.8532
BS 0.034941 0.037015 0.943969 0.3458
B_MET 0.005297 0.016812 0.315079 0.7529
LCAP 1.549523 0.152084 10.18863 0.0000
RET_A 0.022045 0.011136 1.979643 0.0485
R2 0.284826 Adjusted R2 0.275002

insignificant relationship with firm value (TOBINQ). However, board size (BS) has an
insignificant negative relationship with firm value, and board meetings (B_MET) also has
an insignificant and negative relationship with firm value. Control variables return on assets
(RET_A) and market capitalization (LCAP) have a positive and significant relationship with
firm value, where p-value for return on asset is 0.04 and p-value of market capitalization is
0.000.
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

4.3 Result and discussions

4.3.1 State-owned organizations. After investigation of the relationship between corporate


governance and firm value, the results revealed that there is a positive and significant
relationship between board independence and firm value. It is in line with the hypothesis
and is consistent with the previous study (Brickley et al., 1994). One of the possible reason
is that independent directors reduce the agency cost and protect shareholders’ interest,
hence improving firm performance. It is found in the results that board size has an
insignificant relationship with the firm performance, which is not in line with the hypothesis of
the study, but it is consistent with one of the previous study (Agrawal and Knoeber, 1996).
One of the possible reasons is the lack of consensus among large number of board of
directors, which ultimately results in inefficient decisions. Board meeting has an insignificant
relationship with the firm performance; hence, hypothesis of the current study is rejected,
but it is consistent with one of the previous study (Vafeas, 1999). One of the possible
reasons can be that frequent meetings may increase the cost of the firm but are
notproductive enough to increase the value of the firm because of the limited time spent in
the meetings.
According to results of panel OLS, both control variables market capitalization and return on
assets have a positive and significant relationship with firm value, which is in line with our
hypothesis and is consistent with many previous studies (Rashid and Islam, 2013).
4.3.2 Non-state-owned organizations. Results of panel OLS of non-state-owned
organizations reveal that there is positive and insignificant relationship between board
independence and firm value, which is not in line with our hypothesis. However, it is
consistent with a previous study (Yermack, 1996), one of the possible reasons is the
inclusion of outside directors on the basis of political reasons, which makes no value
addition in the organizations. It is found in the results that board size has an insignificant
and negative relationship with the firm performance, so our hypothesis is not accepted. But,
the results are consistent with one previous study (Agrawal and Knoeber, 1996). One of the
possible reasons is that large number of board of directors can make ineffective decisions
because of lack of consensus. Comparing with state-owned organizations, here in non-
state-owned organization has a negative and insignificant relationship, so it can be
concluded that there may be implementation concerns of Pakistan corporate governance
policy. Board meeting has an insignificant and negative relationship with firm performance;
hence, our hypothesis is rejected and is consistent with a previous study (Vafeas, 1999).

VOL. 18 NO. 6 2018 j CORPORATE GOVERNANCE j PAGE 1203


One of the possible reasons can be that frequent meetings increase the cost of the firm but
are not productive enough to increase the value of the firm because of limited time spent in
the meetings. Compared with state-owned organizations, a negative sign shows that
frequent meetings do not yield benefits but rather affect firm value negatively to some
extent. So, it is concluded that most probably, cost of frequent meetings is huge, which
should be reduced, and necessary steps should be taken to ensure how meetings can yield
benefits for the organizations.
As far as the results of control variables are concerned, both variables market capitalization
and return on assets have a positive and significant relationship with firm value. Hence, H4
and H5 are accepted, which is consistent with many previous studies (Rashid and Islam,
2013). There is also consensus found in the literature that both variables have a positive and
significant relationship with firm value.

5. Recommendations
As far as the board of independence is concerned, it has a positive and significant
relationship with firm value in state-owned organizations and has an insignificant positive
relationship with firm value in non-state-owned organizations. Decision-makers can
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

consider this factor while decision-making, and they should also ensure fair selection of
independent directors to protect shareholders’ rights. Board size has a positive and
insignificant relationship with firm value in state-owned organizations; however, board size
in non-state-owned organizations has an insignificant and negative relationship with firm
value. This study suggests that decision-makers should consider most appropriate board
size so that they can benefit organizations with their diverse expertise. Frequency of board
meetings has an insignificant and positive relationship with firm value in state-owned
organizations; however, it has a negative and insignificant relationship with firm value in
non-state-owned organizations. The study recommends a cost-benefit analysis for
conducting the frequent board meetings, and value addition should also be monitored with
the passage of time.

References
Agrawal, A. and Knoeber, C.R. (1996), “Firm performance and mechanisms to control agency problems
between managers and shareholders”, Journal of Financial and Quantitative Analysis, Vol. 31 No. 3,
pp. 377-397.

Anderson, R.C. and Reeb, D.M. (2003), “Founding-family ownership and firm performance: evidence
from the S&P 500”, The Journal of Finance, Vol. 58 No. 3, pp. 1301-1328.

Arora, A. and Sharma, C. (2016), “Corporate governance and firm performance in developing countries:
evidence from India”, Corporate Governance, Vol. 16 No. 2, pp. 420-436.
Barnhart, S.W., Marr, M.W. and Rosenstein, S. (1994), “Firm performance and board composition: some
new evidence”, Managerial and Decision Economics, Vol. 15 No. 4, pp. 329-340.
Bauer, R., Guenster, N. and Otten, R. (2004), “Empirical evidence on corporate governance in Europe:
the effect on stock returns, firm value and performance”, Journal of Asset Management, Vol. 5 No. 2,
pp. 91-104.
Berkman, H., Zou, L. and Shaofeng, G. (2009), “Corporate governance, profit manipulation and stock
return”, Journal of International Business and Economics, Vol. 9 No. 2, pp. 132-145.
Black, B., Love, I. and Rachinsky, A. (2006), “Corporate governance indices and firms’ market values:
time series evidence from Russia”, Emerging Markets Review, Vol. 7 No. 4, pp. 361-379.
Brickley, J.A., Coles, J.L. and Terry, R.L. (1994), “Outside directors and the adoption of poison pills”,
Journal of Financial Economics, Vol. 35 No. 3, pp. 371-390.
Coles, J. and Hesterly, W. (2000), “Independence of the chairman and board composition: firm choices
and shareholder value”, Journal of Management, Vol. 26 No. 2, pp. 195-214.

PAGE 1204 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018


Coles, J.L., Daniel, N.D. and Naveen, L. (2008), “Boards: does one size fit all?”, Journal of Financial
Economics, Vol. 87 No. 2, pp. 329-356.
Conger, J., Finegold, D. and Lawler, E. III (1998), “Appraising boardroom performance”, Harvard
Business Review, Vol. 76, pp. 136-164.
Core, J.E., Holthausen, R.W. and Larcker, D.F. (1999), “Corporate governance, chief executive officer
compensation, and firm performance”, Journal of Financial Economics, Vol. 51 No. 3, pp. 371-406.
Dalton, D.R., Daily, C.M., Ellstrand, A.E. and Johnson, J.L. (1999), “Number of directors and financial
performance: a meta-analysis”, Academy of Management Journal, Vol. 42 No. 6, pp. 674-686.
Eisenberg, T., Sundgren, S. and Wells, M.T. (1998), “Larger board size and decreasing firm value in small
firms”, Journal of Financial Economics, Vol. 48 No. 1, pp. 35-54.
Elsayed, K. (2007), “Does CEO duality really affect corporate performance?”, Corporate Governance: An
International Review, Vol. 15 No. 6, pp. 1203-1214.
Guest, P.M. (2008), “The determinants of board size and composition: evidence from the UK”, Journal of
Corporate Finance, Vol. 14 No. 1, pp. 51-72.
Hermalin, B. and Weisbach, M.S. (1991), “The effects of board composition and direct incentives on firm
performance”, Financial Management, Vol. 20 No. 4, pp. 101-112.
Iftikhar, M.N. (2014), “Corporate governance of state-owned enterprises (SOEs): the case of Pakistan”,
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

Board Leadership, Vol. 2014 No. 134, pp. 1-8, doi: 10.1002/bl.20030.
Jensen, M.C. (1993), “The modern industrial revolution, exit, and the failure of internal control systems”,
The Journal of Finance, Vol. 48 No. 3, pp. 831-880.

Judge, Q.W., Naoumova, I. and Koutzevol, N. (2003), “Corporate governance and firm performance in
Russia: an empirical study”, Journal of World Business, Vol. 38 No. 4, pp. 385-396.

Kang, J. and Shivdasani, A. (1995), “Firm performance, corporate governance, and top executive
turnover in Japan”, Journal of Financial Economics, Vol. 38 No. 1, pp. 29-58.

Klein, A. (1998), “Firm performance and board committee structure”, The Journal of Law and Economics,
Vol. 41 No. 1, pp. 275-304.
Letza, S., Sun, X. and Kirkbride, J. (2004), “Shareholding versus stakeholding: a critical review of
corporate governance”, Corporate Governance: An International Review, Vol. 12 No. 3,
pp. 242-262.

Nadeem, A.S. and Zongjun, W. (2012), “Effects of corporate governance on capital structure: empirical
evidence from Pakistan”, Corporate Governance: The International Journal of Business in Society, Vol. 12
No. 5, pp. 629-641.

Pass, C. (2004), “Corporate governance and the role of non-executive directors in large UK companies:
an empirical study”, Corporate Governance: The International Journal of Business in Society, Vol. 4 No. 2,
pp. 52-63.
Ramachandra, B.P. and Rathish, B.R. (2017), “Corporate governance and firm performance in Malaysia”,
Corporate Governance: The international journal of business in society, Vol. 17 No. 5, pp. 896-912.

Rashid, K. and Islam, S. (2013), “Corporate governance, complementarities and the value of a firm in an
emerging market: the effect of market imperfections”, Corporate Governance: The International Journal
of Business in Society, Vol. 13 No. 1, pp. 70-87.
Sarkar, J. and Sarkar, S. (2000), “Indian development report”, Indira Gandhi Institute of Development
Research, Oxford University Press, New Delhi.
SECP (2002), “Code of Corporate Governance 2002”, available at: www.secp.gov.pk/document/code-
of-corporate-governance-2002/

Shleifer, A. and Vishny, R.W. (1997), “A survey of corporate governance”, The Journal of Finance, Vol. 52
No. 2, pp. 737-783.

Vafeas, N. (1999), “Board meeting frequency and firm performance”, Journal of Financial Economics,
Vol. 53 No. 1, pp. 113-142.

Van den Berghe, L., Levrau, A., Chambers, N., Lenssen, J. and Neville, M. (2011), “The role of boards in
small and medium sized firms”, Corporate Governance: The International Journal of Business in Society,
Vol. 11 No. 5, pp. 527-540.

VOL. 18 NO. 6 2018 j CORPORATE GOVERNANCE j PAGE 1205


Yermack, D. (1996), “Higher market valuation of companies with a small board of directors”, Journal of
Financial Economics, Vol. 40 No. 2, pp. 185-211.

Zahra, S.A. and Pearce, J.A. (1989), “Boards of directors and corporate financial performance: a review
and integrative model”, Journal of Management, Vol. 15 No. 2, pp. 291-334.

Corresponding author
Kalim Ullah Bhat can be contacted at: bhat_dufe@outlook.com
Downloaded by Universitas Negeri Malang At 06:40 22 November 2018 (PT)

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com

PAGE 1206 j CORPORATE GOVERNANCE j VOL. 18 NO. 6 2018

You might also like