Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
IMPACT OF CORPORATE GOVERNANCE ON CAPITAL
STRUCTURE, FINANCIAL PERFORMANCE AND RISK OF
FIRMS OF KARACHI STOCK EXCHANGE
DOCTOR OF PHILOSOPHY (MANAGEMENT SCIENCES)
By
MAHBOOB ULLAH
Registration No. 1094-113028
Supervisor
DR. NOUMAN AFGAN
DEPARTMENT OF BUSINESS ADMINISTRATION
FACULTY OF MANAGEMENT SCIENCES
PRESTON UNIVERSITY, KOHAT
ISLAMABAD CAMPUS
2017
i
IMPACT OF CORPORATE GOVERNANCE ON CAPITAL
STRUCTURE, FINANCIAL PERFORMANCE AND RISK OF
FIRMS OF KARACHI STOCK EXCHANGE
By
MAHBOOB ULLAH
Registration No. 1094-113028
DEPARTMENT OF BUSINESS ADMINISTRATION
FACULTY OF MANAGEMENT SCIENCES
PRESTON UNIVERSITY, KOHAT
ISLAMABAD CAMPUS
2017
ii
IMPACT OF CORPORATE GOVERNANCE ON CAPITAL
STRUCTURE, FINANCIAL PERFORMANCE AND RISK OF
FIRMS OF KARACHI STOCK EXCHANGE
SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
(MANAGEMENT SCIENCES)
By
MAHBOOB ULLAH
Registration No. 1094-113028
Supervisor
DR. NOUMAN AFGAN
DEPARTMENT OF BUSINESS ADMINISTRATION
FACULTY OF MANAGEMENT SCIENCES
PRESTON UNIVERSITY, KOHAT
ISLAMABAD CAMPUS
2017
iii
SUPERVISOR CERTIFICATE
This is to certify that the PhD. (Management Sciences) thesis entitled “Impact of
Corporate Governance on Capital Structure, Financial Performance and Risk of
Firms of Karachi Stock Exchange” is submitted by Mr. Mahboob Ullah, Registration
No. 1094-113028 in partial fulfillment for the award of PhD. degree is a record of the
candidate’s own work carried out under my supervision and has been approved for
submission.
Associate Prof. Dr. Nouman Afgan
iv
CANDIDATE DECLARATION FORM
I, Mahboob Ullah
Son of Mahfooz Ullah
Registration No. 1094-113028
Discipline Management Sciences
Candidate of Doctor of Philosophy at the Preston University Kohat
(Islamabad Campus), do hereby declare that the dissertation Impact of Corporate
Governance on Capital Structure, Financial Performance and Risk of Firms of
Karachi Stock Exchange submitted by me in partial fulfillment of PhD degree in
discipline of Management Sciences is my original work, and has not been submitted or
published earlier. I also solemnly declare that it shall not, in future, be submitted by me
for obtaining any other degree from this or any other university or institution.
I also understand that if evidence of plagiarism is found in my dissertation at any stage,
even after the award of a degree, the work may be cancelled and the degree revoked.
August 28, 2017
Signature
Mahboob Ullah
v
COPYRIGHTS
All rights are reserved. Material of this manuscript is protected by copyright laws. Any
part of the document may not be reproduced or utilized in any form or means, electronic
or mechanical, photocopy, recording, information storage and retrieval system, without
the permission of the university authority.
vi
PLAGIARISM UNDERTAKING
I solemnly declare that research work presented in the thesis entitled “Impact of
Corporate Governance on Capital Structure, Financial Performance and Risk of
Firms of Karachi Stock Exchange” is solely my research work with no significant
contribution from any other person. Small contribution/help wherever taken has been
duly acknowledged and that complete thesis has been written by me.
I understand the zero tolerance policy of the HEC and Preston University Kohat,
Islamabad Campus towards plagiarism. Therefore I as an author of the above titled
thesis declare that no portion of my thesis has been plagiarized and any material used as
reference is properly referred / cited.
I undertake that if I am found guilty of any formal plagiarism in the above titled thesis
even after award of PhD degree, the University reserves the rights to withdraw/revoke
my PhD degree and that HEC and the University has the right to publish my name on
the HEC/university website on which names of students are placed who submitted
plagiarized thesis.
________________
Mahboob Ullah
Registration No. 1094-113028
vii
ABSTRACT
This research is conducted to examine the influence of corporate governance on capital
structure, financial performance, and risk of twenty cement manufacturing corporations
listed on Karachi Stock Exchange (KSE), Pakistan from the year 2005 to 2014.
Additionally, the mediating effect of capital structure with corporate governance,
financial performance, and solvency risk protection was analyzed. For accomplishment
of research objectives, annual audited reports were used for data collection. Agency
theory was the basis of this research, hence quantitative technique employed for testing
the theory. The research hypotheses were tested by deploying Pearson’s product-
moment correlation analysis and dynamic generalized method of moments (GMM)
panel data regression model. The findings revealed the positive and significant impact
of corporate governance (insider director, board independence, institutional
shareholdings, board size, and audit committee) on financial performance and solvency
risk protection, however negative and significant impact on capital structure. The
results indicated a positive impact of capital structure on financial performance,
whereas negative on solvency risk protection. Moreover, the outcomes document that
capital structure plays a partial mediating role between corporate governance,
financial performance, and solvency risk protection. This research is useful for
corporate policymakers and managers in general and particularly for the cement
industry in understanding the worth of corporate governance practices in developing
economies like Pakistan.
Keywords: Corporate Governance, Financial Performance, Capital Structure, Solvency
Risk Protection, and Karachi Stock Exchange
viii
CONTENTS
ABSTRACT ..................................................................................................................... vii
LIST OF TABLES ............................................................................................................ xi
LIST OF FIGURES ......................................................................................................... xii
LIST OF ABBREVIATIONS ........................................................................................ xiii
ACKNOWLEDGEMENT .............................................................................................. xv
CHAPTER 1 ....................................................................................................................... 1
INTRODUCTION ............................................................................................................. 1
The Cement Industry in Pakistan ..................................................................................... 7
Background ...................................................................................................................... 9
Problem Statement ......................................................................................................... 18
Research Questions ........................................................................................................ 20
Research Objectives ....................................................................................................... 20
Significance of the Research .......................................................................................... 21
Theoretical and Applied Significance ............................................................................ 22
CHAPTER 2 ..................................................................................................................... 24
LITERATURE REVIEW ............................................................................................... 24
Introduction ..................................................................................................................... 25
Corporate Governance ................................................................................................... 26
Theoretical Foundation .................................................................................................. 29
Agency Theory ........................................................................................................... 30
Stakeholder Theory .................................................................................................... 31
Stewardship Theory ................................................................................................... 32
Institutional Theory .................................................................................................... 33
Political Theory .......................................................................................................... 34
The Resource Dependency Theory ............................................................................ 34
Transaction Cost Theory ............................................................................................ 35
Systems of Corporate Governance ................................................................................ 35
Unitary System of Corporate Governance ................................................................. 35
Dual System of Corporate Governance ...................................................................... 37
ix
Dimensions of Corporate Governance ........................................................................... 39
Financial Performance ................................................................................................... 44
Dimensions of Financial Performance ........................................................................... 46
Corporate Governance and Financial Performance ....................................................... 48
Risk ................................................................................................................................ 51
Dimension of Risk ......................................................................................................... 53
Corporate Governance and Solvency Risk Protection ................................................... 54
Capital Structure ............................................................................................................ 55
Dimensions of Capital Structure .................................................................................... 57
Corporate Governance and Capital Structure ................................................................ 58
Capital Structure and Financial Performance ................................................................ 61
Capital Structure and Solvency Risk Protection ............................................................ 62
Corporate Governance, Capital Structure, Financial Performance, and Solvency ........ 64
Risk Protection ............................................................................................................... 64
Control Variables ........................................................................................................... 68
Firms Size ................................................................................................................... 68
Firm Age .................................................................................................................... 69
Firm Growth ............................................................................................................... 70
Agency Theory, Corporate Governance, and Cement Industry in Pakistan .................. 72
Rationale of the Study .................................................................................................... 72
Conceptual Framework .................................................................................................. 76
CHAPTER 3 ..................................................................................................................... 77
RESEARCH METHODOLOGY ................................................................................... 77
Research Philosophy ...................................................................................................... 77
Research Approach ........................................................................................................ 78
Research Strategy .......................................................................................................... 79
Research Design ............................................................................................................ 79
Population ...................................................................................................................... 80
Data Collection .............................................................................................................. 83
Type of Data and Statistical Analysis ............................................................................ 83
Measurement of variables .............................................................................................. 83
x
CHAPTER 4 ..................................................................................................................... 87
DATA ANALYSIS ........................................................................................................... 87
Descriptive Statistics ...................................................................................................... 87
Pearson Correlation Analysis ......................................................................................... 89
Corporate Governance, Financial Performance, Solvency Risk Protection, and
Capital Structure ......................................................................................................... 89
Regression Analysis ....................................................................................................... 93
Model Equations ........................................................................................................ 94
Corporate Governance and Financial Performance ................................................... 95
Corporate Governance and Solvency Risk Protection ............................................... 97
Corporate Governance and Capital Structure............................................................. 98
Capital Structure and Financial Performance. ......................................................... 100
Capital Structure and Solvency Risk Protection ...................................................... 101
Mediation Analysis ...................................................................................................... 102
Financial performance as Dependent Variable, Capital Structure as Mediating
Variable and CG as Independent Variable ............................................................... 103
Solvency Risk Protection as Dependent Variables, Capital Structure as Mediating
Variable and Corporate Governance as Independent Variable ................................ 104
CHAPTER 5 ................................................................................................................... 107
DISCUSSIONS AND RECOMMENDATIONS ......................................................... 107
Policy Implications ...................................................................................................... 115
Limitations and Delimitations ..................................................................................... 116
Contribution to Knowledge ......................................................................................... 117
Future Research Recommendations ............................................................................. 119
Research Conclusion .................................................................................................... 119
REFERENCES .............................................................................................................. 121
APPENDIX I: Sectors and Companies at KSE, Pakistan ......................................... 143
APPENDIX II: Measurement of Variables ................................................................. 145
Corporate Governance and Capital Structure .............................................................. 145
Financial Performance ................................................................................................. 152
Solvency Risk Protection, Firm Size, Firm Age and Firm Growth ............................. 159
xi
LIST OF TABLES
Number Page
Table 1 Cement Firms Listed on Karachi Stock Exchange 82
Table 2 Measurement of Variables 84
Table 3 Descriptive Statistics of Variables 88
Table 4 Correlation Analysis: CG, FP, Solvency Risk Protection, Capital
Structure, and Control Variables 92
Table 5 Regression Analysis: CG and FP 96
Table 6 Regression analysis: CG and Solvency Risk Protection 98
Table 7 Regression Analyses: CG and Capital Structure 99
Table 8 Regression Analysis: Capital Structure and FP 100
Table 9 Regression Analyses: Capital Structure and Solvency Risk Protection 101
Table 10 Mediation Analysis: FP and Solvency Risk Protection as Dependent
Variables, Capital Structure as Mediating Variable and CG as
Independent Variable 104
Table 11 Summary of Hypotheses Testing 105
xii
LIST OF FIGURES
Number Particulars Page
Figure 1 Unitary System of Corporate Governance 36
Figure 2 Dual System of Corporate Governance 38
Figure 3 The First Hypothesis of the Study 50
Figure 4 The Second Hypothesis of the Study 55
Figure 5 The Third Hypothesis of the Study 60
Figure 6 The Fourth Hypothesis of the Study 61
Figure 7 The Fifth Hypothesis of the Study 63
Figure 8 The Sixth and Seventh Hypotheses of the Study 67
Figure 9 Conceptual Framework 76
Figure 10 Mediation Model – 1 102
Figure 11 Mediation Model – 2 102
xiii
LIST OF ABBREVIATIONS
AC Audit Committee
BI Board Independence
BS Board Size
CACG Commonwealth Association for Corporate Governance
CG Corporate Governance
CIA Chief Internal Auditor
COC Cost of Capital
CS Capital Structure
CV Co-efficient of Variance
DTE Debt to Equity
DTA Debt to Assets
DV Dependent Variable
EBIT Earnings Before Interest and Taxes
EPS Earning Per Share
FAT Fixed Assets Turnover
FAG Firm Age
FATE Fixed Assets to Equity
FG Firm Growth
FP Financial Performance
FS Firm Size
GDP Gross Domestic Product
GMM Generalized Method of Moments
xiv
IDs Insider Directors
IS Institutional Shareholdings
IV Independent Variable
ISE Islamabad Stock Exchange
KSE Karachi Stock Exchange
LSE Lahore Stock Exchange
MT Million Tons
MV Mediating Variable
NED Non-Executive Director
NIM Net Income Margin
OECD Organization for Economic Co-operation and Development
OIM Operating Income Margin
ROA Return on Assets
ROE Return on Equity
SECP Securities and Exchange Commission of Pakistan
SRP Solvency Risk Protection
TAT Total Assets Turnover
TIE Times Interest Earned
YD Years Dummy
xv
ACKNOWLEDGEMENT
There is no God but ALLAH ALMIGHTY and MUHAMMAD Swal-Lal-Lahu-
Wasuwalum is the last prophet of ALLAH ALMIGHTY.
I would like to express my sincere gratitude and appreciation to a number of persons for
whose support and cooperation facilitated the successful completion of this thesis. First
and most important, to my beloved parents, brother, wife, and sisters for prayers,
encouragement, and support.
My gratitude to my supervisor, Dr. Nouman Afgan, Associate Professor, Preston
University, for his supervision. My sincere thanks to my ex-supervisor, Dr. Khurrum
Riaz, Associate Professor, Ulster University, London Campus, for the kind directions
and valuable guidance in building my research background.
I am greatly indebted to Miss Ayesha Khan Lodhi, Senior Faculty Coordinator-PhD
Program for her great cooperation and support.
My gratitude to Dr. Muhammad Ramazan, Associate Professor, Preston University,
Prof. Dr. Tahir Saeed, Preston University, Prof. Dr. Aziz Ullah, Preston University,
Prof. Dr. Aurangzeb, Preston University, Dr. Qaiser Risqué Yasser, Associate
Professor, Preston University, Dr. Muhammad Kashif Durrani, Dr. Sajjad Ahmad
Afridi, Dr. Muhammad Hashim, and Faiz-u-Rehman for cooperation and guidance.
1
CHAPTER 1
INTRODUCTION
The success of every firm depends upon the golden principles of directing and
controlling. History witnesses that organizations directed and controlled effectively
have touched the heights of the sky. The mechanism through which firms are directed
and controlled is termed as corporate governance (Velnampy & Nimalthasan, 2013).
Corporate governance (CG) consists of rules and laws which affect the way an
organization is directed and controlled (Gordini, 2012). CG establishes a set of
transparent rules in which officers, directors, and stockholders have aligned incentives
and firms grow with the passage of time. CG is one of the key mechanisms for instilling
investors’ trust and protecting their interests.
Proper application of corporate governance practices brings fairness,
transparency in entire matters of a firm and accomplishes the interest of all
stakeholders. Public organizations, companies, and investors have recognized the
significance of corporate governance across the globe as it brings transparency and
control frauds (Ahmed & Hamdan, 2015). CG plays a vibrant role in economic
development, instilling investors’ confidence and increasing corporate financial
performance through transparency and accountability. Enobakhare (2010) documented
that financial performance (FP) is how well an organization utilize assets from its main
source of business and produce revenue. FP is the monetary outcome of corporate
policies and operating activities. Investors purchase equity and debt instruments of
those organizations that yield high return for them.
2
Barbosa and Louri (2015) described that good practices of CG enhance firms’
FP. The outcomes of Todorovic (2013) research evidenced a positive association
between CG and FP of firms. The application of CG practices significantly affects
firms’ performance (Okiro, Aduda, & Omoro, 2015). Financially sound companies offer
handsome dividend and maintain a good amount of retained earnings to meet the future
operating and fixed assets needs. In addition, such firms keep a low level of debts and
do not require paying more interest. However, financially weak corporations use more
debts to meet its need. Such corporations pay high amount of interest on borrowed
funds and bear high risk and lose solvency.
High debt level in corporate capital structure increase firm risk. Investors prefer
organizations that yield more return at low risk. Good governed corporations ensure
optimal capital structure in order to meet the fixed assets and operating needs to
enhance FP and mitigate risk. Aries (2016) described capital structure as the mix of
equity and debt securities. The effective mechanism of CG plays a vibrant role in
capital structure decision to enhance corporate value and minimize risk. High
leveraging negatively affect corporate worth due to high risk and, hence firm solvency
decreases.
There are several studies presenting evidence that agency problem affects CG,
firm financing decision, corporate FP, and solvency risk protection. The corporate
effectiveness and efficiency can be maximized by deploying appropriate supervision
and control. CG contributes a significant role in aligning the stake of principal and
agent to minimize agency problem (Shleifer & Vishny, 2013). Good structure of CG
enable a firm to get loans easily, protect the stake of entire stockholders, escalate
3
transparency and minimize agency problems. Whereas, corporations with weak
corporate structure face more agency problem as the managers in such corporation
obtain personal benefits instead of firm (Jensen & Meckling, 1976).
The impact of CG on FP, capital structure and risk has been a matter of
empirical investigation in the field of finance. The CG has been a part of economics
studies since the influential publication of Adam Smith in 1776 “an inquiry into the
nature and causes of the wealth of nations” and certainly given a stimulus through the
classic publication of segregation of firm ownership from control (Berle & Means,
1932). The CG mechanisms varies from one country to another due to diverse structures
resulting from the different conditions of economic, social, and regulations.
Measuring corporate FP and risk has been elements of debate in CG across the world
(Rehman, & Raoof, 2010; Shoaib & Yasushi, 2017).
Good practices of CG bring transparency, fairness and boost the trust of
shareholders in the financial market, whereas weak practices of CG cast doubt on
corporate trustworthiness, reliability or obligation to stockholders (Solomon, 2010).
Problems have been experienced regarding FP, capital structure, and risk of firms due to
weak practices of CG. Corporations which support or tolerate illegal activities can
create scandals (Quang & Xin, 2014). Corporate scandals across the globe confirmed
that weak CG practices cannot prevent frauds, deception, complain of corruptions and
internal trading. Therefore, corporations require sound CG mechanism to instill
investors’ confidence by offering good return and mitigating risk. FP of the cement
industry of Pakistan depends upon good practices of CG (Shahid, Siddiqui, Qureshi &
4
Ahmad, 2017). Cement manufacturing firms governed according to the code of CG
maximize performance and mitigate risk (Cheema & Din, 2014).
The effect of CG on capital structure, FP and risk has been analyzed mostly in
advanced economies where the stock markets are highly developed. According to
Baydoun, Maguire, Ryan, and Willett (2013), the applications of CG mechanism is
important for developed economies and in particular to developing economies in order
to avoid financial scandals, mitigate risk and enhances FP. According to Ekanayake,
Perera, and Perera (2010), more contemplation has been given to implement CG
practices in under-developed economies because many developing countries lack
adequate exercise of CG.
CG is weak in Pakistan, however Securities and Exchange Commission of
Pakistan (SECP) is trying to enforce code of CG on Pakistani corporations to instill
confidence of national and foreign investors, accomplish corporate goal, and protect
entire stakeholders. Corporations adhering code of CG in Pakistan have been indicated
good financial performance and low risk. Cement sector is also one the sectors in
Pakistan that is adhering code of CG issued by the SECP and proved that most of the
cement sector firms are generating sound return at minimum risk. This industry is one
of the most pivotal sectors that contribute a huge part in the economic growth of
Pakistan. Due to the privatization of the cement industry in Pakistan in 1990, new plants
were set up. The cement industry has grown very rapidly in the last two decades
(Shahid et al., 2017). There were only four cement manufacturing firms in the year
1947 (Pakistan independence time) with the production capability of 470,000 tons
annually. However, in year 2014, there are 29 cement manufacturing firms in Pakistan,
5
out of them twenty firms are listed on KSE Pakistan with 44.09 MT production capacity
(Shahid et al., 2017).
In the light of significant contribution of cement industry in economic
development, it is indispensable to identify the impact of CG (insider directors,
institutional shareholdings, board independence, audit committee, and board size) on
capital structure, FP and solvency risk protection of cement industry of Pakistan.
Studies have proved that CG (audit committee insider directors, institutional
shareholdings, board independence, and board size) significantly impact FP and
solvency risk protection of firm. The agency theory offered by Jensen and Meckling
(1976) also documents that good practices of CG maximize corporate fairness and
transparency in firm affairs. The theory describes that FP and solvency risk protection
can be improved by controlling the agency problem. The theory documents that if
independent directors are entrusted by shareholders to represent them on company
boards that will lead to unbiased corporate judgments and decisions in the best interest
of corporation. As the number of independent directors’ increases, the FP and solvency
risk protection also increases.
Furthermore, the agency theory predicted that FP is maximized and solvency
risk is protected in the presence of institutional shareholding. The institutional
shareholding deploys their financial and analytical skills to fully utilize corporate
resources. The adequate percentage of institutional shareholding in the company board
improves FP and solvency protection due to strong financial insight. In addition, the
agency theory suggests that large board size positively impacts FP and improve
solvency protection. Corporate board properly advice and monitor management and
6
hence improve corporate FP and solvency protection. However, it is worth mentioning
that board size is not similar in all companies. Large size companies need large board
size and small companies need small, however cement companies are large in size,
therefore, there may be a high level of agency problem which requires large board size
to control agency problem.
Agency theory documents there must be proper functioning audit committee
who frequently check the financial records of the corporation to protect the interest of
entire stakeholders and enhance corporate worth. Proper functioning audit committee
ensures controlling management functions like financial reporting, risk management,
and internal auditing. As the numbers of the audit committee members and particularly,
the independent members with sound financial background increases, the FP and
solvency also improves. The pecking order theorem offered by Myers and Majluf
(1984) documents that firm prefer internal financing first (equity) than external
financing (debt) in order to maximize FP and protect solvency.
For accomplishment of research objectives, the entire cement corporations listed
on KSE, Pakistan are deployed to check the impact of CG on capital structure, FP, and
solvency risk protection from year 2005 to 2014. The cement sector is selected due to
its defined structure and likely to indicate an association between the variables of this
research. Besides this, studies are not found on cement industry across the globe
regarding CG, capital structure, FP and solvency risk protection jointly and in particular
to developing economies like Pakistan. In addition, cement sector is chosen because
during the era of 2005 to 2014, the industry was on boom and most of the companies
were indicating sound FP, there it was imperative to analyze the impact of CG on
7
capital structure, FP and solvency risk protection because fraudulent scandals could
happen that might influence the FP and solvency risk protection.
The Cement Industry in Pakistan
Some of the industries are contributing an important role in economic growth of
Pakistan. Among these industries, the role of the cement is highly significant due to its
good contribution to economic growth. This industry is one of the most pivotal sectors
that contribute a huge part in the economic growth of Pakistan. The cement
manufacturing firms operating in Pakistan are producing white, slag, grey Portland and
sulfate cement. Due to the privatization of the cement industry in Pakistan in 1990, new
plants were set up. The era of higher GDP growth and earthquake rehabilitation of
2005, the industry has indicated incredible growth in the last decade. The cement
industry fulfills not only local demand but is also exported to Afghanistan, India, South
Africa, Sri Lanka and the United Arab Emirates (Cheema & Din, 2014). Around thirty
billion rupees have been contributed by the cement industry to national income from
2012 to 2015 (Naz, Naqvi, & Ijaz, 2016).
The cement industry has grown very rapidly in the last two decades (Hijazi &
Tariq, 2006). There were only four cement manufacturing firms in the year 1947
(Pakistan independence time) with the production capability of 470,000 tons annually.
However, in year 2014, there are 29 cement manufacturing firms in Pakistan, out of
them twenty firms are listed on KSE Pakistan with 44.09 MT production capacity
(Shahid et al., 2017). According to Naz et al. (2016), the listed companies are
categorized on the basis of ownership into international corporations (four), armed force
8
corporations (three) and private corporations (thirteen). The cement manufacturing
facilities are segmented into the northern zone and southern zone on the basis of
geographical distribution. The northern zone consists of 19 units “listed and non-listed
firms” whereas, the southern zone consists 10 units “listed and non-listed firms” of
cement manufacturing plants (Economic Survey of Pakistan, 2013). Pakistan has
become self-sufficient in cement and is exporting to many countries. The competitive
environment of the cement industry adds general benefits to final users as well as the
cement industry. The cement product needs a favorable area and high infrastructure.
Majority of cement industries are located in the area of mountains that are rich in irons,
clays and minerals.
The cement industry is playing a magnificent role at the national and
international level in infrastructure development. Construction of dams, governmental
expenditures, rapidly increase in population rate, housing projects, urbanization,
changing living style are the factors that determine the growth of the cement industry of
Pakistan (Cheema & Din, 2014). The cement sector firms listed on KSE, Pakistan are
practicing the code of CG issued by SECP as is one of the pre-requisites for the firms to
be listed on the stock exchange(s) of Pakistan. The cement manufacturing firms with
good CG enhance FP and solvency risk protection (Aries, 2011). The companies must
exercise the code of CG to improve FP (Hasan, Kobeissi, & Song, 2011). Good
practices of CG ensure optimal capital structure decision (Ganiyu & Abiodun, 2012)
that maximize FP (Bernanke, 2008), and solvency risk protection (Aries, 2011).
Keeping in view the significant role of cement industry in several areas of
Pakistan’s economy, the present research was conducted to examine the influence of
9
CG on capital structure, FP and solvency risk protection of cement manufacturing
corporations listed on KSE, Pakistan.
Background
Good practices of Corporate Governance (CG) contribute to strengthening the
economy by enhancing corporate performance and increase access to the global capital
market. In developing economies good practices of CG provide several public policy
objectives. It minimizes the financial susceptibility, decreasing transactions cost, and
leads to the development of the capital market and economic condition. However, the
implementation of code of CG is indispensable in every country. Therefore, regulatory
authorities are established by the governments to issue, revise and ensure the proper
exercise of code of CG across the globe.
For the very first time, the code of CG issued by the USA in 1970s’ and
Pakistan in 2002. The SECP is responsible for issue, revise and ensure the effective
application of the code of CG. This is mandatory for firms to adhere the code in order to
be listed on stock exchange. The code of CG has been revised in different periods for
stronger regulation of companies and lastly updated and issued on 22nd
November 2017
in order to bring more transparency, fairness and boost the trust of shareholders in the
financial market (Code of Corporate Governance, 2017). The confidence of investors
could be instilled more if the firms are properly directed and controlled as per the rules,
laws, practices, and process. The mechanism which is employed to direct and control
corporate matters is called CG (Wanyoike & Nasieku, 2015). CG is the set of laws,
10
policies, rules, and institution-based system which are used to persuade managers to
increase corporate worth.
According to Barbosa and Louri (2015), CG is applied for attaining the interest
of stakeholders through persons interested in the improvement of a corporation by
ensuring that the corporate managers and insiders take necessary steps for this purpose.
Further, they described that stakeholders (shareholders, government, employees,
business associates, lenders, and society at large) have distinctive interest in
corporation. The interest of shareholders is a persistent rise in stock price, the
government looks for taxes, employees look for long service at smart conditions,
business associates seek additional profit, and the stake of lenders is investment’s
security as well as on-time interest reimbursement. It is apparent that stakeholders’
interest varies and clash with each other. Only a few among the stakeholders hold more
control in decision making, which mostly protects their personal stake rather than all.
The mechanism that secures and defends the interest of each stakeholder, minimize the
exploitation of minority stakeholder’s and minimize self-benefited decision of dominant
stakeholder(s) is termed as CG (Eling & Marek, 2011). CG is the mechanism employed
to accomplish the goal of each stakeholder and in particular of shareholders
(Enobakhare, 2010). The goal of every shareholder is to maximize his wealth. Good
practices of CG ensure maximization of Financial Performance (FP) and minimization
of risk and increase solvency risk protection.
Agyei and Owusu, 2014; Alam and Shah, 2013; Bernanke, 2008; Gaaniyu and
Abiodun, 2012; Okiro, 2014; Vo and Nguyen, (2014) employed various dimensions of
CG, capital structure, FP, and risk to analyze their association in different organizations
11
of developed and under-developed economies. Researchers have proved that CG
maximize FP and protect solvency by reducing debt level in capital structure and hence
pay less interest charges. CG is a useful instrument to help corporations for the
accomplishment of their objectives (Quang & Xin, 2014).
Gugnani (2013) conducted research to check the impact of CG (board
independence, board size, institutional shareholdings) on FP (ROA and ROE) of
Twenty-five firms enlisted on Bombay Stock Exchange, India. The outcomes proved
that CG positively affects FP. The research of Yasser, Entebang, and Mansor (2011)
also indicated a positive association between CG and FP of Pakistani listed companies.
Khan and Awan (2012) performed research to check the relation between CG (board
size and board independence, audit committee) and FP (ROA, Net Income Margin, and
ROE) of corporations enlisted on KSE, Pakistan. The results indicated that CG
positively affects FP. They described further that cement manufacturing firms governed
in accordance with the code of CG maximize wealth of stockholders and build
investors’ trust. Reddy, Locke and Frank (2015) checked the association between
dimensions of CG (audit committee and board size) and corporate performance (Net
Income Margin and ROA) of publicly enlisted firms in New Zealand. The outcomes
indicated a positive association between CG and firm performance.
Ehikioya (2009) checked the influence of CG on the FP of one hundred and
seven production corporations enlisted on the Nigeria Stock Exchange from 1998 to
2002. CG was measured through insider directors and audit committee members,
whereas FP was calculated through Net Profit Margin, ROE and ROA. The results
proved that the audit committee, insider directors, and board independence positively
12
impact FP. Gompers, Ishii and Metrick (2013) measured CG through board size,
institutional shareholdings, and managerial shareholdings, whereas FP ROA, total assets
turnover, and net income margin were used to analyze FP. The results documented that
facets of CG positively affects FP.
Good practices of CG enhance corporate FP and build a strong position in the
market, however weak CG negatively affects FP and firms bear massive financial
distress. Weak structured corporations face financial problems and hence depend on
leveraging to meet the operating and fixed assets needs and consequently become more
risky (Eling & Marek, 2011). The risk is inherent with debt financing as the level of
debt in capital structure increases, firms need to pay high interest charges due to which
cost of capital increases, solvency risk protection decreases, and firms become more
risky.
According to Prasetyo (2011), the failure of corporations to settle financial
obligation is termed as risk. Sheikh and Wang (2011) documented that risk arises when
a firm does not own adequate financial resources to cover debts and interest charges.
The inability of a firm to cover matured debts and interest charges is termed as risk
(Eling & Marek, 2011). Researchers have used different tools to measure risk. Lang
and Jagtiani (2010) measured risk with net income plus depreciation expense over total
liabilities. Roggi, Garvey, and Damodaran (2012) measured risk by solvency risk
protection ratio (dividing operating income on interest charges). Time interest earned is
one of the tools used by researchers to measure risk. This research also measure risk
through times interest earned as used by (Alam & Shah, 2013; Aries, 2016).
13
Researchers have provided evidences that good practices of CG increase firms’
solvency due to optimal capital structure decision (Ahmed & Hamdan, 2015; Wanyoike
& Nasieku, 2015).
Aries (2016) documented that risk could be minimized by risk-averse managers
by preferring equity financing over debt financing. A decision regarding the level of
debt and equity significantly affects FP and solvency risk protection (Todorovic, 2013).
The decision regarding the optimal capital structure (debt & equity) which enhance FP
and mitigate risk is one of the core functions of the corporate board. According to
Fosberg (2004), capital structure is the blend of a company short and long term debts,
preference shares and common stock. According to Zeitun and Tian (2017), CG is
primarily related to the capital structure decision which performs a key role in boosting
FP and mitigating risk.
Quang and Xin, (2014) analyzed the association between CG (board
independence, institutional ownership, and board size) and capital structure (debt to
equity). They documented a negative association between CG and capital structure.
Further, they described that the larger size of the corporate board exerts pressure on
management to use low debts while financing the corporate long term investments in
order to minimize the interest charges. In addition, independent directors, presence of
institutional shareholders, and proper functioning audit committee prefer minimum
leverage by deploying internal sources of financing to cut the cost of debt. Firms
efficiently utilize their entire resources to reduce the capital cost and maximize
corporate worth hence, do not prefer debt financing.
14
Ganiyu and Abiodun (2012) analyzed the association between CG and capital
structure of corporations enlisted on the Nigeria Stock Exchange. They documented that
CG (board size, institutional shareholding, and board composition) has a negative
relationship with capital structure. They described that as the board size becomes larger
and institutional shareholdings increases, firm finance assets and operating needs
through internal sources (equity) instead of external (debts). Further, they elaborated
that good practices of CG ensure to finance assets through equity rather than debt in
order to minimize company risk and create goodwill.
Masnoon and Rauf (2013) carried out a study to check the impact of CG on
capital structure of Pakistani corporations. The results indicated that CG (board
independence and managerial shareholdings) have a negative relationship with capital
structure. Further, they described that those organizations with more board
independence, managerial shareholdings, and larger board size concentrate on low debt
financing. These organizations deploy internal financing to meet the operating and
assets needs. Organizations properly adhere to the CG accomplish their goal easily by
minimizing the cost, maximizing the profit, and improving market share. Sound FP will
cover most of its needs through internal sources rather than the external.
Liao, Mukherjee, and Wang (2012) recommended that good practices of CG
help corporations in managing information efficiently due to which the entire cost of
capital decreases and corporations make optimal capital structure decision. Good
practices of CG help firms to finance operating and assets needs at low cost and
consequently reduce the cost of debt and solvency risk protection increases (Aries,
2016). According to Barbosa and Louri (2015), the optimal capital structure gives a
15
balance between debt to equity ratio and minimizes the corporate total cost of capital.
The optimum ratio of debt to equity is that which enhances corporate worth and
minimizes cost. Sunday (2010) analyzed the association between capital structure (debt
to equity) and FP (ROA and ROE). The outcomes revealed an affirmative association
between capital structure and FP. According to Eling & Marek, 2011; Roggi et al.,
2012), there is a negative association between capital structure (debt to equity) and risk
(EBIT divided by interest charges). They documented further that as the level of debt
increases, firms need to pay more interest charges on borrowed funds due to which
corporate solvency is negatively affected and firm become more risky.
Researchers have applied different facets of CG to evaluate its effect on capital
structure, FP and risk in developed and underdeveloped economies across the globe.
Corporate FP increases and risk decreases due to the application of CG mechanism, but
this effect changes more if intervened by capital structure. In this research, the author
has employed board size, insider directors, institutional shareholdings, board
independence, and audit committee to measure CG, whereas, capital structure is
calculated through debt to equity and debt to total assets. Furthermore, FP is analyzed
through ROA, ROE, operating income margin, net income margin, and total assets
turnover, however, times interest earned is used to measure risk.
Insider directors are members of the board with the fiduciary responsibility of
firms operation (Bhagat & Bolton, 2018). The Code of CG of Pakistan (2014) defined
insider directors as the directors who give more time to firm operation. They perform
the function of managing the corporate activities. The Code of CG of Pakistan (2014)
requires insider directors to be a maximum 1/3 of the board of directors of the firm
16
including a chief executive officer. Jensen and Meckling (1976) stated that as the
number of insider directors increases, the managers do not shift the resources of a
corporation away. They argued further that raising the number of insider directors will
impact the company positively by persuading the directors to work in the corporate
interest.
Independent board comprises of outside directors, not affiliated with corporate
top executives and has less or no business dealing with corporations. Independent
directors are those working with other organizations as well (Jensen & Meckling, 1976).
Increasing the number of independent directors maximize corporate worth (Khan &
Awan, 2012). The Code of CG of Pakistan (2014) requires that there must be one
independent director however one-third of the entire company board is more preferred.
Dalton and Dalton (2005) described board size as persons elected in a company for the
representation of entire stockholders. Researchers have provided evidence that large
size of company board positively affects FP and solvency risk protection. The code of
CG of Pakistan (2014) requires up to nine members in a company board. Hermalin and
Weisbach (2001) checked the association between the size of the company board and
FP and found an affirmative association. They documented further that large board size
boosts competitiveness due to better ideas for decision making and hence instill investor
confidence.
Okiro, Aduda, and Omoro (2015) defined the audit committee as corporate
board committee that oversees financial events, reports, and disclosures. Proper
functioning audit committee increases the worth of financial reporting and positively
17
affects the FP of the firm (Gordini, 2012). The Code of CG of Pakistan (2014) requires
at least three audit committee members, headed by an independent director.
According to Wahla et al. (2012), ROA indicates the company efficiency in
utilizing assets entirely. The firm FP increases as a result of high returns. ROE is
calculated to check the profit earned on shareholders’ equity (Enobakhare, 2010). As
more the return a company offers to its stockholders, greater the investment
opportunities for a firm. The ratio of ROE indicates effectiveness of a firm in using the
shareholders’ investment to generate dividends. ROE is measured by dividing net
income on Stockholders’ equity. According to Garcia-Meca and Sánchez-Ballesta
(2009), operating income margin shows the operating efficiency and pricing strategy of
a company. Operating income margin indicates the percentage of income before taxes
and interest that is generated by a company of from its sales. Enobakhare (2010)
described that net income margin is one of the profitability tools. This ratio shows the
conversion of one dollar revenue into profit. The total assets turnover designates the
managerial effectiveness in using its total asset to produce revenue (Ghabayen, 2012). A
high ratio indicates more sales in utilizing company total assets.
The debt to equity ratio shows the level of debts deployed to finance total assets
and other corporate needs as compared to stockholders’ equity (Ganiyu & Abiodun,
2012). Debt to total assets shows the fraction of total assets that are financed through
debts. A high ratio indicates that more assets are financed through debts (Adekunle &
Sunday, 2010). A very high ratio is not good for a company as high ratio indicates that
more assets are financed through debts and corporation can bear high risk (Abdul,
2012). The ratio of times interest earned indicates a firm ability to cover its interest
18
charges on accrued debts from the operation (Aries, 2016). Investors use the ratio of
times interest earned to measure the riskiness of a company. They make investments in
low-risk firms. Analyst predicts that at least twenty percent is a suitable ratio to meet
the interest charges of a company (Roggi, Garvey, & Damodaran, 2012).
Cement sector is one of the key sectors of Pakistan, performing a vibrant role in
economic development. The role of cement sector in the economic development of
Pakistan can be outlined through value addition to the gross domestic product,
employment creation for thousands of people, foreign remittances and huge income for
government in the form of tax. The cement industry of Pakistan has attracted domestic
and foreign investors due to abundant and cheap raw material, persisting rise in local
and foreign demand for cement and sound profit margin.
This research analyzes the influence of CG on FP, capital structure, and risk in
the light of the prevailing code of CG (2014) in Pakistan and the existing internal
system of cement sector firms listed on KSE. The regulatory authorities of Pakistan
have been made good efforts for improvement of the code of CG to strengthen the
entire sectors of Pakistan as it play a significant role in enhancing corporate FP, making
optimal capital structure decision, and mitigating risk.
Problem Statement
Proper application of CG practices plays a significant role in maximization of
corporate FP and mitigating risk. Most of the researches have been conducted to test the
impact of CG on firms’ FP and risk in developed economies (Ahmed & Hamdan, 2015).
According to Ekanayake, Perera, and Perera (2010), more attention should be given to
CG in developing economies as several economies lack proper system of CG. Pakistan
19
is also a developing economy and CG system is weak, therefore this study examines the
impact of CG practices on FP, capital structure, and risk of cement firms listed on KSE,
Pakistan.
One of the basic questions with respect to corporate finance is capital structure
decision; what can be the ideal debt to equity mix. As the fundamental objective of
corporate financing decision is maximize firm value, minimize cost, maximize market
share (Wanyoike & Nasieku, 2015). Corporate board is one of the facets of CG that is
responsible for making such optimal capital structure decision to maximize financial
performance and minimize risk (Jensen & Meckling, 1976; Shoaib & Yasushi, 2017;
Quang & Xin, 2014).
It is believed that CG is a noteworthy tool, deployed to make optimal capital
structure decision, increase FP, and mitigate risk. Researchers have analyzed the impact
of CG on FP (Aggarwal, 2013; Baydoun, Ekanaakey, Perera & Perera, 2010; Gugnani,
2013), impact of CG on capital structure (Baydoun, Maguire, Ryan, & Willett, 2013;
Zeitun & Tian, 2017) but very limited research work is done to examine the impact of
CG on risk (Barbosa & Louri, 2015; Muhammad, Shah, & Islam, 2014; Solomon,
2010).
According to the author's knowledge CG, capital structure, FP and risk with
addition of capital structure as mediator got very limited literature in particular to the
cement industry and specifically in Pakistan. Therefore, this research is conducted to
analyze the impact of CG on capital structure, FP and risk of cement manufacturing
corporations listed on KSE, Pakistan. Furthermore, the role of capital structure as a
mediator is also analyzed.
20
Research Questions
For accomplishment of the research objectives, the current study is conducted to
investigate the impact of CG on capital structure, FP, and risk of cement manufacturing
firms listed on KSE, Pakistan. Therefore, the beneath mentioned questions are designed:
What is the relationship between CG (insider directors, institutional
shareholdings, board size, board independence, and audit committee) and FP
(ROA, ROE, operating income margin, net income margin, and total assets
turnover)?
Does CG impact firms’ solvency risk protection (times interest earned)?
Is there any relationship between CG and capital structure (debt to equity and
debt to total assets)?
What is the relationship between capital structure, FP and solvency risk
protection?
Does capital structure mediate between CG, solvency risk protection and FP?
Research Objectives
The fundamental aim of current study is to explore the impact of CG on capital
structure, FP, and risk from a theoretical and practical perspective of cement
manufacturing corporations listed on KSE, Pakistan. For this purpose, the objectives are
marked as under:
Analyzing the impact of CG (insider directors, institutional shareholdings, board
independence, board size, and audit committee) on capital structure (debt to total
assets and debt to equity), FP (ROA, ROE, operating income margin, net income
21
margin, and total assets turnover), and solvency risk protection (Times Interest
Earned).
Evaluating the relationship between capital structure, FP and solvency risk
protection.
Analyzing the meditating role of capital structure between CG, solvency risk
protection, and FP.
Understanding the existing corporate practices of cement manufacturing
companies of Pakistan and signifying measures to improve these practices.
Significance of the Research
The financial scandals of giant corporations across the globe like Adelphia
Communications, Kmart, Chiquita Brands Int, Enron, World Com, One Tel, China
Medical Technology, Kabul Bank, Crescent Bank Fraud, PTCL, ENGRO Group of
Companies, and Mehran Bank shaken the investors, executives and government. The
fundamental reason behind the downfall and collapse of these organizations were weak
directing and controlling. In all these few bankrupt companies, the directors and
executives were involved in fraudulent affairs.
Cement sector is one of the key sectors of Pakistan, performing a vibrant role in
economic development. The role of cement sector in the economic development of
Pakistan can be outlined through value addition to the gross domestic product,
employment creation for thousands of people, foreign remittances and huge income for
government in the form of tax. The cement industry of Pakistan has attracted domestic
and foreign investors due to abundant and cheap raw material, persisting rise in local
22
and foreign demand for cement and sound profit margin. Therefore, it is imperative to
check the CG practices of cement industry of Pakistan and its impact on capital
structure, FP and solvency risk protection based on code of CG of Pakistan (2014) from
2005 to 2014.
Theoretical and Applied Significance
This research attempts to examine the impact of CG (insider directors, board
independence, institutional shareholding, board size, and audit committee) on FP and
solvency risk protection of cement sector firms listed on KSE. This study would provide
an innovative and applied framework to examine and analyze the role of capital
structure as mediator between CG, FP and solvency risk protection.
This study will enrich the Agency theory in the context of Pakistan by
documenting how to minimize conflict of interest in a company. Agency theory
identifies the major causes of agency problem and suggests the principles which may be
applied to resolve it. Whereas, this research would reveal the mechanisms need to be
applied in cement manufacturing firms of Pakistan in order to overcome this
issue. Furthermore, this research will integrate a new model by enriching the existing
academic framework. The current research will examine that how the association
between CG (predictor) and FP and solvency risk protection (outcome variables) is
intervened by capital structure. This model will not only develop the current academic
structure of CG by integrating capital structure but also present a novelty to add other
significant mediating factors into CG as well.
23
The model used in this research would measure CG with more rich dimensions
(insider directors, institutional shareholdings, board size, board independence, and audit
committee) as compared to earlier studies to check its impact on capital structure, FP
and solvency risk protection. This research will measure FP with rich measures like
ROA and ROE, operating income margin, net income margin, and total assets turnover
to analyze in detail the role of FP as an outcome variable.
Corporations try to enhance CG rating so that the corporate worth can also be
enhanced. For this purpose, the current research will recommend the optimal size of
board, required number of independent directors, insider directors, and institutional
shareholding. This research will be useful for the corporate directors to identify the
usefulness of optimal capital structure decision keeping in view the corporate goal. The
SECP amends and issues the corporate regulations and policies to strengthen the
significance of CG. This research will provide evidences that how to improve the code
of CG practices in Pakistan to maximize corporate FP, enhance solvency risk
protection, bring transparency in corporate affairs, and instill national and international
investors.
24
CHAPTER 2
LITERATURE REVIEW
CG exists as long as corporations but as an area of study, it is less than eighty
years old. In the last four decades, several activities, reports, codes, and laws have
emerged. CG came into vogue in the 1970s in the USA. Since that time it has become
the hot topic of the debate in the world among academicians, regulatory bodies,
investors and executives in this progressive and aggressive` corporate environment. It is
indispensable for the accomplishment of a new frontier of profitability and competitive
edge.
Due to the substantial worth and existing literature of CG, this chapter is
structured as introduction, CG, theoretical foundation, CG systems in the globe,
dimensions of variables used in this research, the cement industry in Pakistan are
discussed. Furthermore, other variables of this research including FP and its
dimensions, solvency risk protection and its dimension, and capital structure and its
dimensions are described. The association between CG and capital structure, the
relation between capital structure and FP, the association between capital structure and
solvency risk protection and influence of CG on capital structure, FP and solvency risk
protection are described. The control variables (firm size, firm age, and firm growth) are
also discussed. The rationale of the study, conceptual framework, and research
hypotheses are also discussed in this chapter.
25
Introduction
The fundamental goalmouth of every corporation is to enhance corporate value,
which occurs when stockholders get a high price for their existing stocks (VanHorne &
Harlow, 2009). The shareholders' wealth can be maximized if corporations exercise the
code of CG. The worth of CG has been realized globally due to financial crises in past
decades, technological advancement, the emergence of financial markets, liberalization
of trade, and capital mobilization (Reddy, Locke, & Frank, 2015). Good CG stabilizes
and strengthens capital market and protects investors. It helps corporations to enhance
FP, mitigate risk, and attract more investors across the globe. High investment in a firm
indicates investors’ trust due to good FP and low risk and greater solvency risk
protection (Khan & Awan, 2012).
The entire industries, particularly service and manufacturing contribute their
significant role in economic development. The contribution of the cement sector in
boosting economic growth cannot be overlooked. Those cement manufacturing firms
exercising the code of CG, produce a good return for shareholders and instill investors’
trust, however those firms do not adhere the code lose the trust of investors, bear loss
and suffer risk. Risk is related to the decision made by the corporate board regarding
capital structure as good decision ensures optimal capital structure, which in turn
enhance FP, mitigates risk, increase solvency risk protection, and instill investors’
confidence (Quang & Xin, 2014).
The work done on the cement industry of Pakistan is not that much as this
industry has been contributing in economic development, employment creation for
thousands of people, foreign remittances and huge income for the government. The key
26
drivers of the current study were to analyze the effect of CG (predictor) on capital
structure, FP, and solvency risk protection (outcome) as well as to test capital structure
as a mediator between the predictor variable and outcome variables of listed cement
manufacturing firms on KSE, Pakistan.
Corporate Governance
CG is the composition of laws, rules and management techniques deployed to
direct and control corporate affairs (Ganiyu & Abiodun, 2012). The code of CG
identifies the allocation of authority and responsibility among distinct members
(shareholders, auditors, creditors, managers, and other stakeholders) and consist the
rules and procedures for operation of listed firms (Agyei & Owusu, 2014). CG is a
system of governing corporate affairs to protect shareholders and other stakeholders that
increases performance. It contains procedures, rules, laws, and policies which influence
the manner a company is regulated (Shoaib & Yasushi, 2017).
The system and definition of CG differs across the globe. Therefore, it is
intricate to offer a universally accepted definition and system due to differentiation in
culture, legislative system, and historic growth (Ramon, 2011). Barbosa and Louri
(2015) described that CG has been defined and practicing in a diverse manner in most
of the countries, depending upon the owners’ power, managers and financiers. It pertain
laws, policies, and customs which affect how corporations are directed and controlled
for the accomplishment of organizational goal.
CG can be defined in relation of shareholders' perspective and the stakeholders’
orientation. Therefore, the discussion of CG rotates that whether corporations should be
27
operated by management in the interest of shareholders only (shareholders perspective)
or consideration should also be given to other constituencies (stakeholders’
perspective). According to the Anglo-American countries (USA and UK), the focus of
CG is to generate good return for investors (shareholders perspective), whereas, in the
Continental European countries (France, Greece, and Germany) CG refers to entire
corporate stakeholders' “stakeholders perspective” (Okiro, 2014).
CG explains the mechanisms, which have been employed since the subsistence
of corporations. These mechanisms seek to make sure that the corporate entities and
management are operated according to the existing corporate standards to protect and
uphold the interest of stockholders, and other stakeholders (Sanvicente, 2013). CG is
the mechanism employed by companies to direct and control its affairs in a transparent
manner (Australian Standard, 2003). This definition is assumed more absolute as it
identifies the pre-requisite of check and balance in managing the corporations. OECD
(2015) described that the CG system is the assortment of affiliation between the board,
management, stockholders and other stakeholders. The system used for directing and
controlling corporations is termed as CG (Cadbury, 1992). According to Butt (2012),
the mechanism used to direct and control the matters of a firm to serve and defend the
interest of each and entire stakeholders. Different mechanisms are used in different
countries by organizations in order to accomplish the organization's goal. The foremost
objective of every firm is to escalate FP which results in increasing return for
stockholders.
According to Bhagat and Bolton (2018), if the management is to operate the
firm, the governance is to watch that it is operated effectively. Todorovic (2013)
28
demarcated CG as the system benefited by external investors to secure themselves from
the expropriation of the internals (controlling stockholders and managers). According
to Okiro (2014), functions performed by the board of directors to ensure the proper
operation of business affairs is termed as governance, whereas what is performed by
employees hired by the board to run on a daily basis is called management. CG is the
system to support financial and economic stability, efficiency and sustainable growth. It
helps corporations in accessing funds for a long time and facilitates by making sure that
stockholders and other corporate stakeholders are fairly treated (Zeitun & Tian, 2017)
Code of CG formulate a transparent environment of accountability and trust for
nurturing long investments, integrity of businesses, financial stability and facilitating
sound growth (Wanyoike & Nasieku, 2015). The practices and rules of CG have been
improved in the majority of corporations in different economies in the last decade.
Nowadays policymakers and regulatory bodies are facing significant challenges
including increasing complexities of the investment chain, stock exchange varying role,
new investors’ emergence, trade practice, and investment strategies to adjust the CG
(OECD, 2015).
The SECP has concerted the regulatory activities to encourage national and
international investors in Pakistan. For this purpose, the code was issued by the SECP
for the first time in March 2002 and updated from time to time and lastly revised and
issued on November 22, 2017, to make sure the accountability and transparency in
firms for safeguarding the interest of the stockholders and other stakeholders. The
SECP has made it mandatory for corporations to exercise the code in order to be
29
enlisted on the stock exchange of Pakistan. All the listed corporations on KSE, Pakistan
are needed to operate according to the code (SECP, 2013).
It is obligatory for the listed Pakistani companies to exercise according to the
code as most of the corporations are family owned and in particular to the cement
industry. The management lies in the hands of a group who possess greater than fifty
percent of issued capital and dominate the board of directors. If these firms are not
regulated through the rules, laws, practices, and policies to conduct in accordance with
the CG mechanisms, the stake of other stakeholders will be impaired and eventually, the
economy as a whole will also be adversely affected.
Theoretical Foundation
Smith (1776) described that the corporate directors (managers) do not see the
money of other people (shareholders) with the same care as personal. Like a rich man’s
stewards, they are apt to deem minor issues as not for the stake of master and simply
give themselves a dispensation from having it. In managing the affairs of corporations,
more or less negligence always prevails. As the matter of fact, managers do not work in
the stake of shareholders due to ownership separation from its management. The
Stockholders want to maximize their wealth, whereas, managers work for their own
empire-building, spending money in wasteful projects, use corporate resources for own
benefits, and do not fire mediocrity subordinates. Therefore, to direct and control all the
matters of corporation effectively and achieve the goal of corporate stockholders and
other stakeholders, several theories of CG are offered by distinctive authorities; Agency
Theory, Stakeholder Theory, Stewardship Theory, Institutional Theory, Resource
30
Dependency Theory, Transaction Cost Theory, and Political Theory are the prominent
theories that base the theoretical framework.
Agency Theory. The ownership separation from management in the corporation
has created many debates on how to integrate the interest of corporate managers and
owners. Smith (1776) highlighted this question that ownership separation and control
raise incentives for managers in order to run the corporation effectively. The theoretical
foundations for the majority of the present structure of CG root from the study of Berle
and Means (1932). They revealed that the agency problem takes place due to
segregation of ownership and control. The center of agency problem is ownership and
control separation (Shleifer & Vishny, 2007).
CG is conventionally related to the agency problem: problem between principal
and agent. The problem between principal (shareholder) and agent (manager) arises
when those who own a corporation differs from those who manage or control (Jensen &
Meckling, 1976). The agency theory states that principal handover the company
operation to the agents and believes that they will exert their entire potential in the
optimum interest of the company. Besides this, the principals presume that the decision
made by the agents will build corporate worth. However, the agents’ interest deviates
from the principals’ presumptions.
Traditionally, CG emerged as a system to tackle the agency problem. Shleifer
and Vishny (2013) reviewed most of the literature which was concentrated on the
unitary system of CG prevailed in the UK, USA and Pakistan and so on, where
corporations are mostly akin to the classical effort of Berle and Means (1932), who
31
debated that agency problem arises as a result of segregation of corporate control and
ownership.
The system of CG which has been emerged and considered good practices in the
UK, USA and Pakistan, require board independence, unitary board system, and board
committees. According to the agency theory, these golden principles basically
concentrate on increasing stockholders worth, increasing executives reward, and have
been the core basis for CG across the globe.
The annual reports of Pakistani firms uncover the fact that the majority of
corporations are family-owned. The management is mostly in the hands of a group,
having greater than 50% of issued stocks. They govern corporations in the best interest
of stockholders as they are elected and answerable to the stockholders. This approach is
denoted as the shareholder approach. The shareholders' approach and the agency theory
lead the board to design policies to maximize shareholder value often at the cost of
other stakeholders.
Stakeholder Theory. Freeman (1994) introduced the stakeholder theory to
integrate corporation to a wider range of stakeholders. This theory states that managers
work and serve the entire stakeholders. The stakeholder approach is related to the Dual
system of CG (Continental European practices) where the law requires 50% seats on the
supervisory board for the representatives of the workforce and large block holders.
Shleifer and Vishny (2013) elaborated the Continental European practices of CG, where
corporations and institutional block holders contribute a significant role of monitoring.
The stakeholders’ theorists (Barbosa & Louri, 2015; Gordini, 2012) advocated that
agents have an association (employees, vendors and business partners) who work for
32
the corporate benefit. It was debated that this group of association is significant other
than principal and agent relations. According to Snyder (2007), the stakeholder theory
focuses on a class of stakeholders requiring the attention of management. The group of
stakeholders takes part in the corporation to get advantages. This group builds a
relationship with several other groups who impact decision making. The theory of
stakeholder is relevant to the nature of such relationship in regard to processes and
effects for corporations as well as stakeholders (Gordini, 2012). According to Smallman
(2004), the theory of stakeholder is an enlargement of agency theory, where the duties
of the board are expanded from the sole interest of stockholders to other stakeholders.
The ethical view of the stakeholder theory is that corporations should treat all the
stakeholders fairly and the managers must manage firm for entire stakeholders gain
(Barbosa & Louri, 2015).
The theory of stakeholder leads to stakeholders’ approach which demands
directors to formulate policies in the best stake of entire stakeholders, not for
stockholders only. This approach is very ideal as it considers all the stakeholders
including shareholders. However, this approach is not practical in Pakistan as the
directors are elected by shareholders and they are accountable to them only.
Stewardship Theory. Donaldson and Davis offered the theory of Stewardship
in 1995 that documents that top executives work as stewards in the stake of
stockholders (principals) and firm. The stewards formulate socialist decisions in the sole
interest of the firm rather than own. This theory presumes that improving an
organization FP is the fundamental responsibility of stewards. It is believed that
stewards get more as the firm grows.
33
The theory of stewardship was developed as the behavior of the firm
counterweight the normal actions of management (Donaldson & Preston, 1995). This
theory aligns the behavior/interest of agents with the principal. Stewardship theory is
basically related in identifying situations where interest of both principal and stewards
are aligned (Donaldson & Davis, 1997). This theory demonstrates situational factors
and psychological factors that persuade an individual to become an agent/steward.
Situational factors are the adjacent cultural environment rather than a firm working
environment, working in a participatory oriented management system instead of a
control-oriented management system. Donaldson and Davis (1997) argued that stewards
integrate their goals with the firm goal. The theorists argue further that stewards are
more motivated as the firm grows.
Institutional Theory. The broadly accepted Institutional theory centers on the
social cultural structure of a firm in deeper and greatly adaptable system. It reflects
procedures through which structures (systems, rules, and standards) are reliable
guidelines for social conduct (Scott, 2004). Various features of this theory elaborate that
how these are formed and followed. Sound legal settings boosts the application of good
CG practices as a result of more corporate incentives. All the countries own
distinguished codes of CG that serve as guideline for exercise (Stulz, Karoyli, &
Doidge, 2008). The fundamental notion of this theory is that firms are linked with
outside environment. CG must make sure a vibrant association among firms and
environment on the basis of its goal and objective. CG must possess influence and
contribution in identification and formalization of firm goal. Zeitun and Tian (2017)
proposed that for planning the compensation policy, upper management must know the
34
entire rules and culture of the firm. According to Weir, Laing and McKnight (2009),
CG entails internal and external governance systems that are associated with the
Institutional Theory. In addition, this theory describes more deeply the social system,
rules, norms and process that have developed as consistent guideline for social
behavior. It examines that how these are formulated and adopted.
It looks at how these elements are created, diffused, adopted over time, and how
they are rejected and neglected. Essentially, the Institutional theory proclaims that
structure and procedure of an organization is important as outside institutions desire.
Institutional systems are not virtuously regulated and coordinated mechanisms for
economics events, they socially formulates rules and principles for traditional standards
and return.
Political Theory. This theory presents the approach of mounting voting support
from stockholders instead of buying voting power. This theory documents the sharing
of company power, income and benefits are determined through the government favor.
The Resource Dependency Theory. The Theory of Resource Dependency
concentrates upon the board of directors’ role in the provision of access to corporate
required resources. This theory documents that directors (internal, support specialists,
business experts, and community influential) contribute a significant role in the
provision or acquiring necessary resources to firm by deploying ties with the outside
environment. The resources provision maximizes corporate functioning, performance,
and survival. The members of the board bring resources to the corporation in the form
of access to major constituents like purchasers, public policy formulators, social groups,
legitimacy, skills, and information.
35
Transaction Cost Theory. The Theory of Transaction Cost describes that
corporations own a number of contracts within the corporation or with markets in order
to create corporate worth. However, each contract is associated with cost with outside
parties; such cost is termed as transaction cost. If market transaction cost is rambling,
then corporations would use such transactions itself to maximize corporate worth.
Systems of Corporate Governance
The set of laws, rules, and processes to direct and control entire functions of a
corporation are termed as CG (Bhagat & Bolton, 2018). The systems of CG
significantly influence FP, capital structure, and solvency risk protection of companies.
CG involves balancing the stakes of various corporate stakeholders including
stockholders, management, clients, creditors, and government.
According Shoaib and Yasushi (2017), the system of CG varies depending upon
the systems that is deployed by the corporate stockholders for persuading managers.
The common objective of the global code of CG is to secure shareholders and other
stakeholders but all countries cannot adhere homogenous governance system (Clarke,
2004). However, all the systems have identical purpose but the design of governance
structure is considerably different. The systems of CG differs from country to country
(Ahmed & Hamdan, 2015). Various CG models are employed worldwide, having
separate and distinct traits (Hasan, Kobeissi, & Song, 2011). Gordini (2012) classified
these models into the unitary system and dual systems.
Unitary System of Corporate Governance. The unitary system also known as
Anglo Saxon Model of CG / Outsider Governance System, followed in the USA, UK,
36
Australia, Canada, Pakistan, and other English speaking economies. This model
highlights that the company view is based on fiduciary association between principals
and agents. The board is elected by stockholders. The board hires and fires managers.
The board is charged with in lieu of the stake of stockholders (Chugh, Meador, &
Kumar, 2009).
Cernat (2004) documented that the Unitary System is found on the notion of
capitalism market and based on the concept that the stake of ownership and
decentralized market can exercise in a controlled and balanced system. In the Unitary
system, the actions of management are monitored and controlled through independent
directors for maximization of stockholders wealth. According to Hasan, Kobeissi, and
Song (2011), ownership is concentrated in Unitary system of CG. Further, they
described that few people possess legitimate power upon the management team and
minority investors have meager protection, who seeks support from independent
directors.
Figure 1. Unitary System of Corporate Governance (Cernat, 2004).
37
The aforementioned diagram indicates that Anglo Saxon/Unitary system based
on the association between the stockholders and managers. The stockholders require
sound legal shields. According to the Anglos Saxon model, the CG function is to
provide protection to the interest and rights of shareholders (Hasan, Kobeissi, & Song
2011).
Dual System of Corporate Governance. The dual system also is known as the
European Continental Model of CG and Insider Governance System is charted in
France, Greece, Japan, and Germany. Donaldson and Preston (1997) described that the
Dual system/Continental model focuses on the association between the broader groups
of stakeholders. According to Chugh, Meador and Kumar (2009), the board is not
charged with the stake of stockholders only but other stakeholders as well. Usually, the
board also consists of a member of labor union and employees.
Craig (2005) described that the Dual system focus on scrutinizing the interest of
shareholders, managers, suppliers, unions, and crew which help in corporate innovation.
A similar notion is employed in the France as directors, managers and crew detain the
duties in the company (Snyder, 2007). Cernat (2004) elaborated that this model of CG
represents stakeholder’s theory. This model focuses not only stockholders’ interest but
also to protect other stakeholders. Several Europeans countries like France, Greece, and
Germany apply stakeholder’s model in large corporations as an element of economic
and social structure (Aries, 2016)
38
Figure 2. Dual System of Corporate Governance (Cernat, 2004).
The above diagram exhibits that the model of the Dual system is based on the
association between stockholders, directors, and supervisory board. The supervisory
board normally consists of several stakeholders including investors (stockholders and
creditors) customers, the crew (group of a union) and suppliers (Cernat, 2004; West,
2006). According to Hasan, Kobeissi, and Song (2011), the structure of CG in
Germany, primarily related to some large corporations, enlisted at stock exchanges and
operate on two levels (supervisory and management board system).
With the insider system of governance and combination of corporate control,
both the systems have grown-up from various environments of regulatory, political and
institutions. Pakistan has unitary CG system. However, there is a uni-boarded system.
39
Dimensions of Corporate Governance
To check the efficacy of CG in literature, researchers across the globe have
employed different facets. The mechanism of CG varies from country to country
therefore, researchers have used different measures. Core, John, and Larcker (2012)
measured CG with shareholders rights, disclosure and transparency, outside directors,
and board size in the context of Japan. DeAngelo, Harry, Linda and Douglas (2004),
measured CG with board characteristics, respect for investor interests, ownership
structure, and quality of disclosure, whereas Brown and Caylor (2006) measured CG
with social awareness, discipline and transparency, fairness, board independence,
accountability, and responsibility, However Ahmed and Hamdan (2015) measured CG
with CEO duality, audit committee, board independence, and transparency, whereas
Wahla, Shah, and Hussain (2012), analyzed CG with Family control, bank control and
ownership concentration in developed economies and recommended to measure CG
with the same facets of manufacturing sectors in developing economies.
Yasser, Entebang, and Mansor (2011) measured CG with board composition,
CEO duality, and board size, and audit committee, whereas Vo and Nguyen (2014),
measured CG with leadership structure, board committee, board meeting, board size,
and board composition, however Velnampy and Nimalthasan (2013), measured CG
with board independence, institutional shareholding, board size and quality of
disclosure in developing economies of financial and non-financial sector.
The aforementioned literature reveals the work done by the different renowned
researchers to measure CG in developed and underdeveloped economies with different
measures. Based on the previous researches, the current research has used important
40
facets of CG in the context of the code of CG of Pakistan (2014) and particularly to the
Cement sector of Pakistan. The dimensions include insider directors, institutional
shareholdings, board independence, audit committee, and board size. The earlier studies
show that CG has been measured with few dimensions (DeAngelo, Gugler, 2013;
Velnampy, 2013; Wahla, Shah, & Hussain, 2012). However, this research has used rich
dimensions of CG in the context of code of CG of Pakistan (2014). The researcher has
taken these dimensions as they prominently influence the FP, capital structure and risk
of cement manufacturing firms listed on KSE, Pakistan.
Insider Directors. The board of directors includes insider directors, also known
as a dependent directors or executive directors (Shah, Butt, & Hassan, 2009). According
to Lang and Jagtiani (2010), the shareholders who perform the function of firm’s
management. According to SECP (2013), insider directors are the members who are
assigned the managerial responsibilities. The insider directors are engaged in managing
the day to day corporate activities (Ahmed & Hamdan, 2015; Petrovic, 2008).
Jensen and Meckling (1976) stated that principals hire agents to fully utilize firm
assets for its profitability but in several cases, it is found that agents strive to increase
own powers. This principals and agent's conflict can be reduced or resolved by
increasing managerial shareholdings. When managerial shareholdings are reduced or
eliminated, managers' interest to increase firm value goes down. The Code of CG
Pakistan (2014) requires a maximum of 1/3 insider directors of the elected directors
comprising chief executive officer. This research measures insider directors as total
number of executive directors in the company board as measured by Ahmed and
Hamdan (2015).
41
Institutional Shareholding. Institutional shareholders are the business
organizations like banks, mutual funds or insurance companies, who purchase stocks in
listed corporations to earn a return (Quang & Xin, 2014). The institutional shareholders
consist of pension fund, insurance corporations, mutual funds, and banks. According to
Pound (1988), institutional shareholdings are corporations that collect individual
savings for re-investment in other corporations. The institutional shareholdings own
sound experience, proficiency, and intellectual skills. They are fully capable to govern
the entire corporation efficiently and consequently increase FP of the firm. The key
objective of institutional shareholdings is to minimize the cost of a transaction.
Institutional shareholdings reduce transactions cost and alleviate agency conflict (Berle
& Means, 1932). In this research, institutional shareholding is calculated as Shares held
by other institutions divided by outstanding shares as calculated by Otman (2014).
Board Independence. The board independence means company’s independent
directors. These independent directors are external directors having no affiliation with
executive directors and own minimal or no business dealing with corporations
(Masnoon & Rauf, 2013). Board independence means the independent board of
directors, who do not have any managerial responsibilities, merely work as directors
(McNutt, 2010). Independent directors carefully monitor the activities of executive
directors to reduce managerial opportunism and increase stockholders worth (Barbosa
and Louri, 2015)
Independent directors are those who also work with many organizations (Jensen
& Meckling, 1976). Independent directors perform a significant role in governance
practices and are responsible for formulating and monitoring the objective of a firm.
42
Agency theorists describe that agency cost is reduced if insider directors are supervised
well by the board. The monitoring is done through a balanced board. The board must
include most of independent directors to control the insider directors having an
opportunistic attitude. They described further that as the proportion of independent
directors’ increase, the activities of insider directors are monitor and control in a good
manner (Jensen & Meckling, 1976). The independent directors prevent the undue
exercises of authority by insider directors, protect shareholders’ stake in board decisions
and making sure competitive corporate performance (Todorovic, 2013).
According to Australian Standards (2003), the best practices of code recommend
more independent directors in a company board and a significant weight in decision
making. The Code of CG of Pakistan (2014) made it obligatory that there must be one
independent director, whereas one third of the company board is a preferred number.
However, in Code of CG of Pakistan (2017), the number of independent directors is
raised from 1 to 2 or 1/3 of the entire company board. The corporations are needed to
increase the number after two years. The independent directors should not join in stock
option. The presence of independent directors in a corporate board enhances
independence of board and firm FP (Cadbury Report, 1992). In this research, board
independence is computed as total number of independent directors in the company
board as measured by authors (Otman, 2014; Yasser et al. 2011).
Board Size. The board of directors is the group of individuals, elected to work
as agents of stockholders and other stakeholders for the formulation of corporate
policies and make decisions on key corporate matters. There are various assumptions
regarding the optimal size of company board to manage the organization
43
successfully. The size of the members of the corporate board should be eight to ten with
the same number of executives and non-executives (Cadbury, 1992). Seven to eight are
the optimum board size (Jensen, 1993). The UAE Code of CG quotes that the board size
must be from three to twelve. The Code of CG of Pakistan (2014) requires nine
members on the company board. According to Bhagat & Bolton (2018), six to fifteen
are the ideal board size in order to maximize corporate FP. The large board size is more
useful as compare to smaller board because larger board size is spread of specialist
opinions and it increases diversity of board in relation to experiences and skills and
nationality (Dalton & Dalton, 2005). Larger board size is feasible for multinational
firms as many advisory committees will be required for making several decisions.
According to the Code of CG of Pakistan (2014), the corporate board of
directors in Pakistan must consist of independent, executives and non-executive, with
the required level of knowledge, skills, experience, and competency and approach.
Furthermore, the presence of one female in the company board is mandatory. The
corporation must disclose all the directors in the annual report. In the current research,
the board size is measured as total number of directors in the company board as
computed by Cheng, Evans, and Nagarajan, 2008).
Audit Committee. According to Todorovic (2013), the audit committee is a
sub-committee of a company which is imperative for good CG. This committee checks
the entire matters of a corporation that increases worth of financial reporting (Garcia-
Meca & Sanchez-Ballesta, 2009). The agency problem arises when control and
ownership is owned by different group of persons, which require proper execution of an
44
audit committee to resolve the agency problems. The focus of the audit committee is to
evaluate management financial actions in order to analyze risk (Cohen & Hanno, 2010).
Australian CG Principles & Recommendations (2007) requires a minimum of
three members, including executive directors and independent directors in the audit
committee. Code of CG of Pakistan (2014) made it obligatory for the firm that the board
must develop an audit committee with 3 members having finance qualifications. This
committee should comprise of most of independent directors. The independent director
must chair the committee, not the chairperson. In this research, the audit committee is
calculated as the total number of audit committee members as measured by Okiro, et al.,
2015; Vo & Nguyen, 2014).
Financial Performance
FP is how well an organization can utilize assets from its main source of
business and produce revenue (Enobakhare, 2010). A corporate performance level in
terms of entire profit and loss for a particular time period is known as FP. The FP is a
monetary outcome of corporate policies and operating activities (Gugler, 2013).
According to Brown and Caylor (2004), the evaluation of performance is mostly based
on a firm FP and non-FP. FP is calculated by utilizing different measures such as net
income margin, ROA and ROE, whereas non-FP is assessed on the basis of quality,
innovativeness, and satisfaction of customers (Wanyoike & Nasieku, 2015). A number
of decisions regarding future business operations, policies, and strategies are made on
the basis of current FP.
45
Investors use various techniques to measure the FP of a corporation. FP of
corporation can be calculated via ROA, earnings per share, net income margin, market
capitalization, ROE, price-earnings ratio and dividend yield (Barbosa & Louri, 2005).
FP is enhanced due to sound practices of CG (Joshua, 2008). According to Adekunle
and Sunday (2010), any mathematical measure to analyze how efficiently a corporation
is utilizing its entire assets to generate profit is termed as FP. Further, they described
that a thorough analysis of corporate FP should be used instead of a single measure of
FP. Several measures including operating income margin, ROA, EBIT, and ROE are
required to be used as single ratio cannot reflect the true picture of the organization.
Assessing corporate FP permits decision-makers to check the monetary outcome
of its corporate strategies and firms’ operations. The term FP is applied as a common
tool of a firm entire financial position during specific time, which can be used to match
similar corporations for the same period or with the previous periods of same
corporation. Different means are used to calculate FP but all means must be used in
aggregate. The shareholders, creditors, bondholders, and management are different
corporate stakeholders’ and each group has its own stake in measuring FP.
Balance sheet and income statement are two of widely financial statements used
by existing and potential shareholders, creditors, and bondholders. In order to measure
FP, data from these financial statements are used individually or in aggregation to
analyze FP and get the true picture of a company and make investment decisions.
Arshaad, Yousaf, Shahzadi, and Mustansar (2014) carried research to check the
relationship between CG and FP of firms enlisted on KSE from 2008 to 2012. FP
calculated with net profit margin, ROA and ROE. Yasser, Entebang, and Mansor (2011)
46
carried research to check the association between CG and FP (ROA and profit margin)
of 30 indexed firms in Pakistan.
Dimensions of Financial Performance
The literature reveals that the most of the researchers have used only a few
dimensions in their studies to calculate FP in developed and under-developed
economies. The author has employed more rich dimensions of FP in the current
research to calculate FP in more depth as compare to previous researchers. A brief
description of FP measures are given as under;
Return on Assets. This ratio describe that how effectively corporations are
utilizing its total assets in producing profit (Wahla et al., 2012). In other words, it shows
that what a corporation can generate from each dollar of the firm’s asset. Alternatively,
this profit ratio shows how many dollars of income is derived from the assets of the
corporations. ROA is a valuable instrument used for comparison with competitive
corporations of same industry and measured as;
ROA = Net Income / Total Assets
Return on Equity. This ratio is used for calculating the profit earned on each
dollar of shareholders’ equity (Enobakhare, 2010). It exhibits how efficiently
corporations utilize shareholders’ investment to produce earning growth. This ratio is
calculated as;
ROE = Net Income / Total Stockholders’ Equity
47
Operating Income Margin. Operating income margin, also known as the
operating margin is a ratio, used to calculate corporate operating efficiency and pricing
strategy (Garcia-Meca & Sánchez-Ballesta, 2009). Operating income margin indicates
the proportion of corporate revenue that is remaining after paying the cost of goods
manufactured and sold and operative cost. This is an important ratio that helps to
analyze the solvency of a firm. This ratio is calculated as;
OIM = Earnings Before Interest & Taxes / Net Sales
Net Income Margin. This ratio is used to analyze a firm’s profitability. Net
income margin indicates how much of each revenue dollar is translated into income
(Enobakhare, 2010). This ratio is calculated as;
Net Income Margin = Net Income / Net Sales
Total Asset Turnover. This ratio specifies that how efficiently the management
has used its total assets in generating its revenue (Ghabayen, 2012). Total assets
turnover is a financial ratio that assesses corporate efficiency in utilization of its total
assets to produce revenue. The higher total assets turnover ratio indicates efficient
utilization of total assets whereas, the lower ratio predicts a dilemma with some of the
assets type. Total assets turnover is calculated as;
Total Assets Turnover = Net Sales / Total Assets
48
Corporate Governance and Financial Performance
Okiro, Aduda, and Omoro (2015) documented that the CG (insider directors,
board independence, and board size) increases FP (ROA, ROE, and net income margin).
According to Quang and Xin (2014), the application of good practices of CG (board
size, audit committee, and institutional shareholding) maximizes the FP (ROA, ROE,
total assets turnover). Gaaniyu and Abiodun (2012) described that CG (insider directors,
institutional shareholdings, and board independence) positively affects FP (operating
income margin, net income margin, and total assets turnover of corporation. Javed and
Iqbal (2008) proved that CG (insider directors, institutional shareholdings, and board
independence) positively influences FP (net income margin and total assets turnover) of
listed corporations of Pakistan.
Todorovic (2013) compared the association of CG (institutional shareholdings
and board independence) and FP of nineteen corporations enlisted on Banja Luka Stock
Exchange and corporations enlisted on Vienna Stock Exchange, Austria. The FP was
measured through the net profit margin and gross profit margin. The outcomes show
that the FP of firms listed on the Vienna Stock Exchange, Austria was stronger than
Banja Luka Stock Exchange, Srpska due to the fact that Austria’s firms were
implementing good CG practice, whereas, CG system was weak in Srpska. They proved
that CG positively associates FP.
Vo and Nguyen (2014) carried research to scrutinize the influence of CG on FP
of one hundred and seventy-seven enlisted corporations in Vietnam from the year 2005
to 2012. CG was measured through the audit committee, the board size, and board
independence. FP was peroxide by ROA, operating income margin, and ROE. The
49
findings revealed that CG has a positive association with FP. They elaborated that the
FP of firms can be more augmented by exercising sound CG practices. Hermalin and
Weisbach (2014) carried a study to evaluate the influence of CG (independent board,
institutional shareholdings, and board size) on corporate FP (operating income margin
and net income margin). The outcomes show an affirmative association between CG
and FP.
Ahmed and Hamdan (2015) analyzed the influence of CG (insider directors and
board independence) on FP of forty-two Bahrain’s corporations enlisted on the Bahrain
Stock Exchange from 2007 to 2011. They measured FP through earning per share, net
income margin, total assets turnover, and return on equity. The results proved that CG
positively influences FP. They argued that the sound application of CG is identified as
the most significant implication which instills shareholders' confidence and attracts
more investors in the corporation. Cheung, Connelly, Limpaphayom, & Zhou (2007)
examined the association between CG and financial performance) of fifty listed firms in
Hong Kong. The outcomes of their research revealed that CG (board size, board
independence and audit committee) positively influence FP (ROA and ROE).
According to Shahid et al. (2017), CG is very imperative for cement industry of
Pakistan. The outcomes of their study indicated an affirmative relation between CG
(audit committee and board size) and FP (operating income margin, total assets
turnover, and ROA) of cement corporations of Pakistan. Cheema and Din (2014) carried
research to check the relationship between CG (institutional shareholdings, board
independence, and audit committee) and FP (ROA and ROE) of cement industry in
Pakistan. The results proved that CG significantly and positively affects FP.
50
Selvam and Vanitha (2016) conducted a research to check the impact of CG
(insider directors, institutional shareholdings, and board independence) on FP
(operating income margin and net income margin) of the cement industry of Calcutta,
India. The findings of their research indicated that CG positively and significantly
impact FP of cement industry of India. The existing literature proves that good practices
of CG positively and significantly impact FP of companies in developed economies as
well as under-developed economies. In this research the author is striving to analyze the
impact of CG on FP of cement sector firms listed on KSE, Pakistan. Hence, this lead to
the first hypothesis of the research:
H1: CG (insider directors, institutional shareholdings, board independence, audit
committee, and board size) positively affect FP (ROA, ROE, operating income
margin, net income margin, total assets turnover).
Figure 3. The First Hypothesis of the Study
Corporate Governance
* Insider Directors
* Institutional Shareholdings
* Board Independence
* Board Size
*Audit Committee
Financial
Performanc
e
51
Risk
Investors purchase various securities in order to yield a return. A rationale
investment decision is that which earn high return at low risk. There are securities
which yield a constant return like bonds, treasury bills whereas, shares produce volatile
return. Hence, shares are considered riskier as compared to bonds and treasury bills
(Eling & Marek, 2011). According to Aries (2016), the chance that actual return will
deviate from the expected return of an investment is called risk. Ehrhardt and Brigham
(2009) defined risk as to the chances of occurrence a number of unfavorable incidents.
Companies also invest surplus cash in these securities (for short term and long term) as
well as in order projects to maximize shareholders wealth and protect against risk.
Therefore, companies use internal sources (equity) and external sources (debts) for this
purpose and meet other corporate needs (operating needs and fixed assets). Companies
face risk in case of high debt level in capital structure due to volatility in market
condition as they require reimbursing the principal and interest charges. The inability of
corporations to pay interest charges is known as risk (Brigham & Daves, 2005).
Brigham and Daves (2005) classified risk into systematic risk and unsystematic
risk. The systematic risk cannot be controlled or diversified, also known as
uncontrollable or un-diversifiable risk. Whereas, the unsystematic risk can be controlled
through diversification strategy, also known as controllable risk or diversifiable risk.
The systematic risk is influenced by outside factors like inflation, higher interest rate,
and recession, hence called market risk. Whereas, the unsystematic risk/business risk
arises due to internal factors and can be controlled (Quang & Xin, 2014). They
described further that the risk which affects an individual firm or a minor class of firms
52
is an unsystematic risk. This kind of risk can be mitigated through diversification by
buying stocks of different corporations in various industries.
Firms use different strategies to control the unsystematic risk. One of the key
strategies to minimize unsystematic risk (corporate solvency) is to minimize debt level
in capital structure. In order to protect corporate solvency, optimal capital structure
decision is made to minimize cost of debt (interest charges). Solvency indicates the
ability of a firm to pay interest charges that arise due to high leverage. An increase in
debt level in capital structure bound a company to pay more interest on the borrowed
funds. Increase in interest charges increase the risk of a firm and decreases solvency as
sales or cost may change due to internal or external factors and firm may not earn profit
to pay interest charges. As the level of debt increases, the company may be required to
pay more interest on the borrowed funds. Increase in interest charges, minimize
corporate solvency and firm bear high risk.
According to Heng, Azerbaijani, and San (2012), the inability of firm to pay
interest charges and debt is called risk. They described further that risk arises due to the
internal decision of corporate managers. These decision-makers may be risk-averse or
risk-takers. Sometimes the risk-taker managers invest in risky projects or use more
debts which generate a high return but risk also increases and firm solvency risk
protection decreases (Lang & Jagtiani, 2010). High debt financing increases corporate
risk that negatively impact solvency risk protection (Nguyen, 2011). Good governed
corporations ensure optimal capital structure decision in order to fulfill operating and
assets needs which in turn reduces risk and increases solvency risk protection (Eling &
Marek, 2011).
53
Corporations that are financed highly through debts may lose solvency. As the
level of debts increases, the solvency risk protection decreases due to high interest
charges on borrowed funds. The corporations which are highly financed through debts
are considered as high risky because sales may decline or input cost might increase.
Decrease in sales volume or increase in input cost creates serious problems for a firm to
pay matured debts and interest.
Dimension of Risk
Researchers have calculated risk with different measures. Lang and Jagtiani
(2010) measured risk with solvency ratio (earnings before interest and taxes divided by
interest charges). They described that as the level of debt in capital structure increases,
the company needs to pay more interest charges on the borrowed funds and
consequently firm solvency declines and it becomes more risky. Low interest coverage
ratio makes the firm more risky due to high interest charges. Reddy et al. (2015) proved
a positive association between CG (board size, board independence, and audit
committee) and solvency (times interest earned). They argued that due to good practices
of CG, firm do not cover its operating and fixed needs through leveraging and hence
protects its solvency. In this study, risk is calculated with solvency risk protection ratio;
Solvency Risk Protection. This ratio shows the company ability to pay interest
on the accrued debt (Aries, 2011). This ratio is significant for management to analyze
its ability against payment of interest charges (Bernanke, 2008). High ratio indicates
firm protection against risk. This ratio is calculated as;
Times Interest Earned= Earnings Before Interest and Taxes / Interest charge
54
Corporate Governance and Solvency Risk Protection
CG significantly affects the risk of corporations (Eling & Marek,
2011). Corporations with good practices of CG maximize solvency risk protection
(Prasetyo, 2011). Risk increases in the financial market of Turkey due to less legal and
regulatory systems (Ararat & Ugur, 2008). According to Brick and Chidambaram
(2008), organizations with a weak system of CG bear more risk. Those organizations
which are not properly controlled by regulatory authority lose the trust of investors and
indulge in high risk. Reddy et al. (2015) found a positive association between CG
(inside directors, institutional shareholdings and board size) and solvency risk
protection (times interest earned) . They argued further that institutional shareholders,
insider directors, and large board size prefer equity financing rather than debt financing.
Corporate executive directors prefer projects with minimum risk. Lesser number of
insider directors puts a firm into risky projects (Eling & Marek, 2011). Alam and Shah
(2013) carried research to check the relation between CG (board independence and
board size) and the risk (solvency ratio) of 106 companies listed on KSE, Pakistan for a
period of six years. They found a positive relationship between the CG measures and
risk. They described further that good practice of CG increases firm solvency.
Morck, Nakamura, and Shivdasani (2009) conducted research on Japanese
companies to test the influence of CG (bank ownership, independence of board, audit
committee) on solvency risk protection (interest coverage ratio). They concluded that
CG has positive association with solvency. They argued further that presence of audit
committee, the existence of institutional shareholders and independent directors
concentrate low risk-taking ventures and prefer equity financing first, retained earnings
55
second and debt financing at the end when retained earnings are exhaust as presented in
Pecking Order Theory (Myers & Majluf, 1984). Wahla et al. (2012) also proved
positive association between CG (insider directors, institutional shareholdings, and
board size) and solvency (times interest earned). According to Bernanke (2008), the
companies in United States minimize risk by deploying good practice of CG. The recent
researches have been proved that good practices of CG have a positive association with
solvency ratio. In this research the author is striving to analyze the impact of CG on
solvency risk protection of cement sector firms listed on KSE, Pakistan. Hence, this
lead to the second hypothesis of the research:
H2: CG positively effects corporate solvency risk protection (times interest earned).
Figure 4. The Second Hypothesis of the Study
Capital Structure
Companies use various sources of financing to replenish the operating and
financial needs for the accomplishment of its goal. Firms usually employ debt and
equity sources to meet corporate operating and asset requirements. Debts come in the
form of loan, bonds, and debentures, whereas equity from retained earnings, ordinary
stocks and preference shares (Sheikh & Wang, 2011). Capital Structure is the blend of
Corporate Governance
* Insider Directors
* Institutional Shareholdings
* Board Independence
* Board Size
*Audit Committee
Solvency
Risk
Protection
56
equity capital, debt, and hybrid securities (Agyei & Owusu, 2014). The combination of
debt and equity capital is termed as capital structure (Aries, 2011). According to Hijazi
(2006), capital structure is the composite of debt and equity employed to increase the
worth of the organization at minimum cost. Saad (2010) defined capital structure as the
sources employed to meet firm assets and operating needs.
Capital structure is the amalgamation of company common stock, preferred
stock, retained earnings, total long-term liabilities and specific short-term
liabilities. According to Liao, Mukherjee, and Wang (2012), capital structure indicates
that how a corporation finances its entire operation and growth by applying different
sources. Firms that are highly financed through debts are considered more risky.
Therefore, the corporate board makes an optimal capital structure decision in order to
maximize shareholder wealth and minimize risk (Aries, 2011). A corporation which is
highly leveraged bears a more risk. Companies make optimal capital structure decisions
to minimize its cost and maximizes worth. There are several theories, offered by
distinguished authorities regarding capital structure.
Modigliani and Miller (1958) offered capital structure theorem also called MM
theorem. The theory describes that in an efficient market, capital structure does not
affect the corporate worth, wither it is financed through debts or equity. Although later
in 1963, they amended that agency cost and taxes do affects the corporate worth. Kraus
and Litzenberger (1973) presented the theory of Trade-off and documented that
companies are required to trade-off benefits and costs while choosing debt to equity
ratio for maximization of its worth. Firms balance bankruptcy costs and tax benefits by
choosing debts and equity capital.
57
Myers and Majluf (1984) offered Pecking Order theory, which presumes that
asymmetric information maximizes financing cost. They argued that corporate retained
earnings, debts and new equity are the major means of financing. Companies prefer
retained earnings first, then debts second (after exhaustion of retrained earnings) and
lastly issue new stocks for financing (when debts are no shrewd). Bokpin and Arko,
2009; Ganiyu and Abiodun, 2012; Shangguan, 2007; Sheikh and Wang, (2011)
concluded that board independence, audit committee, insider directors, institutional
shareholdings, and board size negatively affects capital structure.
Dimensions of Capital Structure
Capital structure is measured by researchers (Abdul, 2012; Ganiyu & Abiodun,
2012; Javeed, Hassan, & Azeem, 2014) through debt to equity ratio. Masnoon & Rauf,
2013; Mwangi, Makau & Kosimbei, 2014; Okiro, (2014) the measured capital structure
through debt to assets ratio. In the current research capital structure is calculated in line
with the earlier researchers and used debt to equity and debt to assets.
Debt to Equity. This ratio shows the level of debt employed to finance
corporate assets as compared to the shareholders equity (Okiro, 2014). In this research,
debt to equity ratio is calculated by as;
Debt to Equity = Total Debt / Shareholders’ Equity
Debt to Total Assets. According to Adekunle and Sunday (2010), debt to total
assets shows the proportion of total assets which are financed through debts. The high
ratio indicates that more of the total assets are financed through debts. High the ratio
increases company risk and negatively influences solvency risk protection (Abdul,
58
2012). Debts may include current liabilities and long term liabilities, whereas, total
assets consist of short term assets, long term assets, and other assets. In this research
debt to total assets is calculated as;
Debt to Total Assets = Total Debt / Total Assets
Corporate Governance and Capital Structure
CG is mainly concerned with decisions regarding capital structure (Graham &
Harvey, 2011). Researchers have been checked the association between CG and capital
structure in developed and underdeveloped economies (Javeed, Hassan, & Azeem,
2014). Masnoon and Rauf (2013) carried research to check the influence of CG on
capital structure of Pakistani firms. The results indicated that CG (board independence,
managerial shareholdings, and board size) has negative association with capital
structure (debt to equity). They described further that those organizations with more
board independence, managerial shareholdings, and larger board size concentrate on
low debt financing.
Driffield, Mahambare, and Pal (2017) proved a negative association between
CG (board independence, the board size, institutional ownership, and audit committee)
and capital structure (debt to equity). They argued that holding of stocks in a company
by other institutional investors, the larger board size, proper functioning audit
committee and existence of high board independence will lead a firm to strict
monitoring over the corporate matters and managers will borrow less in order to
minimize company risk and create an image of the corporation. Ganiyu and
Abiodun (2012) analyzed the relationship between CG and capital structure of
59
companies enlisted on the Nigeria Stock Exchange, Nigeria. They concluded that facets
of CG (board size, institutional shareholding, and board composition) have a negative
association with capital structure (debt to assets). They found a negative association
between CG and capital structure. They described further that as the board size becomes
larger and ratio of institutional shareholdings increase, firm prefer to finance assets
through equity rather than debts. Further, they elaborated that good practices of CG
ensure the minimum utilization of debts which increases firm solvency and create
goodwill.
Muhammad, Shah, and Islam (2014) conducted a research to analyze the impact
of capital structure (Debt to Equity and Debt to Assets) on FP (operating income
margin, net income margin, and total assets turnover) of Pakistani firms. They found
that FP is affected due to debt financing. The outcome revealed that FP and capital
structure has positive association. The decision regarding the ratio between equity and
debt financing is one of the corporate important functions. Firm select an optimal
proportion of debt and equity, which maximize the return for shareholders and
minimize the cost of capital and reduce risk (Hijazi & Tariq, 2006). Agyei and Owusu
(2014) checked the association between CG and capital structure of corporations
enlisted on Ghana Stock Exchange from 2007 to 2011. They identified that CG
(managerial shareholdings, the board size, institutional ownership and board
independence) has a negative relationship with capital structure (debt to equity).
Sound practices of CG help the firms to access funds at minimum cost which in
turn minimize the entire cost of debts (Zeitun and Tian (2017). Shoaib and Yasushi
(2017) conducted research to examine the association between CG (board
60
independence, audit committee, and board size) and capital structure (debt to assets and
debt to equity). They proved a negative association between CG and capital structure.
Managers seek to get low debts in presence of sound practices of CG. Gaaniyu and
Abiodun (2012) analyzed the relationship between CG (board size, institutional
shareholdings, and board independence) and capital structure (debt to equity) of ten
beverages and food corporations of Nigeria Stock Exchange from the year 2000 to
2009. The results indicate that CG significantly affects capital structure. They
concluded that the presence of institutional shareholdings, the larger board size and
higher board independence reduce the debt level in a corporation.
The existing literature reveals a negative association between CG and capital
structure. Good practices of CG significantly impacts capital structure which in turn
minimize the cost of capital, maximize shareholders value, and improve FP. In this
research the author is striving to analyze the impact of CG on capital structure of
cement sector firms listed on KSE, Pakistan. Hence, this lead to the third hypothesis of
the research:
H3: CG negatively affects capital structure (debt to equity and debt to total assets).
Figure 5. The Third Hypothesis of the Study
Corporate Governance
* Insider Directors
* Institutional Shareholdings
* Board Independence
* Board Size
*Audit Committee
Capital
Structure
61
Capital Structure and Financial Performance
Corporations need adequate amount of funds to meet the operating and assets
requirements. Funds may be acquired through debts or equity sources to meet the
corporate needs. Corporations strive to use that source of funds that can minimize the
cost. For this purpose, firms are required to understand the optimal capital structure that
makes FP stronger. Mwangi et al. (2014) performed a research to check the influence of
capital structure (debt to equity and debt to assets) on FP (operating income margin, net
income margin, and total assets turnover) of listed corporations of Nairobi Stock
Exchange, Kenya. They found that capital structure has positive and significant impact
on FP.
Capital structure positively correlates FP. The debt level increases FP of the
corporation due to tax deductibility as described by Kraus and Litzenberger (1973) in
Trade-off theory. Firms trade-off benefits of tax and cost of bankruptcy through debt to
equity ratio to maximize the corporate value (Ganiyu & Abiodun, 2012). In the light of
recent literature (Mwangi et al., 2014; Shoaib & Yasushi, (2017) the significance of
capital structure to maximize corporate FP is pivotal. In this research the author is
striving to analyze the impact of capital structure on FP of cement sector firms listed on
KSE, Pakistan. Hence, this lead to the fourth hypothesis of the research:
H4: Capital structure positively impacts FP.
Figure 6. The Fourth Hypothesis of the Study
Capital
Structure
Financial
Performanc
e
62
Capital Structure and Solvency Risk Protection
According to Kraus and Litzenberger (1973), firms analyze cost and benefit of
debts while choosing an optimal capital structure. Cost of debt is bankruptcy (financial
distress) and benefit is tax shield. The capital structure decision affects risk as more risk
is associated with highly leverage corporations. Brigham (1999) described the
applications of trade-off theory as:
a. Companies with heavy business risk uses less debt. If business risk seems to be
high and in that period the firm use high debts then it will make high constant
interest charges and consequently the firms will face financial distress in the
long run.
b. The use of debt can benefit the higher taxed firm through saving tax.
The capital structure management is not only to reduce the cost of capital but it
is required to manage it properly (Wanyoike & Nasieku, 2015). Optimal capital
structure is that which increase corporate value as well as decrease the cost of capital.
According to Quang and Xin (2014), optimal capital structure is that which enhances
the corporate worth and reduce the cost of capital. Companies select different blend of
financing that increase FP and solvency risk protection, and reduce risk. Prasetyo
(2011) proved that capital structure (debt to equity and debt to total assets) negatively
correlates solvency risk protection (times interest earned) of Indonesian listed
corporations. The corporations highly financed through debts bear more risk and hence
solvency decline due to high interest charges.
63
Practices of CG affect risk of firm as good governed corporation instill
investors’ confidence, boost FP (ROA, ROE, and net income margin) and reduce risk
(interest coverage) (Brick & Chidambaran, 2005). Good practices of CG ensure less
investment in risky ventures and a minimum debt level while making capital structure
decision (Driffield et al., 2007: Eling & Marek, 2011; Estrada, 2007). Good governed
corporations’ gain good market share and easily acquire fund at low cost in the
domestic and foreign markets (Aries, 2016). According to Zeitun and Tian (2017),
capital structure (debt to equity and debt to total assets) and solvency risk protection
(times interest earned) has negative associations. They described further that as the level
of debt in capital structure increases, firm need to pay more interest charges and hence
solvency protection decreases. Solvency risk protection is significantly associated with
capital structure decision and significantly affects investors’ trust. In this research the
author is striving to analyze the impact of capital structure on solvency risk protection
of cement sector firms listed on KSE, Pakistan. Hence, this lead to the fifth hypothesis
of the research:
H5: Capital structure negatively impacts solvency risk protection.
Figure 7. The Fifth Hypothesis of the Study
Capital
Structure
Solvency
Risk
Protection
64
Corporate Governance, Capital Structure, Financial Performance, and Solvency
Risk Protection
Heng, Azrbaijani and San (2012) conducted a study to analyze the impact of CG
on capital structure of thirty Malaysian manufacturing firms from 2007 to 2010. The
results indicated that facets of CG (institutional ownership, audit committee, and board
size) negatively and significantly affect capital structure (debt to equity). Further, they
documented that good practices of CG minimize debt level in the capital structure of
listed Malaysian manufacturing companies. Okiro et al. (2015) checked the association
between CG (insider directors, institutional shareholdings, and board independence) and
capital structure (Debt to Assets) and FP (ROA, ROE, and operating income margin) of
corporations listed on Uganda, Kenya, Burundi, Tanzania and Rwanda from 2009 to
2013. The results indicate that CG positively and significantly associates FP whereas,
negatively and significantly correlates capital structure. They described that due to good
practices of CG, firms do not require to borrow more and hence utilize internal source
(retained earnings) to meet the operating and assets requirement of company.
Saeedi and Mahmoodi (2011) evaluated the effect of capital structure (debt to
equity) on FP (ROA, ROE and net income margin) of firms listed on Tehran Stock
Exchange, Iran. They concluded that capital structure has positive and significant effect
on FP of corporations. Adekunle and Sunday (2010) used debt to equity for
measurement of capital structure however calculated FP through ROA and ROE. They
predicted that capital structure positively and significantly correlates FP. Alam and
Shah (2013) carried a research to check the relation between CG (board independence,
board size, and audit committee) and the risk (interest coverage ratio) of 106 companies
65
listed on KSE, Pakistan for a period of six years. They found a positive and significant
association between the measures of CG and risk. They described that due to good
practices of CG, the ability of firms’ pay interest expenses increases and hence firm
solvency increases. Morck, Nakamura, and Shivdasani (2009) conducted a study on
Japanese companies to test the impact of CG (board size, independence of board,
institutional ownership) on solvency risk protection (interest coverage ratio). The
outcomes of their study indicated that CG has positive and significant impact on
solvency risk protection. They argued further that the existence of institutional
shareholding, independent directors, and large board size focus on low risk-taking
ventures and prefer internal funds first (retained earnings), second external (debt) when
retained earnings are exhausted and new equity lastly as presented in Pecking Order
Theory by Myers and Majluf (1984).
Good governed corporations’ gain good market share and easily acquire fund at
low cost in the domestic and foreign markets (Farber, 2005). According to Hovakimian,
Hovakimian, and Tehranian (2004), capital structure (debt to equity and debt to total
assets) and solvency risk protection (times interest earned) has negative and significant
association. They described further that as the level of debt in capital structure
increases, firm need to pay more interest expense and hence solvency protection
decreases. Solvency risk protection is significantly and negatively associated with
capital structure decision (Todorovic, 2013).
Muthoni, Nasieku, and Olweny (2018) conducted a research to analyze the
mediating effect of capital structure (debt to equity) between CG (managerial,
institutional, government and retail ownerships) and financial performance (return on
66
capital employed and Tobin’s Q) for firms listed on Kenya Stock Exchange from 2008
to 2017. The outcomes of their study indicated that capital structure mediates the
association between CG and financial performance. Furthermore, they recommended to
test capital structure as mediating variable with other significant facets of CG according
to the prevailing code of CG in the country. Ullah, Malik, Zeb, & Rehman (2019),
carried a research to examine the mediating role of capital structure (debt to equity)
between CG (board independence, institutional ownership and audit committee) and
risk (interest coverage ratio) of listed firms on PSX, Pakistan. The results indicated that
capital structure mediates between CG and risk.
According to Quang and Xin (2014), two parties are highly concerned with
financial performance and risk of a company; equity holders and debt holders. Equity
holders are the real owners and carry the highest risk and are rewarded through
dividends and appreciation of the share value, whereas debt holders are rewarded with
interest and principal repayment. The equity holders take more caution by ensuring that
firm pursues financial plans that enhance firm performance and mitigate risk thus
influence corporate capital structure. Moreover, agency theory predicts that capital
structure is influenced by several factors including board composition (Myers & Majluf,
1984). Facet of CG: Board composition is the most significant influencing element of
capital structure that further affects corporate financial performance (Liang et al. 2011;
Wahla et al., 2012).
Studies have provided evidences that CG have significant impact on capital
structure, FP and solvency risk protection. The literature also reveals a significant
impact of capital structure on FP and solvency risk protection. In addition, studies have
67
provided evidenced that capital structure mediates the association between CG and FP
and risk. However, previous studies have evaluated the CG, capital structure, FP and
risk with limited facets individually, whereas in this research the author is trying to
analyze the impact of CG (predictor variable) on capital structure, FP, and solvency risk
protection (outcome variables) jointly with rich measures based on code of code of CG
of Pakistan (2014) as well as capital structure is used as an intervening variable between
predictor variable and outcome variables of cement sector firms listed on KSE, Pakistan
Hence, this lead to the sixth and seventh hypotheses of the research:
H6: Capital structure mediates the association between CG and FP.
H7: Capital structure mediates the association between CG and solvency risk
protection.
Figure 8. The Sixth and Seventh Hypotheses of the Study
Corporate Governance
* Insider Directors
* Institutional Shareholdings
* Board Independence
* Board Size
*Audit Committee
Capital
Structure
Financial
Performanc
e
Solvency
Risk
Protection
68
Control Variables
This research controls a number of potential confounding variables that could
also impact FP and risk. Previous studies (Alam & Shah, 2013; Aljifri & Moustafa,
2007; Banchuenvijit, 2012; Saliha & Abdessatar, 2011) have used firms’ reputation,
collateral, firm size, firm growth, leverage, industry and firm age as control variables
and proved their influence on FP and solvency risk protection. In order to analyze the
influence of CG on FP and solvency risk protection, this research has used firm size,
firm age and firm growth as control variables based on the variables employed in this
research. In addition, these control variables have been used in this research due to the
assumption of impact on FP and solvency risk protection.
Firms Size
Firm size is employed as a control variable in the current research because
studies have proved its significant impact on FP and solvency risk protection.
Researchers across the globe have been attempted to analyze the influence of firm size
on FP and risk. Studies have proved that firm size have a significant impact on FP and
solvency risk protection in developed and underdeveloped economies (Jonsson, 2007).
Big size firms grasp competitive edge as compared to small size firm due to large
market share and earn high returns. Furthermore, big size firms have more advanced
resources and thus enjoy economies of scale and enhance performance and maximize
solvency risk protection (Bayyurt, 2007). However, studies have proved that small size
firm yield low return and bear more risk (Banchuenvijit, 2012; Saliha & Abdessatar,
2011). Lehn, Patro, and Zhao (2009) documented that firm size has positive association
with financial performance whereas, (Aljifri & Moustafa, 2007; Haniffa & Hudaiba,
69
2006) proved a negative association between firm size and solvency risk protection.
Large size firm concentrate on less leveraging due to sound financial position and
solvency is protected.
Firm size is measured by researchers through total sales, total number of
employees, total assets, and market capitalization. This research has calculated firm size
through market capitalization as measured by (Shubita & Alsawalhah, 2012; Quang &
Xin, 2014). Market capitalization refers to the total market monetary worth of the
corporate outstanding shares and measured by multiplying the outstanding shares with
current price of each share in the market. This study has measured firm size by taking
natural logarithm of the market capitalization.
Firm Age
Firm age emerge as a prolific area of today’s research and got good momentum.
The rising interest of researchers in the domain of firm age and its impact on
performance and solvency risk protection also echoes a persistent change over time.
Studies have been proved different associations between firm age, FP, and solvency risk
protection. Banchuenvijit (2012) documented a positive association between firm age
and performance. Pastor and Veronesi (2013) have proved a positive association of firm
age with solvency risk protection. The corporate uncertainties decline as the firm grows
older. The corporate performance is enhanced due to specialization and experience of
companies exercising since long (Adams, Almeida, & Ferreira, 2005). Older firms own
more assets, advanced technologies, experience, and utilize resources to generate more
profit for shareholders. Older firms have strong market share and goodwill in the market
and can enter into a new market and can generate more profit and minimize risk due to
70
strong financial condition (Ahmed & Hamdan, 2015). According to Aries, 2016;
Banchuenvijit, 2012) firm age positively affect financial performance and solvency of
firm. Hence financial performance increases and risk decreases with firm age. Gaaniyu
and Abiodun (2012) proved that firm age negatively correlates capital structure. They
described further that as older firms prefer equity sources instead of debt financing. As
the level of debt decreases, solvency risk protection increases.
In sum, the firm age significantly influence FP and solvency risk protection due
to firm maturity, and firm can enter into new market in order to maximize financial
performance, minimize risk. Reddy et al (2015) measured firm age as the number of
years since listing and that event is a defining moment in corporate life. Researchers
(Shumway, 2014); Fama & French, 2004) has measured firm age in the same way. In
this research, firm age is measured by taking the natural logarithm of the total number
of years between firm’s year of incorporation and observation year.
Firm Growth
In the groundbreaking definition of firm growth, Penrose (1995) referred to it as
increase in a particular amount (growth of specific parameters like production, sales and
export), and increase in particular development process same as biological process due
to an increase in size and quality improvement. Hutzschenreuter and Hungenberg,
(2006) also classified firm growth into the quantitative and qualitative approach. They
described further that quantitative approach refers to rise in measurable parameters
whereas the qualitative approach refers to the quality of products and the quality of
customer relationships.
71
The growth of firms plays a significant role in economic development,
particularly for developing economies. The prior studies have proved that firm growth
effect financial performance and risk in developed and underdeveloped countries. Firm
growth is measured by researchers through growth in sales (Cooper, Gulen, & Schill,
2008; Shoaib & Yasushi, 2017) growth in total assets value (Goddard, Tavakoli, &
Wilson, 2009; Jang, & Park, 2011), and employment growth (Glen, Lee, & Singh,
2003).
The outcomes of Jang and Park (2011) indicated a positive and significant
impact of firm growth on financial performance. Cooper, Gulen, & Schill (2008)
documented that firm growth has positive and significant influence on financial
performance and solvency risk protection of manufacturing firms listed on Nigeria
Stock Exchange. They argued further that as the firm grows, the financial performance
of such companies increases and firms do not require using heavy external sources of
finance and hence mitigate risk due to strong solvency ratio.
According to Goddard, Tavakoli, and Wilson (2009), firm growth has a positive
and significant effect on financial performance. They described further that financial
performance increases due to growth in firm sales. In this research firm growth is
measured in line with (Cooper, Gulen, & Schill, 2008; Quang, & Xin, 2014) by taking
the difference between the current year sales minus previous year sales divided by
previous year sales. High growth firms provide greater investment avenues and hence
grow speedy and thus produce high performance and mitigate risk.
72
Agency Theory, Corporate Governance, and Cement Industry in Pakistan
Agency theory documents the principles of board independence, institutional
shareholdings, the board size, and audit committees which are the significant facets of
the code of CG of Pakistan. Agency theory describes that in order to accomplish goal of
firm, agency problem must be controlled. Code of CG of Pakistan describes that in
order to attain the corporate goal by mitigating agency problem, there must be a
maximum of one-third of insider directors in the corporate board, at least one
independent director in the board, as well as audit committee, must contain three
members headed by an independent director as well as board size must nine. Adhering
the golden principles of CG of Pakistan (2014) by cement sector firms listed on KSE,
Pakistan can easily accomplish their goal. Agency theory emphasizes upon shareholder
approach / unitary system of corporate governance, which is also prevailing in Pakistan.
In Pakistan, cement firms are privately owned and more than fifty percent of shares are
held by them.
Rationale of the Study
Researchers across the globe have conducted several studies to predict that how
to enhance FP and minimize risk in business organizations. Studies have been done to
analyze this problem in various sectors of Pakistan. In the light of significant
contribution of cement industry in economic development, it is indispensable to identify
the impact of CG on capital structure, FP and risk of cement industry of Pakistan. The
literature has proved that CG (audit committee insider directors, institutional
shareholdings, board independence, and board size) significantly impact FP and
73
solvency of firm. The recent literature reveals the association between CG, FP, capital
structure, and solvency risk protection. Shahid et al. (2017) carried research to check the
effect of CG on the FP of cement industry of Pakistan. The results show that CG
positively influences the FP of the cement industry of Pakistan.
Selvam and Vanitha (2016) checked the relation between CG and FP of cement
industry of Calcutta Stock Exchange, India. The results revealed a positive association
between CG and FP of cement manufacturing companies listed on Calcutta Stock
Exchange, India. Todorovic (2013) evaluated the impact of CG on FP of Banja Luka
Stock Exchange, Srpska and Vienna Stock Exchange, Austria. The results indicated that
FP of listed firms on the Vienna Stock Exchange, Austria was much stronger than firms
listed on Banja Luka Stock Exchange, Srpska due to CG mechanism. Sound practices of
CG enhance FP of corporation (Ahmed & Hamdan, 2015; Brown & Caylor, 2004;
Enobakhare, 2010; Gill, Vijay & Jha, 2009; Khan & Awan, 2012). Good practices of
CG reduce risk and enhance solvency risk protection (Vo & Nguyen, 2014).
Masnoon and Rauf (2013) analyzed the effect of CG on the capital structure of
nonfinancial corporations listed on KSE, Pakistan. They concluded that CG negatively
correlates the capital structure. Agyei and Owusu, 2014; Driffield et al. 2007; Gaaniyu
and Abiodun, 2012; Liao, (2012) identified a negative association between CG and
capital structure. They proved that good governed corporations prefer optimal capital
structure to minimize risk, enhance FP and build corporate image. Alam and Shah
(2013) checked the influence of CG on the solvency risk protection (interest coverage
ratio) of companies listed on KSE, Pakistan. The results indicate a positive relation
between CG and interest coverage ratio. Ararat and Ugur (2018) carried research to
74
evaluate the association between CG and risk (times interest earned) of companies
enlisted on Istanbul Stock Exchange, Turkey. The outcome revealed that CG positively
associate times interest earned. According to Brick and Chidambaram (2008); Brigham
and Daves (2005); Eling and Marek (2011); Reddy et al. (2015); Wahla et al. (2012),
there is a positive association between CG and solvency risk protection. Morck et al.
(2009) conducted a research to evaluate the behavior of companies enlisted on Nagoya
Stock Exchange, Japan in hedging risk. They proved that Japanese firms adopt Pecking
Order Theorem, offered by Myers and Majluf (1984) by preferring internal financing
(equity financing and retained earnings) than external financing (debt financing) in
order to maximize FP and protect solvency.
The optimal capital structure decision is made in accordance with good practices
of CG which in turn affects FP and solvency risk protection of corporations. Mwangi et
al. (2014), identified the influence of high leveraging on FP of corporations listed on
Nairobi Stock Exchange, Kenya. The results indicate that high leveraged firms have
positive association with FP. As the level of debts increases, the FP also increases.
Saeedi and Mahmoodi (2011) also documented positive association between capital
structure and FP of corporations enlisted on Tehran Stock Exchange. Adekunle and
Sunday (2010) described that FP improves as the debts increases due to tax
deductibility as described in Trade-off theory. Firms trade off cost and benefit through
optimal capital structure decision to enhance corporate value (Ganiyu & Abiodun,
2012). The optimal capital structure maximizes FP but if the debt level goes high then it
indulge firm into risk due to low solvency risk protection. The capital structure decision
affects corporate risk as high risk is associated with more debt financing. Prasetyo
75
(2011) proved a negative association between capital structure and solvency risk
protection of corporations listed on Indonesian Stock Exchange. The findings revealed
that as the debt level is increased in capital structure, the solvency risk protection
decreases. Roggi et al., (2012) also proved a negative relation between capital structure
and solvency risk protection.
In light of recent literature (Ahmed & Hamdan, 2015; Alam & Shah, 2013;
Aries,2016; Bhagat & Bolton, 2018; Eling & Marek, 2011; Gaaniyu & Abiodun,
2012; Khan & Awan, 2012; Mwangi et al. 2014; Quang, & Xin, 2014; Shahid et al.,
2017; Shoaib & Yasushi, 2017; Todorovic, 2013; Vo & Nguyen, 2014; Wanyoike &
Nasieku, 2015; Zeitun & Tian,2017) the author conclude that studies have been
conducted on CG, capital structure, FP and risk separately or in little combination but
CG, capital structure, FP and risk got very limited literature collectively, specifically in
cement sector and in particular to Pakistan.
This research will contribute to the growing literature on CG, capital structure,
FP and solvency risk protection in the context of a growing economy like Pakistan.
Therefore, for the very first time this research will analyze the impact of CG on capital
structure, FP and solvency risk protection as well as capital structure will also be tested
as mediator between CG, FP and solvency risk protection with rich dimensions in
cement sector firms listed on KSE, Pakistan from 2005 to 2014.
76
Conceptual Framework
The conceptual model is designed in line with the earlier studies, conducted by
researchers on CG (independent variable) and its influence on capital structure
(mediating variable), FP, and solvency risk protection (dependent variables). Firm size,
firm age and firm growth are used as control variables. The conceptual framework is
designed from the preceding studies: CG and its impact on FP (Ahmed & Hamdan,
2015; Barbosa & Louri, 2015; Cheema & Din, 2014; Otman, 2014; Shahid et al., 2017),
impact of CG on solvency risk protection (Alam & Shah, 2013; Aries, 2016), impact of
CG on capital structure (Gaaniyu & Abiodun, 2012; Okiro, Aduda & Omoro, 2015),
impact of capital structure on FP (Quang & Xin, 2014; Shoaib & Yasushi, 2017), and
impact of capital structure on solvency risk protection (Ullah, Akhtar, & Zaefarian,
2018; Ullah et al, 2017).
Figure 9 Conceptual Framework
Corporate Governance
* Insider Directors
* Institutional Shareholdings
* Board Independence
* Board Size
*Audit Committee
Capital
Structure
Financial
Performance
Solvency
Risk
Protection
* Firm Size
* Firm Age
* Firm Growth
Ind
epen
den
t Variab
le
Mediating Variable
Control Variables
Dependent Variable
Dependent Variable
77
CHAPTER 3
RESEARCH METHODOLOGY
This research was conducted to check the impact of CG (board size, insider
directors, institutional shareholdings, board independence, and audit committee) on
capital structure, FP, and solvency risk protection of corporations listed on KSE,
Pakistan. This chapter will depict research philosophy, research approach, research
strategy, and research design. Furthermore, population, data collection methods, and
instruments used in data collection of firms listed on KSE, Pakistan is also described.
Research Philosophy
Philosophical orientations influence research methodology. In order to build
philosophical perspective, researcher formulates many core assumptions, pertaining two
research dimensions: sociological and scientific. According to Saunders, Lewis, and
Thornhill (2007), philosophical approaches: Positivism (objective) approach and
phenomenology (subjective/interpretive) approach exist as these form the ground of
knowledge on which assumptions and pre-dispositions of study base. Positivism
(objective) approach and phenomenology (subjective / interpretive) approach are
defined as assumptions relating to epistemology (knowledge), ontology (reality), human
nature and methodology (tool kit of researchers). These are the two approaches which
navigate research in social sciences. Moreover, the positivist approach follows the
quantitative paradigm to explore phenomena. This approach presumes that the reality
of an object exist which is independent of the behavior of human. This approach seeks
78
facts of social phenomena with slight concern for the subjective state of individuals.
This approach considers the propositions accurate only after the verification of
empirical tests. The researchers concentrate upon facts, seek causality and basic laws,
minimize phenomena to simplest part, and originate hypotheses, and test them.
The phenomenological approach focuses on experience and narration of things
as they are, not as a researcher perceives they are. This paradigm includes the collection
of a large quantity of rich information which is based on the belief of understanding the
experience and situation (Veal, 2005). This study inclines towards the positivist
(objective) philosophical approach as literature is reviewed from the prior relevant
studies, the conceptual framework is designed and the scientific procedure is adopted in
hypothesizing the basic laws. The author presumes that CG positively affects FP and
solvency risk protection whereas, it negatively affects capital structure. Furthermore,
capital structure mediates the association between CG, FP and solvency risk protection.
Research Approach
Research approach is classified into a deductive approach and inductive
approach (Saunders, Lewis, & Thornhill, 2009). Inductive approach is employed in
research when literature is available for developing a new theory, whereas, deductive
approach is applied when the literature and theory both are available. In deductive
approach, quantitative techniques are deployed for testing the theory. In this research,
the deductive research approach is used.
79
Research Strategy
The research strategy is used to select a methodology for answering research
questions (Saunders et al., 2009). Research strategies are categorized into quantitative
research strategy and qualitative research strategy. Usually, researchers use qualitative
research strategy when interviews are conducted from respondents, whereas,
quantitative research strategy provides result in numeric and conducted through
statistics and questionnaires etc. (Afridi, 2017; Saunders, Lewis & Thornhill, 2009).
The current research inclines towards a quantitative research strategy.
Research Design
Research design navigates the research study to ensure that it highlights the
research problem. Research designs are classified under three major headings:
exploratory, descriptive and explanatory. Descriptive research design includes an
explanation of phenomena or traits connected with subject population (what, when,
who, how and where). It permits approximation of the amount of population having
these traits. Descriptive study is done once it presents a snapshot at specific time
(Cooper & Schindler, 2008).
The descriptive research design involves the collection of data to evaluate the
hypothesized relationship among these variables. Descriptive design helps in answering
questions relating to the present study (Mugenda & Mugenda, 2003). This research
analyzes the effect of CG on FP and solvency risk protection with mediating role of the
capital structure of cement sector firms listed on KSE, Pakistan from the year 2005 to
2014. The author has used descriptive and explanatory research as descriptive research
design encompasses data gathering to analyze the hypothesized association between the
80
variables. This design has made the researcher able in finding out the relationship
between CG, capital structure, FP, and solvency risk protection of cement sector firms
listed on Karachi Stock Exchange, Pakistan. Aduda & Musyoka, 2011; Okiro, 2014;
Otman, (2014) have also used the same research design to examine the relationship
between CG and capital structure, and CG and FP.
Population
The KSE (at present known as Pakistan Stock Exchange after integration of
KSE, LSE, and ISE on January 11, 2016) is the 3rd
sound performer across the globe
since 2009. Since that time Pakistani equities delivered 26% per annum for investors in
US dollars, which made KSE one of the top performing stock markets in the world
(KSE, 2015). There are 576 listed corporations of 35 different sectors (See appendix I).
Among these 35 sectors, there are 11 services based sectors.
The author has used reliable data of cement sector among these 24 different
sectors listed on KSE, Pakistan for a period of ten years (from 2005 to 2014). There are
total twenty cement manufacturing corporation listed on KSE, Pakistan (KSE, 2014).
The author used entire cement sector corporations listed on KSE for the reported period
because studies has been conducted to examine the impact of CG mechanisms in other
manufacturing and non-manufacturing sectors in the developed and developing
economy like Pakistan. Furthermore, cement sector is one of the good manufacturing
sectors with the same manufacturing process and mechanism in the developing
economies across the globe and has been found on high boom and earning more profit
in Pakistan. Previous researchers have also recommended to examine the role of CG in
81
the cement sector in developing economy as very limited work have been done in
under-developed economies specially in Pakistan. In addition, based on sound financial
condition and good contribution of cement sector to the national economy of Pakistan,
it is indispensible to analyze the role of board of directors in the cement sector of
Pakistan as history revealed that firms with poor accountability have indulged firms into
fraudulent affairs from the board of directors.
Cement sector is one of the key sectors of Pakistan, performing a vibrant role in
economic development. The role of cement sector in the economic development of
Pakistan can be outlined through value addition to the gross domestic product,
employment creation for thousands of people, foreign remittances and huge income for
government in the form of tax. The cement industry of Pakistan has attracted domestic
and foreign investors due to abundant and cheap raw material, persisting rise in local
and foreign demand for cement and sound profit margin.
The list of cement manufacturing firms is obtained from KSE, Pakistan (see
Table 1). This study has deployed the entire 20 cement manufacturing firms listed on
KSE, Pakistan. The cement sector was selected due to defined structure and is likely to
show elaborated association between research variables. Besides this, the work done on
the cement industry of Pakistan is not that much as it has been contributing to economic
growth, employment creation for thousands of people, foreign remittances and huge
income for the government. According to author knowledge, the studies done across the
globe in the cement sector on CG, capital structure, FP and solvency risk protection are
not measured collectively as well as not with such rich variables as used in this
research.
82
Table 1
Cement Firms Listed on Karachi Stock Exchange
Sr. No. Symbol Company
1 ACPL Attock Cement Pakistan Limited
2 BWCL Bestway Cement Limited
3 CHCC Cherat Cement Company Limited
4 DBCI DadaBhoy Cement Industries Limited
5 DCL Dewan Cement Limited
6 DGKC D.G. Khan Cement Company Limited
7 DNCC Dandot Cement Company Limited
8 FCCL Fauji Cement Company Limited
9 FECTC Fecto Cement Limited
10 FLYNG Flying Cement Company Limited
11 GWLC Gharibwal Cement Limited
12 JVDC Javedan Corporation Limited
13 KOHC Kohat Cement Company Limited
14 LPCL Lafarge Pak Cement Limited
15 LUCK Lucky Cement Limited
16 MLCF Maple Leaf Cement Limited
18 POWER Power Cement Limited
19 THCCL Thatta Cement Company Limited
20 ZELP Zeal Pak Cement Factory Limited
Source: www.kse.com.pk (2014)
83
Data Collection
The annual reports, research articles, books, newspapers, online data,
governmental organizations, catalogs are the means which are widely used as sources
for secondary data (Sekaran, 2003; Veal, 2005). Therefore, authentic secondary source
is used for data collection from audited annual reports of entire cement sector
corporations listed on KSE, Pakistan for ten years (2005 to 2014) due to its reliability as
checked and verified by the chartered accountants at the end of the financial year.
Type of Data and Statistical Analysis
In this research, balanced panel data from the entire cement sector (20 cement
corporations) listed on KSE, Pakistan for a period of 10 years (2005 to 2014). Stata 14
was used to analyze the data.
Measurement of variables
Based on literature review, CG (predictor variable) was measured with insider
directors, institutional shareholding, board independence, board size and audit
committee, whereas the outcome variables include FP (ROA, ROE, operating income
margin, net income margin, and total assets turnover) and solvency risk protection
(times interest earned), however capital structure (debt to equity and debt to total assets)
is employed as mediating variable, and Firm size, Firm age, and Firm growth are used
as control variables. The given below Table 2 shows the measurement of all the
variables (independent, dependent, mediating and control variable) used in this
research.
84
Table 2
Measurement of Variables
Sr. No Variables Abbreviation Measurement Reference
1 Insider Directors ID Total number of executive directors in the
company board (Ahmed & Hamdan,
2015)
2 Institutional shareholding IS Shares held by other institutions divided by
outstanding shares (Otman, 2014
3 Board Independence BI Total Number of Independent Directors
in the board Yasser et al., 2011)
4 Board Size BS Total number of directors in the company Board Cheng, Evans, &
Nagarajan, 2008)
5 Audit Committee AC Total number of audit committee members (Okiro, et al., 2015)
85
Table 2 (Continued)
Sr. No Variables Abbreviation Measurement Reference
6 Return on Assets ROA Net Income divided by Total Assets (Bokpin & Arko, 2009;
Enobakhare, 2010)
7 Return on Equity ROE Net Income divided by Total Stockholders’ Equity (Otman, 2014;
Mackay, 2012)
8 Operating Income Margin OIM Earnings Before Interest & Taxes divided by (Gill et al., 2009)
Net Sales
9 Net Income Margin NIM Net Sales divided by Total Assets (Mackay, 2012)
10 Total Assets Turnover TAT Net Sales divided by Total Assets (Ullah et al., 2017)
11 Debt to Equity DTE Total Debt divided by Shareholders’ Equity (Mwangi et al.,
2014)
12 Debt to Total Assets DTA Total Debt divided by Total Assets (Otman, 2014)
13 Times Interest Earned TIE Earnings Before Interest and Taxes divided by
Interest charge (Lang & Jagtiani, 2010)
86
Table 2 (Continued)
Sr. No Variables Abbreviation Measurement Reference
14 Firm Size FSZ Natural logarithm of the market capitalization (Muthoni, Nasieku,
Olweny 2018)
15 Firm Age FAG Natural logarithm of the number of years between
the observation year and the incorporation year
of the firm (Shoaib & Yasushi, 2017)
16 Firm Growth FGR Difference between the current year sale and the
previous year sale to the previous year sale (Shahid et al., 2017)
___________________________________________________________________________________________________
87
CHAPTER 4
DATA ANALYSIS
This chapter is designed as descriptive statistics, correlation analysis and
regression diagnosis: CG and FP, CG and solvency risk protection, CG and capital
structure, capital structure and FP, capital structure and solvency risk protection,
mediation analysis and summary of the hypotheses estimates.
Descriptive Statistics
The descriptive statistics of CG (insider directors, institutional shareholdings,
board independence, board size and audit committee), FP (ROA, ROE, operating
income margin, net income margin and total assets turnover) capital structure (debt to
equity and debt to assets) and solvency risk protection (times interest earned) are
documented in Table 3. Descriptive measures comprised of minimum, maximum, mean
and standard deviation. Mean values range from 0.15 to 15.74, whereas, standard
deviation range from 0.16 to 0.54 shows that all instruments were governed to use.
88
Table 3
Descriptive Statistics of Variables (N=200)
Variables Minimum Maximum Mean Std. Deviation
Corporate Governance
ID 1.00 4.00 2.94 0.54
IS 1.00 23.23 6.75 0.52
BI 0.00 4.00 0.63 0.47
BS 7.00 11.00 8.00 0.43
AC 3.00 4.00 3.19 0.39
Financial Performance
ROA -0.41 3.52 1.09 0.16
ROE -1.84 4.87 2.14 0.32
NIM -3.31 7.95 4.13 0.54
OIM -2.30 12.93 7.01 0.51
TAT 0.36 15.97 4.22 0.26
Solvency risk protection -1.24 8.91 7.06 0.26
Capital Structure
DTE -0.04 2.43 0.15 0.35
DTA 0.01 7.18 0.55 0.54
Control Variables
FSZ 2.48 8.74 5.53 0.50
FAG 1.32 1.77 1.53 0.15
FGR -46.85 93.80 15.74 0.32
Note: ID= Insider Directors, IS= Institutional Shareholdings, BI= Board Independence,
BS= Board Size, AC= Audit Committee, ROA= Return on Assets, ROE= Return on
Equity, OIM= Operating Income Margin, NIM= Net Income Margin, TAT= Total
Assets Turnover, DTE= Debt to Equity, DTA= Debt to Assets, FSZ = Firm Size, FAG
= Firm Age, and FGR = Firm Growth.
89
Pearson Correlation Analysis
Pearson product moment correlation analysis was used to form the association
between CG (board size, insider directors, institutional shareholdings, board
independence and audit committee), FP (ROA, ROE, operating income margin, net
income margin, total assets turnover) solvency risk protection, and capital structure
(debt to equity and debt to assets). The Pearson correlation matrix (Table 4) documents
that there is a positive and significant correlation between facets of CG, dimensions of
FP, and solvency risk protection. Whereas, there is a negative correlation between
facets of CG and measures of capital structure as well as capital structure measures’ and
solvency risk protection. The outcomes indicate that change in one variable impact
another variable. The entire values are significant at 0.05.
Corporate Governance, Financial Performance, Solvency Risk Protection,
and Capital Structure. The Table 4 documents that the CG (board size, insider
directors, institutional shareholdings, board independence and audit committee)
positively associates FP (ROA, ROE, operating income margin, net income margin,
total assets turnover), and solvency risk protection (times interest earned) whereas,
negatively correlates capital structure (debt to equity and debt to total assets). The
results indicated that there is no value above 0.90 and hence there is no issue of
multicollinearity in the variables.
The results show that insider directors positively correlates with dimensions of
FP (ROA ROE, net income margin, operating income margin, total assets turnover),
solvency risk protection, firm size, firm age, firm growth, however negatively correlates
with capital structure measures (debt to equity and debt to assets) (r = 0.351, 0.263,
90
0.277, 0.225, 0.099, 0.404, 0.042, 0.144, 0.049, -0.058, & -0.042). There are evidences
that insider directors have positive correlation with FP (Cheema & Din, 2014; Shahid,
et. al, 2017; Vo & Nguyen, 2014). Reddy et al. (2015) identified that insider directors
positively correlates solvency risk protection. Masnoon and Rauf (2013) identified that
insider directors negatively correlates capital structure.
The results document that institutional shareholdings positively correlates with
FP (ROA ROE, net income margin, operating income margin, total assets turnover),
solvency risk protection, and firm growth, however negatively correlates with firm size,
firm age, firm growth, and capital structure measures (debt to equity and debt to assets)
(r = 0.175, 0.173, 0.168, 0.211, 0.176, 0.151, 0.136, -0.488, -0.174, -0.211, & -0.250).
The results of Ahmed and Hamdan (2015) proved that there is an affirmative
association between institutional shareholdings and FP. Reddy et al. (2015) identified
that institutional shareholdings positively correlates solvency risk protection, whereas,
Driffield, Mahambare, and Pal (2007) proved that there is a negative relationship
between institutional shareholdings and capital structure.
The results prove that board independence positively correlates with FP (ROA,
ROE, net income margin, operating income margin, total assets turnover), solvency risk
protection, and firm growth, however negatively correlates with firm size, firm age,
firm growth, and capital structure measures (debt to equity and debt to assets) (r =
0.272, 0.306, 0.315, 0.366, 0.422, 0.364, 0.163, -0.217, -0.161, -0.339, & -0.424).
Chugh et al., 2009; Gaaniyu & Abiodun, 2012; Javed & Iqbal (2008) proved a positive
association between board independence and FP. Eling and Marek (2011) proved a
positive association between board independence and solvency risk protection. Bokpin
91
and Arko, 2009; Ganiyu and Abiodun, 2012; Shangguan, 2007; Sheikh and Wang,
(2011) proved that board independence negatively associates with capital structure.
The results proved that board size positively correlates with FP (ROA, ROE, net
income margin, operating income margin, total assets turnover), solvency risk
protection, and firm growth, however negatively correlates with firm size, firm age,
firm growth, and capital structure measures (debt to equity and debt to assets) (r =
0.083, 0.081, 0.105, 0.079, 0.193, 0.089, 0.119, -0.041, -0.318, -0.090, & -0.071).
Masnoon & Rauf, 2013; Velnampy, 2013; Vo and Nguyen, (2014) proved that board
size and FP has positive association. Agyei and Owusu (2014) proved a negative
relation between capital structure and board size. The results prove that audit committee
positively correlates with FP (ROA, ROE, net income margin, operating income
margin, total assets turnover), solvency risk protection, and firm size however
negatively correlates with firm age, firm growth, and capital structure measures (debt to
equity and debt to assets) (r = 0.087, 0.111, 0.127, 0.083, 0.016, 0.192, 0.259, -0.060, -
0.064, -0.062, & -0.037). Ahmed and Hamdan, 2015; Cheema and Din, (2014) proved
that audit committee and FP positively correlates each other. Bernanke (2008) proved
that audit committee positively associates solvency risk protection. Agyei and Owusu,
2014; Gaaniyu and Abiodun, (2012) proved that audit committee negatively correlates
capital structure.
92
Table 4
Correlation Analysis: CG, FP, Solvency Risk Protection, Capital Structure and Control Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
ROA 1
ROE .739**
1
NIM .741**
.751**
1
OIM .854**
.645**
.819**
1
TAT .635**
.688**
.674**
.736**
1
DTE .478**
.472**
.466**
.417**
.353**
1
DTA .506**
.517**
.509**
.475**
.439**
.753**
1
TIE .512**
.510**
.515**
.524**
.624**
-.309**
-.371**
1
FSZ -0.035 -0.019 -0.001 -0.051 -0.014 0.051 0.107 -0.079 1
FAG -.304**
-.271**
-.275**
-.261**
.033 .280**
.277**
-.145* 0.074 1
FGR .228**
.248**
.234**
.219**
.239**
-.318**
-.319**
.238**
-.175* -.194
** 1
ID .351**
.263**
.277**
.225**
.099 -0.058 -0.042 .404**
0.042 .144* 0.049 1
IS .175* .173
* .168
* .211
** .176
* -.205
** -.250
** .151
* -.488
** -.174
* 0.136 -0.107 1
BI .272**
.306**
.315**
.366**
.422**
-.339**
-.424**
.364**
-.217**
-.161* .163
* 0.119 .429
** 1
BS .083 .081 .105 .079 .193**
-0.090 -0.071 0.089 -0.041 -.318**
0.119 -.193**
.146* 0.057 1
AC .087 .111 .127 .083 -0.016 -0.062 -0.037 .192**
.259**
-0.060 -0.013 -0.064 -0.083 -.190**
.359**
1
**. Correlation is significant at the 0.01 level (2-tailed), *. Correlation is significant at the 0.05 level (2-tailed), ROA= Return on Assets, ROE=
Return on Equity, NIM= Net Income Margin, OIM= Operating Income Margin, TAT= Total Assets Turnover, DTE= Debt to Total Equity, DTA=
Debt to Total Assets, TIE= Times Interest Earned, FSZ= Firm Size, FAG= Firm Age, FGR= Firm Growth, ID = Insider Directors, IS = Institutional
Shareholdings, BI = Board Independence, BS = Board Size, and AC = Audit Committee.
NOTE: ROA, ROE, NIM, OIM, and TAT are the dimensions of FP (Dependent Variable), DTE and DTA are measures of Capital Structure
(Intervening Variable), TIE is used to calculate Solvency Risk Protection (Dependent Variable). FSZ, FAG, and FGR are Control Variables
whereas, ID, IS, BI, BS and AC are the facets of CG (Independent Variable).
93
Regression Analysis
The research hypotheses were tested by applying panel data Generalized Method
of Moments (GMM) model to spell out the effect of CG on capital structure, FP, and
solvency risk protection of cement listed firms on KSE, Pakistan. CG is independent
variable, capital structure is a mediating variable, FP and solvency risk protection is
dependent variables, whereas firm size, firm age and firm growth are control variables.
Diagnostic Tests
The following tests have been conducted to check the Normality,
Multicollinearity, Autocorrelation, Heteroscedasticity and endogeneity biases in order
to satisfy the data for viability of analysis. After evaluating the study found that there is
a problem of heteroscedasticity and endogeneity.
Shapiro-Wilk Test. Data normality was assessed through Shapiro-Wilk test.
The results were significant at p<0.05, indicated that data is normally distributed.
Variance Inflation Factors. To test the Multicollinearity in predictor variable,
Variance Inflation Factors (VIF) was employed. The outcome indicated that there is no
Multicollinearity in the data.
Wooldrige Test. To test the autocorrelation in independent variable,
Wooldridge test has been employed at a significant level of p<0.05, which indicated
that there is no autocorrelation in predictor variables of this study.
Breusch-Pagan/Cook-Weiserg Test. To predict the heteroscedasticity in the
data, Breusch-Pagan/Cook-Weiserg test has been deployed. The result indicated 0.210
94
which is insignificant at p<0.05, which prove that there was heteroscedasticity in the
data.
Dynamic Modeling and Panel Data Analysis. In order to resolve these
problems, the study performs the dynamic generalized method of moments model
(GMM). GMM has the ability to resolve the above problems in corporate governance,
financial performance, and solvency risk protection data as recommended by many
researchers (Ullah, Akhtar, & Zaefarian, 2018).
Principal Component Analysis. Principal component factor analysis (PCA)
was performed to reduce the number of variables within a dataset as recommended by
the previous authors (Tracey, 2014). The PCA were performed to reduce the number of
items and convert number of dependent variables into one. The PCA was utilized for FP
and capital structure variables respectively.
Model Equations
Equation 1: In this model, FP is regressed on CG (See Table 5).
FP it= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+
β8{FGRit}+β9{YDit}+µtit
Equation 2: In this model, solvency risk protection is regressed on CG (See Table 6).
SRPit= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+
β8{FGRit}+ β9{YDit}+µtit
Equation 3: In this model, capital structure is regressed on CG (See Table 7).
CSit= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+
β8{FGRit}+β9{YDit}+µtit
95
Equation 4: In this model, FP is regressed on capital structure (Table 8).
FPit=π+β1{DTE it}+β2 {DTA it}+β3{FSZit}+β4{FAGit}+β5{FGRit}+β6{YDit}+µtit
Equation 5: In this model, solvency risk protection is regressed on capital structure
(Table 9).
SRPit=π+β1{TIE it}+β2{FSZit}+β3{FAGit}+β4{FGRit}+β6{YDit}+µtit
In above equations, FP denotes financial performance, ID denotes insider
directors, IS denotes institutional shareholdings, BI denotes board independence, BS
denotes board size, AC audit committee, FSZ denotes firm size, FAG denotes firm age,
FGR denotes firm growth, YD denotes years dummy, CS denotes capital structure, SRP
denotes solvency risk protection, DTE denotes debt to equity, DTA denotes debt to
assets, π denotes constant, it indicates individual company and time, β denotes beta, µt
denotes the error term.
Corporate Governance and Financial Performance. The author estimated
equation 1 and the estimation outcomes are documented in Table 5, which shows the
effect of CG on FP. The results show that there is a positive impact of CG variables on
FP. The results show beta value of 0.17 for insider directors, 0.22 for institutional
shareholdings, 0.14 for board independence, 0.29 for board size and 0.16 for audit
committee and t-value 2.39 for insider directors, 3.29 for institutional shareholdings,
1.92 for board independence, 4.14 for board size and 2.25 for audit committee with p-
value 0.023 for insider directors, 0.000 for institutional shareholdings, 0.000 for board
independence, 0.057 for board size and 0.026 for audit committee.
The results indicate that CG: insider directors, institutional shareholdings, board
independence, board size, and audit committee positively affects FP. This is evidence of
96
hypothesis 1 that investigates the direct positive influence of CG: insider directors,
institutional shareholdings, board independence, board size and audit committee on FP.
There are evidences that insider director have positive impact on FP of (Shahid et al.,
2017; Vo & Nguyen, 2014). Wahla et al., (2012) proved a positive association between
board independence and FP. Cheema and Din (2014) identified that insider directors
positively influence corporate FP. Velnampy (2013) documented a positive association
between board size and FP of firm. Ahmed and Hamdan (2015) proved that audit
committee improves FP.
Table 5
Generalized Method of Moments Model (GMM): CG and FP
FP Coef. St.Err t-value p-value Sig.
Lag of Dependent
Variable
0.690 0.076 9.08 0.000 ***
Insider Directors 0.171 0.069 2.39 0.023 *
Institutional
Shareholdings
0.221 0.067 3.29 0.000 ***
Board Independence 0.146 0.076 1.92 0.057 *
Board Size 0.293 0.071 4.14 0.026 *
Audit Committee 0.164 0.073 2.25 0.026 **
Firm Size 0.015 0.062 0.24 0.813
Firm Age -0.091 0.057 -1.59 0.115
Firm Growth 0.065 0.056 1.17 0.244
Years Dummy YES - - - - Mean dependent variable 0.051 SD dependent variable
variable
0.991
Number of observation 200 F-test 13.250
*** p<0.01, ** p<0.05, * p<0.1
97
Corporate Governance and Solvency Risk Protection. The author estimated
equation 2 and the estimation outcomes are shown in Table 6, which shows the
influence of CG on solvency risk protection. The results in below table show that all the
dimensions of CG have positive impact on solvency risk protection. The results indicate
beta value of 0.17 for insider directors, 0.36 for institutional shareholdings, 0.14 for
board independence, 0.12 for board size and 0.10 for audit committee and t-value 3.01
for insider directors, 2.51 for institutional shareholdings, 2.57 for board independence,
2.47 for board size and 1.93 for audit committee with p-value 0.003 for insider directors
and 0.000 for institutional shareholdings and 0.011 for board independence, 0.015 for
board size, and 0.055 for audit committee.
The outcomes indicate that insider directors, institutional shareholdings, board
independence, board size, and audit committee positively impact solvency risk
protection. This is evidence of hypothesis 2 that investigates the direct positive
influence of CG on solvency risk protection. Reddy et al. (2015) identified that insider
directors, institutional shareholdings and larger board positively affects solvency risk
protection. Ahmed & Hamdan, 2015; proved that audit committee and board
independence have positive impact on solvency risk protection.
98
Table 6
Generalized Method of Moments Model (GMM): CG and Solvency Risk Protection
Solvency Risk Protection Coef. St.Err t-value p-value Sig.
Lag of Dependent Variable 0.760 0.058 13.00 0.000 ***
Insider Directors 0.173 0.058 3.01 0.003 ***
Institutional Shareholdings 0.360 0.043 2.51 0.000 ***
Board Independence 0.148 0.058 2.57 0.011 **
Board Size 0.125 0.051 2.47 0.015 **
Audit Committee 0.107 0.055 1.93 0.055 *
Firm Size -0.015 0.040 -0.37 0.713
Firm Age -0.027 0.035 -0.78 0.438
Firm Growth 0.081 0.037 2.21 0.029 **
Years Dummy
Mean dependent variable -0.005 SD dependent variable 0.979
Number of observation 200 F-test 36.779
*** p<0.01, ** p<0.05, * p<0.1
Corporate Governance and Capital Structure. The author estimated equation
3 and the estimation results are exhibited in Table 7, which shows the effect of CG on
capital structure. The results indicate beta value of -0.31 for insider directors, -0.20 for
institutional shareholdings, -0.15 for board independence, -0.17 for board size and -0.21
for audit committee and t-value -04.21 for insider directors, -3.27 for institutional
shareholdings, -2.24 for board independence, -2.07 for board size and -2.01 for audit
committee with p-value 0.000 for insider directors, 0.000 for institutional shareholdings,
0.027 for board independence, 0.041 for board size, and 0.031 for audit committee.
99
The outcomes reveal that insider directors, institutional shareholdings, board
independence, board size, and audit committee negatively affects capital structure. This
is evidence of hypothesis 3 that investigates the direct negative influence of CG: insider
directors, institutional shareholdings, board independence, board size, and audit
committee on capital structure. Masnoon and Rauf (2013) identified that CG: board
independence, managerial shareholdings and board size has negative effect on capital
structure: debt to equity. Driffield et al. (2017) proved that insider directors, audit
committee and board independence negatively affects capital structure.
Table 7
Generalized Method of Moments Model (GMM): CG and Capital Structure
Capital Structure Coef. St.Err t-value p-value Sig.
Lag of Dependent Variable 0.751 0.065 11.50 0.000 ***
Insider Directors -0.312 0.060 -4.21 0.000 ***
Institutional Shareholdings -0.200 0.061 -3.27 0.000 ***
Board Independence -0.155 0.069 -2.24 0.027 **
Board Size -0.177 0.055 -2.07 0.041 *
Audit Committee -0.216 0.066 -2.01 0.031 *
Firm Size 0.058 0.056 1.04 0.299
Firm Age 0.075 0.052 1.44 0.152
Firm Growth -0.054 0.051 -1.05 0.295
Years Dummy
Mean dependent variable -0.005 SD dependent variable 1.009
Number of observation 200 F-test 16.872
*** p<0.01, ** p<0.05, * p<0.1
100
Capital Structure and Financial Performance. The author estimated equation
4 and the estimation outcomes are presented in Table 8, which shows the influence of
capital structure on FP. The results indicate beta value of 0.123, t-value 7.68, and with
p-value 0.000 for capital structure.
The results indicate that debt to equity and debt to assets have positive effect on
FP. This is evidence of hypothesis 4 that investigates the direct positive effect of capital
structure on FP. Ganiyu and Abiodun (2012) documented that capital structure
positively affect FP. Researchers (Quang & Xin, 2014; Shoaib & Yasushi, 2017) also
proved affirmative association between capital structure and FP.
Table 8
Generalized Method of Moments Model (GMM): Capital Structure and FP
FP Coef. St.Err t-value p-value Sig.
Lag of Dependent Variable 0.731 0.118 6.20 0.000 ***
Capital Structure 0.123 0.016 7.68 0.000 ***
Firm Size 0.040 0.057 0.70 0.486
Firm Age -0.055 0.059 -0.94 0.347
Firm Growth 0.027 0.060 0.45 0.655
Years Dummy
Mean dependent variable 0.051 SD dependent variable 0.991
Number of observations 200 F-test 12.285
*** p<0.01, ** p<0.05, * p<0.1
101
Capital Structure and Solvency Risk Protection. The author estimated
equation 5 and the estimation outcomes are documented in Table 9, which shows
negative influence of capital structure on solvency risk protection. The results indicated
beta value of -0.40, t-value -2.82 and with p-value 0.000 for solvency risk protection.
The results describe that debt to equity and debt to assets negatively affects
solvency risk protection. This is evidence of hypothesis 5 that investigates the direct
negative influence of capital structure on solvency risk protection. Researchers (Ullah,
Akhtar, & Zaefarian, 2018; Ullah et.,al, 2017) proved that capital structure negatively
affects solvency risk protection.
Table 9
Generalized Method of Moments Model (GMM): Capital Structure and Solvency Risk
Protection
Solvency Risk Protection Coef. St.Err t-value p-value Sig.
Lag of Dependent Variable 0.873 0.066 13.14 0.000 ***
Capital Structure -0.408 0.145 -2.82 0.005 ***
Firm Size 0.018 0.038 0.46 0.644
Firm Age -0.012 0.037 -0.33 0.741
Firm Growth 0.051 0.041 1.24 0.216
Years Dummy Yes - - -
Mean dependent variable -0.005 SD dependent variable 0.979
Number of observation 200 F-test 20.004
*** p<0.01, ** p<0.05, * p<0.1
102
Mediation Analysis
The hypotheses of mediation predict that capital structure mediates between CG
and FP and solvency risk protection. For testing the mediation hypotheses, Stata 14.0
SGMEDIATION command was applied. This command gives an outcome of 4 steps
mediation approach recommended by renowned authors (Baron & Kenny, 1986;
Preacher & Hayes, 2004; Preacher, Rucker, & Hayes, 2007; Sobel, 1982). Furthermore,
the SGMEDIATION outcomes gives indirect effect test, Sobel test and Goodman tests
for more testing and authentication of the mediation effect between the variables used in
the model (Hicks & Tingley, 2011).
Figure 10. Mediation Model -1
Figure 11. Mediation Model based -2
Corporate
Governan
ce
Capital
Structure
Financial
Performanc
e
Path A Path B
Path C
IV DV MV
Corporate
Governan
ce
Capital
Structure
Solvency
Risk
Protection
Path A Path B
Path C
IV DV MV
103
The authors (Baron & Kenny, 1986; Preacher & Hayes, 2004; Preacher et al.,
2007) recommended the given four steps to test mediation between predictor, mediating
and outcome variables:
1. The predictor variable significantly effects the mediating variable, named as path A
2. The mediating variable significantly effects outcome variable, named as path B
3. The predictor variable significantly effects the outcome variable, named as path C
4. The effect of predictor variable on outcome variable may change after the effect of
mediating variable is controlled, named as path C. In step four, if the relationship of the
predictor variable and outcome variable becomes insignificant it is considered as full
mediation, otherwise partial mediation. In addition, if a single condition from the
aforesaid is not satisfied, then there is no mediation (Baron and Kenny, 1986).
Preacher and Hayes, 2004; Preacher et al., 2007) recommended further that
indirect effect must be significant in order to support the mediation effect in the model.
Assenting to the direction of mediation testing steps, CG (ID, IS, BI, BS, & AC) is
deployed as predictor variable, FP and solvency risk protection as outcome variables,
and capital structure as mediating variable.
Financial performance as Dependent Variable, Capital Structure as
Mediating Variable and CG as Independent Variable. The results indicate
significant values for the direct effect and indirect effect. The indirect tests also show
significant values suggesting that capital structure (intervening variable) partially
mediates the relationship between CG: insider directors, institutional shareholdings,
104
board independence, board size, and audit committee (predictor variables) and FP
(outcome variable) by getting the significant direct beta values of 0.24, 0.12, 0.24,
0.043, and 0.023 respectively (see Table 10 section 1).
Solvency Risk Protection as Dependent Variables, Capital Structure as
Mediating Variable and Corporate Governance as Independent Variable. The
results indicate significant values for the direct effect and indirect effect. The indirect
effect tests also show significant values suggesting that capital structure (intervening
variable) partially mediates the relationship between CG: insider directors, institutional
shareholdings, board independence, board size, and audit committee (predictor
variables) and solvency risk protection (outcome variable) by getting the significant
indirect beta values of 0.018, 0.089, 0.133, 0.030 and 0.117 respectively (see Table 10
section2).
Table 10
Mediation Analysis: FP and SRP as Dependent Variables, Capital Structure as
Mediating Variable and CG as Independent Variable
Relationship Beta Indirect Effect
(Z value)
Sig
Mediation: CG>CS >FP (Section 1)
ID >CS > FP .024 2.74** 0.006
IS >CS > FP .124 3.29** 0.000
BI >CS > FP .241 4.81** 0.000
BS >CS > FP .043 3.23** 0.001
AC >CS > FP .023 3.28** 0.000
105
Table 10 (Continued)
Relationship Beta Indirect Effect
(Z value)
Sig
Mediation: CG>CS >SRP (Section 2)
ID >CS > SRP .018 2.73** 0.006
IS >CS > SRP .089 2.98** 0.002
BI >CS > SRP .133 3.23** 0.001
BS >CS > SRP .030 3.56** 0.000
AC >CS > SRP .117 2.14* 0.032
Note. FP= Financial Performance, CS= Capital Structure, SRP=Solvency Risk
Protection, ID= Insider Director, IS=Institutional Shareholdings, BI= Board
Independence, BS= Board Size, and AC= Audit Committee.
Note: **= p<0.01, *= p<0.05
Table 11
Summary of Hypotheses Testing
Hypotheses Results
H1: CG (insider directors, institutional shareholdings, board
independence, audit committee, and board size) positively
affect FP (ROA, ROE, operating income margin, net income margin,
total assets turnover). Supported
H2: CG positively effects corporate solvency risk protection
(times interest earned). Supported
106
Table 11 (Continued)
Hypotheses Results
H3: CG negatively affects capital structure (debt to equity and debt
to total assets). Supported
H4: Capital structure positively influences FP. Supported
H5: Capital structure negatively affects solvency risk protection. Supported
H6: Capital structure mediates the association between CG and FP. Supported
H7: Capital structure mediates the association between CG and
solvency risk protection. Supported
107
CHAPTER 5
DISCUSSIONS AND RECOMMENDATIONS
The fundamental constituents of this chapter are result based discussion,
limitations of the study, contribution to the knowledge, future research
recommendations and research conclusion.
The fundamental aim of this research was to check the influence of CG on
capital structure, FP and solvency risk protection of cement firms listed on KSE,
Pakistan from 2005 to 2014. Furthermore, capital structure was tested as a mediator
between CG, FP, and solvency risk protection. In this research CG is used as
independent variable, FP and solvency risk protection as dependent variables, and
capital structure as mediating variable. In addition firm size, firm age, and firm growth
are used as control variables due to its significant impact on dependent variables. The
current research was conducted to answer the following questions: 1) What is the
association between CG (insider directors, institutional shareholdings, board size, board
independence, and audit committee) and FP (ROA, ROE, operating income margin, net
income margin, and total assets turnover)? Does CG effects firms’ solvency risk
protection (times interest earned)? 3) Is there any association between CG and capital
structure (debt to equity and debt to total assets)? 4) What is the relationship between
capital structure, FP and solvency risk protection? 5) Does capital structure mediate
between CG, solvency risk protection and FP?
The outcomes of current research documented an important addition to the field
of CG and address the work of CG, capital structure, FP, and solvency risk protection of
cement manufacturing firms listed on KSE, Pakistan. The total of twenty cement firms
108
listed on KSE, Pakistan were deployed to analyze the association between CG, capital
structure, FP, and solvency risk protection from year 2005 to 2014. The cement sector
was selected due to its defined structure and likely to indicate an association between
the variables of this research. Besides this, studies are not found on cement industry
across the globe regarding CG, capital structure, FP and solvency risk protection jointly
and in particular to developing economies like Pakistan. The data regarding research
variables are gathered from the audited annual reports due to data reliability as verified
by the chartered accountants.
The current research is based on Agency Theory and inclined towards the
positivist philosophical approach. The deductive approach is applied due to the
availability of literature and theory, and the quantitative technique is employed for
testing the theory. Descriptive and explanatory research design is employed keeping in
view the data type and analytical mechanism. Pearson correlation analysis and dynamic
generalized method of moments (GMM) model were applied for panel data regression
analysis to measure the relation between the variables used in the current research.
GMM model is used for regression analysis due to its ability to resolve the problems in
CG, FP, capital structure and solvency risk protection data as recommended by many
researchers (Ullah, Akhtar, & Zaefarian, 2018). The tests were done at 5% significance
level (α = 0.05). All of the hypotheses of the current research and the results are
documented in the succeeding paragraphs.
The first hypothesis of current research aims to analyze the positive impact of
CG (insider directors, institutional shareholdings, board independence, audit committee,
and board size) on FP. The empirical analysis provides findings in support of the first
109
hypothesis. It demonstrates that there is positive association between CG (board size,
institutional shareholdings, board independence, and audit committee) and FP of cement
manufacturing firms listed on KSE, Pakistan.
The Agency theory describes that FP can be improved by controlling the agency
problem. The agency problem is controlled effectively if independent directors
are entrusted by shareholders to represent them on company boards. As the number of
independent directors’ increase in cement manufacturing firms, the FP also increases.
Furthermore, the agency problem is minimized and FP is maximized in the presence of
institutional shareholdings in cement firms. The institutional shareholdings deploy their
financial and analytical skills to fully utilize corporate resources and maximize FP. The
adequate percentage of institutional shareholdings in the company board of cement
manufacturing firms improves FP due to strong financial insight.
The Agency theory suggests that large board size positively affects FP. The
outcomes support the theory in the cement firms listed at KSE, Pakistan. Board size
properly advice and monitor management and hence improve corporate FP. However, it
is worth mentioning that board size is not similar across companies. Large companies
need large board size and small companies need small, however cement companies are
large in size, therefore, there may be a high level of agency problem which requires
large board size to control agency conflict. Thus the outcomes support the Agency
theory that a large size of board improves monitoring and enhances corporate FP.
Proper functioning audit committee ensures controlling managerial functions
like financial reporting, risk management, and internal auditing. As the numbers of the
audit committee and particularly the independent members with sound financial
110
background increases, the control on agency problem also increases. The proper
functioning of the audit committee will improve financial performance. Agency theory
describes that in order to mitigate the agency problem and control the activities of
agents, there must be proper functioning audit committee who frequently check the
financial records of the corporation to protect the interest of entire stakeholders and
enhance corporate worth. There is empirical evidence on the effect of CG (insider
directors, institutional shareholdings, board independence, the board size, and audit
committee) on FP. The outcomes of this research support the previous studies (Ahmed
& Hamdan, 2015; Barbosa & Louri, 2015; Cheema & Din, 2014; Otman, 2014; Shahid
et al., 2017).
The second hypothesis of this research was to examine that CG (insider
directors, institutional shareholdings, board independence, the board size, and audit
committee) positively affects solvency risk protection. The outcomes of this study were
in the support of the hypothesis after evaluating the data. The outcomes documented
that CG positively influence solvency risk protection. The Agency Theory states that
good practices of CG maximize corporate fairness and transparency in a firm affair and
enhance solvency risk protection.
The Agency theory elaborates that in order to minimize corporate risk, agency
problem must be controlled properly. Agency problems can be controlled in cement
companies if independent directors are entrusted by shareholders to represent them on
the company board to make unbiased corporate judgments and decisions in the best
interest of corporation. As the number of independent director increases in cement
manufacturing firms, the unbiased decision and fair and transparent judgment of the
111
corporation also evolves and managers do not work against corporate interest which in
turn minimizes risk.
In addition, the agency problem is controlled and risk is minimized in presence
of institutional shareholdings. The institutional shareholdings deploy financial and
analytical skills to fully utilize corporate resources and minimize risk. The adequate
ratio of institutional shareholdings in the firm board of cement manufacturing firm do
not allow managers to expand own power by buying other companies or spend money
on wasteful projects, and utilize organizational resources for personal use that
negatively affects solvency risk protection.
The Agency theory suggests that large board size properly advice and monitor
management and do not allow managers to expand own power, invest in risky projects,
borrow more funds for operating and fixed assets needs, due to which the risk is
controlled. Cement firms are large in size, therefore the agency problem is also more in
such firms. Agency theory also documents that in order to control the agency problem
and control the corporate activities, there must be properly functioning audit committee
who frequently check and share the financial records of a corporation and ensure
fairness in the record. Empirical work on CG (insider directors, institutional
shareholdings, board independence, the board size, and audit committee) and risk is not
abundant, but still the findings of this research support the earlier work (Alam & Shah,
2013; Aries, 2016; Ullah et al., 2017).
The third hypothesis of the current research was to analyze that dimensions of
CG (insider directors, institutional shareholdings, board independence, board size, and
audit committee) negatively affect capital structure. The outcomes indicate that CG
112
negatively affects the capital structure of cement manufacturing corporations listed on
KSE, Pakistan. This documents that CG align the interest of corporate managers with
entire stakeholders and minimize the level of debt in the capital structure to control the
agency problem. The Agency theory suggests that in order to properly control the
agency problem, board size is also needed to be large for effective monitoring that
ensures low debt level in capital structure.
Agency theory documents that agency problem is controlled by bringing down
the level of debt in capital structure. Board independence controls the work of managers
and ensures low debts in capital structure in order to boost corporate goodwill by
ensuring unbiased corporate judgments and decisions in the best interest of corporation.
As the number of independent directors increases in cement manufacturing firms, the
unbiased decision and fair and transparent judgments of a corporation also increases,
and managers may not able to borrow more funds for risky ventures.
The negative association between institutional shareholdings and capital
structure shows that corporations with high percentage of institutional shareholdings
deploy less debt as a mechanism to control the agency problem and prefer internal
sources like retained earning first but after exhausting the internal funds, they negotiate
debts at a lower cost. It can be stated that institutional shareholdings ensure good CG
structure as they have good recognition from the debt market. Companies with high
ratio of institutional shareholdings are considered less risky.
Myers and Majluf (1984) described that in order to minimize cost and maximize
benefit, firms prefer to utilize internal sources of funds to meet the operating, financial
and assets need of corporations and external sources in last. The Agency theory
113
documents that good CG will decrease agency costs and encourage investors’ trust
which in turn maximizes the capability of a corporation to get access to equity finance
and reduce reliance on debt finance. The findings of current research are in line with the
prior studies which have proved that CG (insider directors, institutional shareholdings,
board independence, the board size, and audit committee) negatively affect capital
structure (Gaaniyu & Abiodun, 2012; Okiro et al., 2015).
The fourth hypothesis of this research was to check that capital structure has
positive effect on FP. After empirical investigation regarding association of capital
structure and FP, the outcomes revealed that capital structure positively influences FP.
The cement manufacturing companies which are highly financed through debt offers a
higher return to investors. Risk taker investors invest in such riskier ventures in order to
gain more return. The Agency Theory demonstrates that highly levered firms offer more
return to investors due to tax shield (as the level of debts increases the company pay less
amount of taxes which goes to investors).
Kraus and Litzenberger (1973) documented in the trade-off theory that a
company must trade-off cost and benefit while choosing debt and equity in order to
enhance its total worth. Company balance bankruptcy cost and tax shield benefit while
selecting the debt to equity ratio. Companies have advantages of debt financing, tax
benefits of debt. Findings of the present research support the previous studies (Quang &
Xin, 2014; Shoaib & Yasushi, 2017) that have proved that capital structure have
positive association with FP.
The fifth hypothesis of the current research was to check that capital structure
negatively influence solvency risk protection. The results revealed that capital structure
114
negatively associates with solvency risk protection. As the level of debt in capital
structure of cement sector firm increases, the firm solvency risk protection decreases. If
firms reduce the level of debt in capital structure, the solvency risk protection will be
augmented and the firms will not face risk. The Agency theory documents that highly
leveraged firms bear more costs like bankruptcy, supplier demanding high payment
terms, bondholder/stockholder infighting which puts a company into more risk.
According to Trade-off theory, firms’ trade-off cost with benefit while choosing
capital structure ratio in order to reduce cost and enhance solvency. Firms’ trade-off
cost of debt and benefit of tax. Firms have tax benefit but bear financial and non-
financial costs of distress. The financial cost of distress is bankruptcy cost, whereas
non-financial cost of distress is staff leaving, supplier of funds demand for high
payment terms. Therefore, such firms are required to have optimal capital structure in
order to maximize solvency risk protection. The outcomes support earlier studies
(Ullah, Akhtar, & Zaefarian, 2018; Ullah et.,al, 2017) that have proved negative
association between capital structure and solvency risk protection.
The sixth and seventh significant hypotheses were that capital structure mediates
the association between CG, solvency risk protection, and FP. The fundamental
objective of CG (exogenous variable) is the projection of specific outcomes. CG,
directly and indirectly, influences FP, capital structure, and solvency risk protection.
Shareholders and other corporate stakeholders believe that sound CG (institutional
shareholdings, board independence, the board size, and audit committee) significantly
impact FP, capital structure, and solvency risk protection of cement manufacturing
firms. The outcomes of this research are in line with Agency theory that predicts that
115
good practices of CG maximize FP, solvency risk protection, and minimize debt level in
capital structure.
The outcomes revealed that capital structure partially mediates between CG, FP,
and solvency risk protection. It demonstrates that CG significantly affects capital
structure which further significantly affects FP and solvency risk protection. Empirical
work on CG, capital structure as mediating and FP and solvency risk protection are
support the work of authors (Muthoni, Nasieku, Olweny 2018; Ullah, Malik, Zeb, &
Rehman, 2019).
Policy Implications
The fundamental objective of this research was to examine the impact of CG
practices on capital structure, FP and solvency risk protection of cement firms listed on
KSE, Pakistan from 2005 to 2014 in the context of code of CG of Pakistan (2014).
Hence, the outcomes of research predicted some significant policy implication.
Application of code of CG in cement industry of Pakistan is a best way to
maximize FP, solvency risk protection, and minimize debt level in capital structure. For
this purpose, board size is required to be nine, insider directors to be 1/3 of the board
(lesser is better) whereas, independent directors must be 1/3 of the board of directors
(greater is better), and there must be proper functioning audit committee with at least 3
members. This research is very useful for managers and policy makers of cement
manufacturing firms in developing economies and particularly in Pakistan to identify
the significance of code of CG.
116
This research has integrated a new model by enriching the existing academic
framework (how the association between CG (predictor) and FP and solvency risk
protection (outcome variables) is intervened by capital structure). In addition, the
current research has enriched the agency theory by documenting that how to minimize
conflict of interest in cement sector firms in the context of code of CG of Pakistan
(2014) by predicting the optimum number of independent directors, insider directors,
audit committee members, institutional shareholding, and optimal board size required
for maximization of FP and solvency risk protection and minimization of debt level in
capital structure.
Limitations and Delimitations
Although the current study has contributed significantly in the area of CG,
capital structure, FP, and solvency risk protection however, this study has few
limitations and delimitations.
Limitations. The current research was based on the cement manufacturing firms
listed on KSE, Pakistan which rim the generalization of outcomes to other services
sectors. Due to non-availability of research data for entire cement sector firms listed on
KSE, Pakistan, this study has used data for ten years only.
Delimitations. This research lacks analyzing more industries as only cement
industry is discussed. The current research integrated only five significant facets of CG:
insider directors, institutional shareholdings, board independence, the board size, and
audit committee, whereas there are other CG measures which have significant effect on
capital structure, FP and solvency risk protection.
117
Capital structure was measured through debt to equity and debt to total assets,
however it could be calculated with long term debt to capitalization, total debt to
capitalization. FP was measured through ROA, ROE, operating income margin, net
income margin and total assets turnover. However, FP could be measured through
Tobin’s Q and earning per share. This research has measured only solvency risk
protection, however, the impact of CG and capital structure on systematic risk could
also be analyzed. Last but not the least, this research has analyzed only the correlation
between CG, FP, and solvency risk protection, whereas the causal relationship could
also be checked.
Contribution to Knowledge
This research has imperatively contributed to the existing knowledge,
specifically in the field of CG, capital structure, FP, and solvency risk protection in the
context of cement manufacturing companies listed on KSE, Pakistan. The empirical
evidence shows that this is the first research that evaluates the impact of CG on capital
structure, FP and solvency risk protection as well as testing the meditating role of
capital structure between CG, FP, and the solvency risk protection of cement
manufacturing corporations listed on KSE, Pakistan for a period of ten years (2005 to
2014). Furthermore, the previous researchers have used few dimensions to measure CG,
FP, and capital structure and solvency risk protection however, the current research
used rich facets to measure CG (insider directors, institutional shareholdings, board
size, board independence, and audit committee), FP (ROA, ROE, operating income
margin, net income margin, and total assets turnover), capital structure (debt to equity
118
and debt to total assets), and solvency risk protection (times interest earned) based on
code of CG of Pakistan (2014) and keeping in view the causes of collapse of the giant
corporations in Pakistan and other countries.
This research presents an integrated approach to enhance CG effectiveness and
proposes a broad understanding of CG system as previous research has overlooked the
mediating variable that also contribute a significant role between CG, FP and solvency
risk protection. This study provides a framework that associate CG with FP and
solvency risk protection with mediating role of capital structure.
The current study also enriched the agency theory in the context of Pakistan.
Agency theory documents the principles of board independence, institutional
shareholdings, board size, and board committees whereas, this research specifically
indicates the number/ratio of insider directors, institutional shareholdings, board
independence, the board size, and audit committee based on code of CG (2014) in the
context of Pakistan in order to enhance FP and solvency risk protection, and minimize
debt level in capital structure.
The findings of this research show the impact of CG on FP, capital structure and
risk collectively and individually in the context of developing economy like Pakistan.
The majority of prior studies in CG provide evidence from developed economies,
therefore the outcomes of such studies might not be applied on firms in developing
economies due to contextual variations. This research is highly significant for future
researchers while conducting researches in the same area as most of the variables and its
relationship in the context of literature is described well, which will fully help them to
accomplish their research objectives.
119
Future Research Recommendations
The current research has been analyzed the cement sector firms listed on KSE,
Pakistan however, future researchers could consider doing the same study by adding
more sectors. Future researchers could employ the same data by comparing the cement
sector with other manufacturing sectors(s) of Pakistan or other developed and
developing economies in order to evaluate changes in response.
Further studies could be conducted by deploying the same variables by adding
more facets in main variables like CEO duality, board diversity, board meeting,
disclosures and reporting mechanism in CG. In addition, the capital structure could be
calculated with total capitalization and fixed assets to equity, and FP with Tobin’s Q
and earnings per share.
Future researchers could add more variables with CG in addition of FP, capital
structure, and solvency risk protection to check its association like adding non-FP and
systematic risk. Future research could be conducted by adding moderating variables
along with mediating variable to examine the impact of CG on FP and solvency risk
protection. Besides this future researchers could deploy other than capital structure as
an intervening variable to evaluate its mediating effect with CG, FP, and solvency risk
protection.
Research Conclusion
The fundamental aim of conducting this research was to examine the influence
of CG on capital structure, FP and solvency risk protection, and test capital structure as
a mediator between CG, FP, and solvency risk protection in cement manufacturing
120
firms listed in KSE, Pakistan. The current research has proved that good structure of CG
enhance FP and solvency risk protection which is supported by the existing literature.
The outcomes of this research prove that CG (insider directors, institutional
shareholdings, the board size, board independence, and audit committee) positively
influence FP (ROA, ROE, operating income margin, net income margin and total assets
turnover) and solvency risk protection (times interest earned), whereas negatively affect
capital structure (debt to equity and debt to total assets). The indirect impact by adding
capital structure as mediator shows that capital structure partially mediates the
association between CG, FP, and solvency risk protection.
The significance of CG cannot be ignored as it improves corporate environment,
FP, and solvency risk protection. The adherence of code of CG is essential in order to
protect against mismanagement, fraud, and corruption. Good practices of CG stimulate
transparency in business, instill the confidence of national and foreign investors in the
capital market, and protect the interest of entire stakeholders.
121
REFERENCES
Abdul, K. (2012). The relationship of capital structure decisions with firm Performance:
a study of the engineering sector of Pakistan. International Journal of
Accounting and Financial Reporting, 2 (1), 192 - 212.
Adams, R. B., Almeida,H., & Ferreira, D. (2005). Powerful CEOs and their impact on
corporate performance. Review of Financial Studies, 18, 1403-1432.
Adekunle, A. O., & Sunday, O.K. (2010). Capital structure and firm performance:
evidence from Nigeria. European Journal of Economics, Finance and
Administrative Sciences, 25, 71-80.
Afridi, A. S. (2017). The impact of service quality on customers’ loyalty and advocacy;
mediating role of trust: A comparative study of public and private sectors
hospitals. Ph.D. thesis. Preston University Islamabad, Pakistan.
Aggarwal, P. (2013). Corporate governance and corporate profitability: are they
related? A study in Indian context. International Journal of Scientific and
Research Publications, 3(12), 1-7.
Agyei, A., & Owusu, R. A. (2014). The effect of ownership structure and corporate
governance on capital structure of Ghanaian listed manufacturing companies.
International Journal of Academic Research in Accounting, Finance and
Management Sciences, 4 (1), 109 - 118.
Ahmed, E., & Hamdan, A. (2015). The impact of corporate governance on firm
performance: evidence from Bahrain Stock Exchange. European Journal of
Business and Innovation Research, 3 (5), 25– 48.
122
Aljifri, K. & Khasharmeh, H. (2006). An investigation into the suitability of the
international accounting standards to the United Arab Emirates environment’,
International Business Review, vol. 15, no. 5, pp. 505–526.
Alam. A., & Shah. A. Z. S. (2013). Corporate governance and its impact on firm risk.
International Journal of Management, Economics and Social Sciences, 2 (2),
76- 98.
Arshaad, R.A., Yousaf. S., Shahzadi, K., & Mustansar E. ( 2014). Corporate governance
practices and firms performance: a case of banking sector of Pakistan.
International Journal of Multidisciplinary Sciences and Engineering, 5 (7). 139
- 152
Ararat M., Ugur, M. (2018). Corporate governance in Turkey: an overview and some
policy recommendations. Corporate Governance, 3 (1), 58 - 75.
Aries. H. P., (2016). Systematic risk and capital structure in emerging Indonesian
market. International Conference on Economics, Business and Management,
(2), 132-138.
Australian Corporate Governance Principles & Recommendations, (2007). Corporate
governance principles and recommendations, Sydney, NSW: Australian Stock
Exchange, Sydney.
Australian Standard (2003). Principles of Good Corporate Governance and Best
Practice Recommendations, Australian Stock Exchange, Sydney.
Azeem, M., Hassan, M., & Kouser, R. (2013). Impact of quality corporate governance
on firm performance: a ten year perspective. Pakistan Journal of Commerce and
Social Sciences, 7 (3), 656 - 670.
123
Banchuenvijit, W. (2012). Determinants of Firm Performance of Vietnam Listed
Companies. Academic and Business Research Instıtute.
http://aabri.com/SA12Manuscripts/SA12078.pdf (Erişim Tarihi, 05 Ocak 2013).
Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in
social psychological research: Conceptual, strategic, and statistical
considerations. Journal of personality and social psychology, 51 (6), 1173.
Baydoun, N., Maguire, W., Ryan, N., & Willett, R. (2013). Corporate governance in
five Arabian Gulf countries. Managerial Auditing Journal, 28 (1), 7-22.
Bayyurt, N. (2007). Işletmelerde Performans Değerlendirmenin Onemi ve Performans
Göstergeleri Arasındaki İlişkiler”, Sosyal Siyaset Konferansları Dergisi, Sayı
53, 577-592.
Bernanke, B. (2008). Risk management in financial institutions. Speech delivered at
the Federal Reserve Bank of Chicago, Illinois.
Berle, A. A., & Means, G. G. C. (1932). The modern corporation and private property.
The Macmillan Company, xiii, 396.
Bhagat, S., & Bolton, B. (2018). Corporate governance and firm performance. Journal
of corporate Finance, 14 (3), 257 - 273.
Bodie, Z, A., Kane., & A. J. Marcus. (2002). Investments, 6th ed, Mc.Graw Hill
Brigham, E. F., P. R. Daves. (2005). Intermediate Financial Management, 8th ed,
Thomson - South Western.
Brown, L. & Caylor. M. (2006). Corporate governance and firm valuation. Journal
of Accounting and Public Policy, 25, 409 - 434.
124
Bokpin, G. A. & Arko, A. C. (2009). Ownership structure, corporate governance and
capital structure decisions of firms: empirical evidence from Ghana. Studies in
Economics and Finance, 26 (4), 246 - 256.
Brick, I. E., Chidambaran, N. K. (2005). Board monitoring and firm risk. Unpublished
working paper. Rutgers University. New York.
Brennan, M. J. (2005). Corporate finance over the past 25 years. Financial
Management, 24, 9 - 22.
Butt, A. S. (2012). Corporate governance for Pakistan. 4th edition, Azeem Academy.
Caballero, R. J. (2009). The other imbalance and the financial crisis, MIT
Department of Economics. Working Paper No. 9 - 32.
Cadbury, A. (1992). Report on the committee on the financial aspects of corporate
governance, Gee, London.
Campbell, J. Y., J. Hilscher, & J. Szilagyi. (2008). In search of distress risk. Journal
of Finance 63:2899-2939.
Cernat, L. (2004). The emerging European corporate governance model: Anglo-Saxon,
Continental, or still the century of diversity? Journal of European Public Policy,
11(1), 147-166.
Cheng, S., Evans, J. H., & Nagarajan, N.J. (2008). Board size and firm performance:
The moderating effects of the market for corporate control. Review of
Quantitative Finance and Accounting, 31 (2), 121 - 145.
Cheema, R. K., & Din. S., M. (2014). Impact of corporate governance on performance
of firms: a case study of cement industry in Pakistan. Journal of Business and
Management Sciences. 1(4), 44-46.
125
Cheung, Y. L., Connelly, J. T., Limpaphayom, P., & Zhou, L. (2007). Do investors
really value corporate governance? Evidence from the Hong Kong market.
Journal of International Financial Management and Accounting, 18, 53−85.
Chugh, L.C., Meador, J. W., Kumar, A. S. (2009). Corporate governance and firm
performance: evidence from India. Journal of finance and accountancy, (5) 547-
553.
Claessens, S., & Fan, J. P. H. (2007) Corporate governance in Asia: a survey.
International review of Finance, 3, 71-103.
Clarke, T. (2004). Theories of corporate governance, Routledge New York.
Core, John, & Larcker, D. (2012). Performance consequences of mandatory increases in
executive stock ownership. Journal of Financial Economics, 64, 317- 340.
Cohen, J. R., & Hanno, D. M. (2010). Auditors consideration of corporate governance
mid management control philosophy in preplanning and planning judgments
auditing. Journal of Practice & Theory, 19 (2), 133 - 146.
Code of Corporate Governance (2014). Available at:
https://www.secp.gov.pk/document/code-of-corporate-governance-2012-
amended-july-2014/
Code of Corporate Governance (2017). Available at:
https://www.pwc.com.pk/en/assets/document/Listed%20Companies%20(Code%
20of%20Corporate%20Governance)%20Regulations,%202017.pdf
Cohen, J., Gaynor, L., Krishnamoorthy, G., & Wright, A. M. (2007).Auditor
communications with the Audit Committee and the Board of Directors.
Accounting Horizons, Vol. 21, No. 2: pp. 165–87.
126
Cooper, M. J., Gulen, H., & Schill, M. J. (2008). Asset growth and the cross-section of
stock returns. Journal of Finance, 63(4), 1609-1651.
Craig, V. V. (2005). The Changing Corporate Governance Environment: Implications
for the Banking Industry. FDIC Banking Review. Page 1-15
Dalton, C.M., & Dalton, D. R., (2005). Boards of directors: utilizing empirical evidence
in developing practical prescriptions. British Journal of Management, 16 (1), 91
- 97.
Davis, G.F. & Useem, M. (2002). Top management, company directors, and corporate
control, in Handbook of strategy and management, eds Pettigrew A. M.,
Thomas, H., & Whittington, R. London, 233 -259.
Damodaran, A. (2001). Corporate Finance, Theory and Practices. John Wiley &
Sons.
DeAngelo, Harry, Linda. D., & Douglas. J. S. (2004). Are dividends disappearing?
Dividend concentration and the consolidation of earnings. Journal of Financial
Economics. 72, 425 - 456.
Deegan, C. (2004). Financial Accounting Theory, McGraw-Hill Australia PVT (Ltd),
NSW.
Donaldson, L. & Davis, J. H. (1997). Stewardship theory or agency theory: CEO
governance and shareholder returns. Australian Journal of Management, 16 (1).
Donaldson, T. & Preston, L. E. (1995). The stakeholder theory of the corporation:
Concepts, evidence, and implications. Academy of Management Review, 20(1),
65-91.
127
Driffield, N., Mahambare, V., & Pal, S. (2017). How does ownership structure affect
capital structure and firm value? Economics of Transition, 15, 535-573.
Drobetz, W. & Wanzenried, G. (2006). What Determines the Speed of Adjustment to
the Target Capital Structure? Applied Financial Economics, 16, 941 - 958.
Economic Survey of Pakistan (2013).
http://www.finance.gov.pk/survey_1314.html.
Ehikioya, B.I. (2009). Corporate governance structure and firm performance in
developing economies: Evidence from Nigeria. Corporate Governance, 9 (3),
231- 243.
Ehrhardt, M. & Brigham, E. (2009). Financial Management: Theory and Practice.
USA, South - Western Cengage Learning.
Ekanayake, A., Perera, H., & Perera, S. (2010). Contextual relativity of the role of
accounting in corporate governance: evidence from the banking industry in Sri
Lanka. The Sixth Asia Pacific Interdisciplinary Research in Accounting
Conference, Sydney, 1-27.
Eling, M. & Marek, S., (2011). Corporate governance and risk taking: Evidence from
the U.K. and German insurance markets. Institute of Insurance Economics,
Working Papers on Risk Management and Insurance, No. 103.
Enobakhare, A. (2010). Corporate governance and bank performance in Nigeria.
Doctoral dissertation, Stellenbosch: University of Stellenbosch.
Estrada, J. (2007). Mean-semi variance behavior: downside risk and capital asset
pricing. International Review of Economics and Finance, 16, 169 - 185
128
Fama, E. F. & French, K. R. (1993). Common Risk Factors in the Returns on Bonds and
Stocks. Journal of Financial Economics, 33 (1), 3-53.
Farber, D. B., (2005). Restoring trust after fraud: does corporate governance matter?
The Accounting Review, 80 (2), 539 - 561.
Fitzsimmons, J. R., Steffens, P., & Douglas, E. J. (2005). Growth and profitability in
small and medium sized Australian firms. Melbourne: GSE Entrepreneurship
Exchange.
Fosberg, R. H. (2004). Agency problems and debt financing: Leadership structure
effects. Corporate Governance, 4(1), 31- 38.
Freeman, R. (2004). Strategic management: A stakeholder approach, Pitman
Publishing, Boston.
Fraser, D, R., Zhang, H., & Derashid. (2006). Capital structure and political patronage:
The case of Malaysia. Journal of Banking and Finance, 30 (4), 1291-1308.
Gaaniyu, O.Y. & Abiodun, Y. B. (2012). The impact of corporate governance on
capital structure decision of Nigerian firms. Research Journal in Organizational
Psychology & Educational Studies, 1 (2), 121 - 128.
Galagedera, D. U. A. & Brooks, R. D. (2007). Is co-skewness a better measure of risk
in the downside than downside beta?: Evidence in emerging market data.
Journal of Multinational Financial Management, 17(3), 214 - 230.
Galagedera, D. U. (2009). Economic significance of downside risk in developed and
emerging markets. Applied Economics Letters, 16, 1627 - 1632.
Garmaise, M. J. & Liu, J. (2005). Corruption, firm governance and the cost of capital.
Philadelphia Meetings Paper.
129
Garcia-Meca, E. & Sánchez Ballesta, J.P. (2009). Corporate governance and earnings
management: A meta-analysis. Corporate Governance: An International
Review, 17 (5), 594 - 610.
Ghabayen, M.A. (2012). Board characteristics and firm performance: Case of Saudi
Arabia. International Journal of Accounting and Financial Reporting, 2(2),
168-200.
Gillan, S. L. (2006). Recent Development in Corporate Governance: An overview.
Journal of Corporate Finance 12, 381-402.
Glen, J., Lee, K., & Singh, A. (2003). Corporate profitability and the dynamics of
competition in emerging markets: A time series analysis. The Economic Journal,
113(491), F465-F484.
Goddard, J., Tavakoli, M., & Wilson, J. O. S. (2009). Sources of variation in firm
profitability and growth. Journal of Business Research, 62(4), 495-508.
Gompers, P., Ishii, J., & Metrick, A. (2013). Corporate governance and equity prices.
Quarterly Journal of Economics, 118(1), 107-155.
Gordini, N. (2012). The impact of outsiders on small family firm performance: evidence
from Italy. World Journal of Management, 4 (2), 14 - 35.
Graham, J,R. & Harvey, C. (2011). The theory and practice of corporate finance:
evidence from the field. Journal of Financial Economics, 60 (2), 187-243.
Gugler, K. (2013). Corporate governance and dividend payout policy in Germany,
European Economic Review, 47, 731 - 758.
Gugnani, R. (2013). Corporate governance and financial performance of Indian firms.
Vidyasagar University Journal of Commerce, 18 (18), 118-133.
130
Harmilalin, B. E. & Weisbach, M. S. (2014). Board of directors as an endogenously
determined institution: a survey of economic literature, Federal Reserve Bank of
New York. Economic Policy Review, 9(1), 7-26.
Hasan, I., Kobeissi, N., & Song, L. (2011). Corporate governance, investor protection,
and firm performance in MENA countries. The Economic Research Forum.
Working paper no. 600.
Heng, T. B., Azrbaijani, S., & San, O. T. (2012). Board of Directors and capital
Structure, Evidence from leading Malaysian Companies. Asian Social Science,
8(3), 123-136.
Hicks, R. & Tingley, D. (2011). Causal Mediation Analysis. The Stata Journal, 11(4),
605–619.
Hijazi, T.S. & Tariq, B.Y. (2006). Determinants of capital structure: A case for
Pakistani cement industry. The Lahore Journal of Economics,63 - 80.
Hovakimian, A., Hovakimian G., & Theranian, H. (2004). Determinants of target
capital structure: the case of dual debt and equity issues. Journal of Financial
Economics, 71(3), 517-540.
Hutzschenreuter, T. & Hungenberg, P. D. H. (2006). Wachstumsstrategien: Einsatz von
Management kapazitäten zur Wertsteigerung: Deutscher Universitätsvlg.
Ibrahim, Q., Rehman, R., & Raoof, A. (2010). Role of corporate governance in firm
performance: A comparative study between chemical and pharmaceutical
sectors of Pakistan. International Research Journal of Finance and Economics,
50, 7-16.
131
Jang, S. & Park, K. (2011). Inter-relationship between firm growth and profitability.
International Journal of Hospitality Management, 30(4), 1027-1035.
Javid, A.Y. & Iqbal, R. (2008). Ownership concentration, corporate governance
and firm performance: Evidence from Pakistan. The Pakistan Development
Review, 47 (4), 643 - 659.
Javed, N. & Louri, H. (2005). Corporate performance: does ownership matter? A
comparison of foreign and domestic owned firms in Greece and Portugal.
Review of Industrial Organization, 27 (1), 73 - 102.
Javeed, A., Hassan, M., & Azeem, M. (2014). Interrelationship among capital
structure, corporate governance measures and firm value: panel study from
Pakistan. Pakistan Journal of Commerce and Social Sciences, 8 (3), 572 - 589.
Jensen, C. M. & Meckling, H. W. (1976). Theory of the firm: managerial behavior,
agency costs and ownership structure. Journal of Financial Economics, 3 (4),
305 - 360.
Jensen C. M. (1986). Agency costs of free cash flow, corporate finance, and takeovers.
The American Economic Review, 76 (2), 323-329.
John, K., Litov, L.P., & Yeung, B.Y. (2005). Corporate governance and managerial
Risk - taking: theory and evidence. Working paper.
Jon MacKay, J., (2012). Corporate Governance and Firm Performance: Analyzing the
Social Capital of Corporate Insiders. PhD thesis. University of Waterloo,
Ontario, Canada.
132
Jonsson, B. (2007). Does the size matter? The relationship between size and
profitability of Icelandic firms”, Bifröst Journal of Social Sciences, 1, pp. 43-55.
Joshua A. (2008). Determinants of capital structure of Ghanaian firms, Nairobi:
Department of Finance. Acts Press, Nairobi, Kenya.
Kaplan, S. (2005).Corporate governance and corporate performance: A comparison of
Germany, Japan, and the US. Journal of Applied Corporate Finance, 9(4), 86-
93.
Kapopoulos, T. P. & Lazaretou, S. (2009). Corporate ownership structure and firm
performance: evidence from Greek firms. Working paper (Bank of Greece No.
37). Greece: Bank of Greece.
Khan, A. & Awan, S. (2012). Effect of board composition on firm‘s performance: a
case of Pakistani listed companies. Interdisciplinary Journal of Contemporary
Research in Business, 3(10), 853 - 863.
Klapper, L. F. & Love, I. (2004). Corporate governance, investor protection, and
performance in emerging markets. Journal of Corporate Finance, 10 (5), 703-
728.
Kraus, A. & Litzenberger, R. H. (1973). A state-preference model of optimal financial
leverage. Journal of Finance, 8(3) 911 - 922.
Lang W. & Jagtiani, J. (2010). The mortgage and financial crises: The role of credit
risk management and corporate governance. International Atlantic Economic
Society, 38, 123 - 144.
133
Lehn, KM, Patro, S & Zhao, M 2009, ‘Determinants of the size and composition of US
corporate boards: 1935–2000’, Financial Management, vol. 38, no. 4, pp. 747–
780.
Liao, L., Mukherjee, T.K., & Wang, W. (2012). Does corporate governance impact
capital structure adjustments? Midwest Finance Association 2013 Annual
Meeting Paper.
Mangena, M. & Tauringana, V. (2007). Disclosure, corporate governance and foreign
share ownership on the Zimbabwe Stock Exchange. Journal of International
Financial Management & Accounting, 18 (2), 53 - 85.
Mallin, C.A. (2004). Corporate governance, 1th edn, Oxford University Press,
Incorporated.
Masnoon, M. & Rauf. M. (2013). Impact of corporate governance on capital structure-
a study of KSE listed Firms. Global Management Journal for Academic &
Corporate Studies, 3 (1), 94-110.
Mahar, M. & Andersson, T. (2008). Corporate governance: effects on firm
performance and economic growth. Contemporary Accounting Research, 25,
351 - 405.
Mayers, D. & C. W. Smith, C. W. (2010). Compensation and board structure: evidence
from the insurance industry. Journal of Risk and Insurance, 77 (2), 297 - 327.
McNutt, P.A. (2010). Edited ethics: corporate governance and Kant's philosophy.
International journal of Social Economics, 37 (10), 741 - 754.
Morck, R., Nakamura, M., & Shivdasani, A. (2009). Banks, ownership structure, and
firm value in Japan. Journal of Business, 73 (4), 539 - 567.
134
Modigliani, F. & Miller, H.M. (1958), The Cost of Capital, Corporation Finance and
the Theory of Investment. The American Economic Review, 48(3), 261-297.
Mugenda, O. & Mugenda, A. G. (2003). Research methods: qualitative and
quantitative approaches. Acts Press, Nairobi, Kenya.
Muhammad, H., Shah, B., & Islam, U. Z. (2014). The impact of capital structure on
firm performance: evidence from Pakistan. Journal of Industrial Distribution &
Business, (5) 2, 13-20.
Murphy, A. & Topyan, K. (2005). Corporate governance: A critical survey of key
concepts, issues, and recent reforms in the US. Employee Responsibilities and
Rights Journal, 17 (2), 75 - 89.
Muthoni, G.G., Nasieku, M.T., Olweny, T., (2018). Does Capital Structure Have A
Mediation Effect On Ownership Structure And Financial Corporate
Performance? Evidence From Kenya. International Journal of Economics,
Commerce and Management United Kingdom, 4(9), 65.
Mwangi, W. L., Makau,S. M., & Kosimbei,G. (2014). Relationship between capital
structure and performance of non-financial companies listed in the Nairobi
Securities Exchange, Kenya. Global Journal of Contemporary Research in
Accounting, Auditing and Business Ethics (GJCRA) An Online International
Research Journal, 1 (2), 72 - 90.
Myers., Stewart C., Majluf., & Nicholas, S. (1984). Corporate financing and investment
decisions when firms have information that investors do not have. Journal of
Financial Economics, 13 (2), 187 - 221.
135
Naz, F., Ijaz, F., & Naqvi, F.(2016). Financial Performance of Firms: Evidence from
Pakistan Cement Industry. Journal of Teaching and Education, 5 (1), 81-94.
Nestor, S. & Thompson, J. (2001). Corporate governance patterns in OECD
economies: is convergence under way in Organization for Economic
Cooperation and Development, corporate governance in Asia: A comparative
perspective, OCED.
Nguyen, P. (2011). Corporate governance and risk-taking: Evidence from Japanese
firms. Pacific-Basin Finance Journal, 19 (3), 278 - 297.
OECD (2015). G20/OECD Principles of Corporate Governance, OECD Publishing,
Paris. http://dx.doi.org/10.1787/9789264236882-en
Okiro, O. K. (2014). Corporate Governance, Capital Structure, Regulatory
Compliance And Performance of Firms Listed At the East African Community
Securities Exchange. Phd Thesis. School of Business, University of Nairobi.
Okiro, K., Aduda. J., & Omoro, N. (2015). The effect of corporate governance and
capital structure on performance of firms listed at the East African Community
Securities Exchange. European Scientific Journal, 11 (7), 159-172.
Otman, M. A.K. (2014). Corporate Governance and Firm Performance in Listed
Companies in the United Arab Emirates. PhD thesis. College of Business,
Victoria University of Melbourne, Australia.
Owen. J. (2003). The failure of HIH insurance: A corporate collapse and its lessons,
Common Wealth of Australia. HIH Royal Commission Report, Speech to 13th
Common Wealth Law Conference.
136
Pastor, L. & P. Veronesi. 2013. Stock valuation and learning about profitability.
Journal of Finance 58:1749-1789.
Petrovic, J. (2008). Unlocking the role of a board director: a review of the literature,
Management Decision, 46 (9), 1373-1392.
Peck, S. I. & Ruigrok, W. (2000). Hiding behind the flag? Prospects for change in
German corporate governance. European Management Journal, 18 (4), 420-
430.
Penrose, E. T. (1995). The Theory of the Growth of the Firm: Oxford University Press.
Pound, J. (1988). Proxy contests and the efficiency of shareholder oversight. Journal of
Financial Economics, 20, 237-265.
Prasetyo, H. A. (2011). Systematic risk and capital structure in emerging Indonesian
market. International Conference on Economics, Business and Management:
IPEDR, (2), 132-138. IACS IT Press, Manila, Philippines.
Preacher, K. J. & Hayes, A. F. (2007). Asymptotic and resampling strategies for
Assessing and comparing indirect effects in multiple mediator models.
Manuscript submitted for publication.
Preacher, K.J. & Hayes, A.F. (2004). SPSS and SAS Procedures for Estimating Indirect
Effects in Simple Mediation Models. Behavior Research Methods, Instruments,
& Computers. 36, 717-731.
Pye, A. (2001). Corporate boards, investors and their relationships: accounts of
accountability and corporate governing in action. Corporate Governance: An
International Review, 9 (3), 186-195.
137
Quang, D. X. & Xin, W.Z. (2014). The Impact of Ownership Structure and Capital
Structure on Financial Performance of Vietnamese Firms. International Business
Research, 7(2), 64-71.
Ramon, V. R. (2011). Corporate governance as competitive advantage in Asia:
Managing corporate governance in Asia. Asian Institute of Management,
Philippines.
Reed, D. (2002). Corporate governance reforms in developing countries. Journal of
Business Ethics, 37(3), 223-247.
Reddy, K., Locke, S., & Frank, S. (2015). The efficacy of principle-based corporate
governance practices and firm financial performance: An empirical
investigation. International Journal of Managerial Finance, 6 (3), 190 - 219.
Roggi, O. Garvey, M., & Damodaran, A. (2012). Risk Taking: A Corporate
Governance Perspective. New York: University Stern School of Business.
Saad, N. M. (2010). Corporate governance compliance and the effects to capital
structure. International Journal of Economics and Financial, 2 (1), 105 - 114.
Saeedi, A. & Mahmoodi, I. (2011). Capital structure and firm performance: evidence
From Iranian companies. International Research Journal of Finance and
Economics, 70, 20-29.
Saito, T. (2008). Family firms and firm performance: evidence from Japan. Journal of
the Japanese and International Economies, 22 (4), 620 - 646.
Saliha, T. & Abdessatar, A. (2011), “The Determinants Of Financial Performance: An
Empirical Test Using The Simultaneous Equations Method”, Economics and
Finance Review 10(1), 01 – 19.
138
Saunders, M., Lewis, P., & Thornhill, A. (2007). Research Methods for Business
Students. 4th edn, Pearson Prentice Hall Financial Times, Harlow, Essex.
Saunders, M., Lewis, P., & Thornhill, A. (2009). Understanding research philosophies
and approaches. Research Methods for Business Students, 4, 106-135.
Sanvicente, A. Z. (2013). Capital structure decisions and the interaction with payout
and ownership decisions: Empirical evidence from Brazil, Insper Working Paper
Series WPE 264/2011, viewed on 10June 2013,
Scott, W. R. (2004). Institutional Theory: The Process of Theory Development, Oxford:
Oxford University Press.
SECP. (2013). www.secp.gov.pk/cg/sro_180_publicsectorcompanies_cgrules_2013.pdf
SECP (2014). www.secp.gov.pk/news/PDF/News_14/PR_Jan13_2014.pdf
Sekaran, U. (2003). Research methods for business: a skill-building approach, 4th edn,
Wiley, New York.
Selvam, M. & S. Vanitha, et al. (2016). A study on financial health of cement industry-
Z” score analysis. Management Accountant-Calcutta- 39 (7), 591 - 593.
Sharabati, A. A., Jawad, S. N., & Bontis, N. (2010). Intellectual capital and business
performance in the pharmaceutical sector of Jordan. Management Decision,
48 (1), 105 - 131.
Shah, A., Butt, S., & Saeed, A. (2007). Corporate governance and earnings management
an empirical evidence form Pakistani listed companies. European Journal of
Scientific Research, 26 (4), 624 - 638.
139
Shahid, N. M., Siddiqui, A. M., Qureshi, H. M., & Ahmad, F. (2017). Corporate
governance and its impact on firm’s performance: evidence from cement
industry of Pakistan. Global Journal of Management and Business Research,
11(8), 1-10.
Shangguan, Z. (2007). Risky debt and the earnings response coefficient: A re-
examination in the presence of illiquid growth opportunities. International
Journal of Business Innovation and Research, 1 (4), 404 - 424.
Sheikh, N.A. & Wang, Z. (2011). Determinants of capital structure. An empirical study
of firms in manufacturing industry of Pakistan. Managerial Finance, 37 (2), 117
- 133.
Shleifer, A. & Vishny, R. W. (2013). A survey of corporate governance. Journal of
Finance, 52 (2), 737 - 783.
Shoaib, K. & Yasushi, S. (2017). Ownership and Capital Structure of Pakistani Non-
Financial Firms. e-Finanse, 12(1), 57-67.
Shumway, T. (2014). Forecasting bankruptcy more accurately: A simple hazard model.
Journal of Business 74, 101-124.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.
Cannan (2 ed.).
Smallman, C. (2004). Exploring theoretical paradigm in corporate governance.
International Journal of Business Governance and Ethics, 1 (1), 78 - 94.
Snyder, L. (2007). Filling a position of corporate governance in France: A practical
introduction. Corporate Governance: An International Review, 7 (3), 238 - 250.
140
Sobel, M. E. (1982). Asymptotic confidence intervals for indirect effects in structural
equations models. In S. Leinhart (Ed.), Sociological methodology 1982 (290-
312).
Solomon, J. (2010). Corporate governance and accountability, 3th edn, Wiley,
Hoboken, NJ.
Stulz,R., Karoyli, A., & Doidge, C. (2008).Why do countries matter so much for
Corporate Governance? Journal of Financial Economics, 86, 1-9.
Sundaram, A. K. & Inkpen, A. C. (2004). Stakeholder theory and the corporate
objective revisited: A reply. Organization Science, 15 (3), 370 - 371.
Tahir, H. S., Sabir, M. H., Arshad, A., & Haq, A. M. (2012). Two-Tier Corporate
Governance Model for Pakistan. European Journal of Business and
Management, 4 (6), 145-162.
Todorovic, I. (2013). Impact of corporate governance on performance of companies.
Montenegrin Journal Of Economics, 9 (2), 47 – 53.
Ullah, M., Hashim, M., Khan, A.M., & Safi, W. (2017). Does corporate governance
affects risk: a case of listed firms on Pakistan Stock Exchange. City University
Research Journal, 21 - 26.
Ullah, M., Malik.A. H., Zeb. A, & Rehman, A., (2019). Mediating Role of Capital
Structure between Corporate Governance and Risk. Journal of Managerial
Sciences.13 (3), 47-56.
Van Horne, C. J. & Harlow, W. M. J. (2009). Fundamentals of Financial Management,
13th edition. F. T. Prentice Hall.
141
Veal, A. J. (2005). Business research methods: a managerial approach, 2th edn,
Addison-Wesley, South Melbourne, Vic.
Velnampy, T. & Nimalthasan, P., (2013). Corporate governance practices, capital
structure and their impact on firm performance: a study on Sri Lankan listed
manufacturing companies. Research Journal of Finance and Accounting, 4 (18),
69 - 80.
Velnampy, T. (2013). Corporate governance and firm performance: a study of Sri-
Lankan manufacturing companies. Journal of Economics and Sustainable
Development,4 (3), 228 - 236.
Vo, H. D. & Nguyen, M. T. (2014). The impact of corporate governance on firm
performance: empirical study in Vietnam. International Journal of Economics
and Finance, 6 (6), 145-161.
Wan, D. & Ong, C. H. (2005). Board structure, process and performance: evidence
from public listed companies in Singapore, Corporate Governance: An
International Review, 13 (2), 277-290.
Wanyoike, C. G. & Nasieku, T. (2015). Capital structure determinants among
companies quoted in securities exchange in East Africa. International Journal of
Education and Research, 3 (5), 483-496.
Wahla, K., Shah, S. Z. A., & Hussain, Z. (2012). Impact of ownership structure on firm
performance: evidence from non-financial listed companies at Karachi stock
exchange. International Research Journal of Finance and Economics, 84, 6-13.
West, A. (2006). Theorising South Africa’s corporate governance. Journal of Business
Ethics, 68 (4), 433 - 448.
142
Welch, I. (2004). Stock returns and capital structure. Journal of Political Economy,
112, 106 - 131.
Weir, C., Laing, D. & McKnight, P. (2009). Internal and external governance
mechanisms: Their impact on the performance of large UK public companies
Journal of Business Finance and Accounting, 29, 579-611.
Yasser, R., Entebang, H., & Mansor, A. S. (2011). Corporate governance and firm
performance in Pakistan: The case of Karachi Stock Exchange (KSE)-30.
Journal of Economics and International Finance, 3 (8), 482 - 491.
Zeitun, R. & Tian, G. G. (2017). Does ownership affect a firm’s performance and
default risk in Jordan? Corporate Governance, 7(1), 66 – 82.
143
APPENDIX I: Sectors and Companies at KSE, Pakistan
Sr. No. Sector Name Number of Companies
1 Automobile Assembler 12
2 Automobile Parts & Accessories 10
3 Cable & Electrical Goods 08
4 Cement 20
5 Chemical 29
6 Close - End Mutual Fund 08
7 Commercial Banks 20
8 Engineering 19
9 Fertilizer 07
10 Food & Personal Care Products 22
11 Glass & Ceramics 10
12 Insurance 31
13 Inv. Banks / Inv. Cos. / Securities Cos. 30
14 Jute 02
15 Leasing Companies 10
16 Leather & Tanneries 05
17 Miscellaneous 22
18 Modarabas 31
19 Oil & Gas Exploration Companies 04
20 Oil & Gas Marketing Companies 08
21 Paper & Board 10
144
22 Pharmaceuticals 11
23 Power Generation & Distribution 19
24 Real Estate Investment Trust 01
25 Refinery 04
26 Sugar & Allied Industries 34
27 Synthetic & Rayon 11
28 Technology & Communication 10
29 Textile Composite 56
30 Textile Spinning 82
31 Textile Weaving 13
32 Tobacco 03
33 Transport 05
34 Vanaspati & Allied Industries 06
35 Woolen 02
35 TOTAL FIRMS 576
Source: www.kse.com.pk (2014)
145
APPENDIX II: Measurement of Variables
Corporate Governance and Capital Structure
Year Cement Firms
Insid
er Directo
rs
Institu
tion
al S
hareh
old
ings
Board
Ind
epen
den
ce
Board
Size
Au
dit C
om
mitte
e
Deb
t to E
qu
ity
Deb
t to A
ssets
2005 Attock Cement 2 0.7 2 7 3 0.41 0.29
2006 2 0.31 2 7 3 0.39 0.27
2007 2 0.19 2 7 3 0.35 0.25
2008 2 0.28 2 7 3 0.41 0.29
2009 2 0.63 2 7 3 0.43 0.31
2010 2 0.78 2 7 3 0.32 0.21
2011 2 0.33 2 7 3 0.35 0.25
2012 2 0.79 3 7 3 0.36 0.26
2013 2 0.89 3 7 3 0.39 0.27
2014 2 0.59 3 7 3 0.38 0.26
2005 Best Way Cement 2 0.45 1 7 3 0.25 0.19
2006 2 0.25 1 7 3 0.31 0.29
2007 2 0.47 1 7 3 0.35 0.26
2008 2 0.49 1 7 3 0.27 0.19
2009 2 0.84 1 7 3 0.41 0.35
2010 2 0.25 1 7 3 0.34 0.28
2011 2 0.19 1 7 3 0.38 0.31
2012 2 0.41 1 7 3 0.41 0.28
2013 2 0.61 1 7 3 0.35 0.24
2014 2 0.33 1 7 3 0.33 0.27
2005 Cherat Cement 1 0.15 3 8 3 0.36 0.26
2006 1 0.89 3 8 3 0.33 0.24
146
2007 1 0.54 3 8 3 0.31 0.21
2008 1 0.57 3 8 3 0.29 0.19
2009 2 0.67 3 8 3 0.41 0.32
2010 2 0.25 3 8 3 0.35 0.26
2011 2 0.3 3 8 4 0.45 0.37
2012 2 0.19 3 8 4 0.32 0.21
2013 2 0.6 1 7 3 0.27 0.12
2014 2 0.65 1 7 3 0.25 0.12
2005 DGK Cement 2 0.6 1 7 3 0.19 0.16
2006 2 0.65 1 7 3 0.21 0.18
2007 2 0.51 1 7 3 0.18 0.16
2008 2 0.58 2 7 3 0.19 0.17
2009 2 0.49 2 7 3 0.26 0.21
2010 2 0.17 2 7 3 0.22 0.15
2011 2 0.61 2 7 3 0.17 0.14
2012 2 0.58 2 7 3 0.36 0.31
2013 2 0.52 2 7 3 0.29 0.24
2014 2 0.7 2 7 3 0.31 0.22
2005 Dada Cement 4 0.21 1 7 3 0.32 0.24
2006 4 0.63 1 7 3 0.31 0.27
2007 4 0.77 1 7 3 0.33 0.28
2008 3 0.58 1 7 3 0.32 0.27
2009 3 0.21 1 7 3 0.29 0.24
2010 3 0.89 1 7 3 0.31 0.27
2011 3 0.57 1 7 3 0.34 0.28
2012 3 0.69 1 7 3 0.31 0.27
2013 3 0.87 1 7 3 0.35 0.29
2014 3 0.54 1 7 3 0.31 0.25
2005 Dandot Cement 4 0.19 1 7 3 0.21 0.17
2006 4 0.19 1 7 3 0.19 0.15
2007 4 0.19 1 7 3 0.17 0.14
147
2008 4 0.19 1 7 3 0.18 0.16
2009 4 0.19 1 7 3 0.19 0.17
2010 4 0.19 1 7 3 0.15 0.13
2011 4 0.16 1 7 3 0.12 0.09
2012 4 0.17 1 7 3 0.14 0.11
2013 4 0.14 1 7 3 0.16 0.12
2014 4 0.13 1 7 3 0.12 0.09
2005 Dewan Cement 2 0.2 1 7 2 0.43 0.35
2006 2 0.2 1 7 2 0.41 0.32
2007 2 0.22 1 7 2 0.39 0.34
2008 2 0.22 1 7 2 0.35 0.29
2009 2 0.21 1 7 2 0.41 0.34
2010 2 0.21 1 7 2 0.41 0.36
2011 2 0.21 1 7 2 0.42 0.35
2012 2 0.08 1 7 2 0.36 0.27
2013 2 0.06 1 7 2 0.45 0.33
2014 2 0.11 1 7 2 0.41 0.36
2005 Fauji Cement 3 0.11 1 10 5 0.32 0.29
2006 3 0.08 1 10 5 0.35 0.31
2007 3 0.12 1 10 5 0.34 0.28
2008 3 0.32 1 10 5 0.39 0.33
2009 3 0.3 1 10 5 0.41 0.38
2010 3 0.28 1 10 5 0.27 0.19
2011 3 0.28 1 10 5 0.38 0.26
2012 3 0.05 1 10 5 0.33 0.25
2013 3 0.15 1 10 5 0.34 0.23
2014 3 0.19 1 10 5 0.35 0.28
2005 Fecto Cement 2 0.19 0 7 3 0.56 0.47
2006 2 0.19 0 7 3 0.61 0.53
2007 2 0.17 0 9 3 0.52 0.42
2008 2 0.17 0 9 3 0.59 0.49
148
2009 2 0.16 0 9 3 0.67 0.61
2010 2 0.16 0 9 3 0.51 0.48
2011 2 0.15 0 9 3 0.48 0.39
2012 2 0.12 2 9 3 0.49 0.41
2013 2 0.12 2 9 4 0.52 0.45
2014 2 0.4 2 9 4 0.53 0.47
2005 Flying Cement 3 0.1 1 7 3 0.32 0.29
2006 3 0.1 1 7 3 0.31 0.28
2007 3 0.1 1 7 3 0.35 0.27
2008 3 0.1 1 7 3 0.39 0.33
2009 3 0.01 1 7 3 0.35 0.29
2010 3 0.01 1 7 3 0.36 0.25
2011 3 0.01 1 7 3 0.33 0.26
2012 3 0.02 1 7 3 0.37 0.31
2013 3 0.03 1 7 3 0.36 0.31
2014 3 0.03 1 7 3 0.31 0.27
2005 Gharibwal Cement 3 0.11 0 7 3 0.52 0.45
2006 3 0.03 0 7 3 0.51 0.47
2007 3 0.01 0 6 3 0.48 0.39
2008 3 0.01 0 7 3 0.47 0.41
2009 3 0.01 0 7 3 0.49 0.38
2010 3 0.01 0 7 3 0.47 0.38
2011 3 0.03 0 7 3 0.45 0.37
2012 3 0.16 0 7 3 0.44 0.33
2013 3 0.16 0 7 3 0.46 0.35
2014 3 0.15 0 7 3 0.45 0.32
2005 Javedan Cement 2 0.18 0 7 3 0.68 0.61
2006 2 0.19 0 7 3 0.71 0.64
2007 2 0.2 0 7 3 0.58 0.53
2008 2 0.23 0 7 3 0.65 0.61
2009 2 0.2 0 7 4 0.59 0.52
149
2010 2 0.18 0 7 4 0.63 0.58
2011 2 0.08 0 7 4 0.51 0.47
2012 2 0.07 0 7 4 0.53 0.48
2013 2 0.3 0 7 4 0.55 0.49
2014 2 0.02 0 7 4 0.57 0.51
2005 Kohat Cement 1 0.1 0 7 3 0.29 0.26
2006 1 0.09 0 7 3 0.31 0.25
2007 1 0.13 0 7 3 0.28 0.22
2008 1 0.18 0 7 3 0.37 0.31
2009 1 0.09 0 7 3 0.35 0.29
2010 1 0.04 0 7 3 0.32 0.24
2011 1 0.03 0 7 3 0.33 0.28
2012 1 0.02 0 7 3 0.34 0.29
2013 1 0.08 1 7 3 0.35 0.29
2014 1 0.11 1 7 3 0.35 0.29
2005 Lafarge Pak Cement 2 0.17 0 6 4 0.29 0.26
2006 2 0.17 0 6 4 0.31 0.25
2007 2 0.17 0 6 4 0.28 0.22
2008 2 0.12 0 6 4 0.37 0.31
2009 2 0.11 0 6 4 0.35 0.29
2010 2 0.08 0 6 4 0.32 0.24
2011 2 0.07 0 6 4 0.33 0.28
2012 2 0.1 0 6 4 0.34 0.29
2013 2 0.1 0 6 4 0.35 0.29
2014 2 0.1 0 6 4 0.35 0.3
2005 Lucky Cement 1 0.46 0 9 4 0.41 0.36
2006 1 0.38 0 9 4 0.39 0.35
2007 1 0.45 0 9 4 0.33 0.29
2008 1 0.55 0 9 4 0.34 0.27
2009 1 0.48 0 9 4 0.29 0.23
2010 1 0.11 0 9 4 0.25 0.19
150
2011 1 0.12 0 9 4 0.27 0.21
2012 1 0.12 0 9 4 0.27 0.22
2013 1 0.08 0 9 4 0.26 0.2
2014 1 0.07 0 9 4 0.21 0.16
2005 Mapple Leaf Cement 2 0.19 0 8 3 0.67 0.61
2006 2 0.19 0 8 3 0.69 0.63
2007 2 0.12 0 8 3 0.53 0.47
2008 2 0.16 0 8 3 0.58 0.49
2009 2 0.16 0 8 3 0.78 0.64
2010 2 0.07 0 8 3 0.81 0.73
2011 2 0.06 0 8 3 0.85 0.79
2012 2 0.14 0 8 4 0.82 0.68
2013 2 0.19 0 8 4 0.71 0.66
2014 2 0.18 0 8 4 0.65 0.58
2005 Poineer Cement 3 0.43 3 7 3 0.41 0.35
2006 3 0.43 3 7 3 0.38 0.32
2007 3 0.4 3 7 3 0.33 0.29
2008 3 0.4 3 7 3 0.37 0.22
2009 3 0.34 0 7 3 0.36 0.29
2010 2 0.43 0 7 3 0.33 0.21
2011 2 0.35 0 7 3 0.41 0.35
2012 2 0.22 0 7 3 0.39 0.32
2013 2 0.35 0 7 3 0.35 0.31
2014 2 0.68 0 7 3 0.33 0.25
2005 Power Cement 3 0.19 0 7 3 0.67 0.61
2006 3 0.2 0 7 3 0.69 0.63
2007 3 0.19 0 7 3 0.53 0.47
2008 3 0.19 0 7 3 0.58 0.49
2009 3 0.13 0 7 3 0.78 0.64
2010 3 0.05 0 7 3 0.81 0.73
2011 3 0.2 0 7 3 0.85 0.79
151
2012 3 0.02 0 7 3 0.82 0.68
2013 3 0.1 0 7 3 0.71 0.66
2014 3 0.14 0 7 3 0.65 0.58
2005 Tatta Cement 2 0.12 1 7 3 0.32 0.29
2006 2 0.12 1 7 3 0.31 0.28
2007 2 0.14 1 7 3 0.35 0.27
2008 2 0.12 1 7 3 0.39 0.33
2009 2 0.14 1 7 3 0.35 0.29
2010 2 0.18 1 7 3 0.36 0.25
2011 2 0.28 1 7 3 0.33 0.26
2012 2 0.28 1 7 3 0.37 0.31
2013 2 0.53 1 7 3 0.36 0.31
2014 2 0.71 1 7 3 0.31 0.27
2005 Zeal Cement 3 0.01 1 6 3 0.33 0.27
2006 3 0.01 1 6 3 0.39 0.28
2007 3 0.11 1 6 3 0.36 0.29
2008 3 0.1 1 6 3 0.33 0.26
2009 3 0.1 1 8 3 0.37 0.31
2010 3 0.1 1 6 3 0.41 0.35
2011 3 0.11 1 6 3 0.46 0.37
2012 3 0.11 1 6 3 0.44 0.36
2013 3 0.1 1 6 3 0.39 0.32
2014 3 0.11 1 6 3 0.37 0.31
152
Financial Performance
Year Cement Firms
Retu
rn o
n A
ssets
Retu
rn o
n E
qu
ity
Net In
com
e Marg
in
Op
eratin
g In
com
e Margin
Tota
l Assets T
urn
over
2005 Attock Cement 0.33 0.5 0.41 0.67 1.05
2006
0.39 0.57 0.44 0.72 1.18
2007
0.25 0.47 0.41 0.69 1.12
2008
0.39 0.51 0.49 0.7 1.4
2009
0.33 0.55 0.51 0.71 1.43
2010
0.31 0.59 0.49 0.73 1.51
2011
0.42 0.69 0.52 0.79 1.62
2012
0.43 0.61 0.53 0.82 1.72
2013
0.52 0.68 0.55 0.86 1.83
2014
0.37 0.49 0.42 0.58 0.95
2005 Best Way Cement 0.11 0.28 0.22 0.35 0.65
2006
0.21 0.37 0.27 0.48 0.71
2007
0.19 0.28 0.23 0.39 0.67
2008
0.2 0.32 0.21 0.41 0.76
2009
0.19 0.31 0.25 0.48 0.63
2010
0.31 0.49 0.33 0.52 0.61
2011
0.27 0.38 0.39 0.49 0.59
2012
0.31 0.53 0.41 0.61 0.73
2013
0.36 0.47 0.32 0.66 0.98
2014
0.39 0.52 0.44 0.69 1.02
2005 Cherat Cement 0.31 0.43 0.36 0.51 0.73
2006
0.39 0.65 0.51 0.79 0.85
2007
0.37 0.55 0.48 0.66 0.91
153
2008
0.35 0.41 0.38 0.59 0.76
2009
0.39 0.46 0.41 0.61 0.85
2010
0.36 0.44 0.42 0.63 0.85
2011
0.37 0.48 0.39 0.72 0.97
2012
0.41 0.58 0.53 0.61 1.06
2013
0.44 0.55 0.49 0.69 1.15
2014
0.42 0.64 0.55 0.72 1.21
2005 DGK Cement 0.37 0.57 0.39 0.61 0.96
2006
0.32 0.44 0.35 0.51 0.85
2007
0.33 0.41 0.36 0.53 0.83
2008
0.43 0.49 0.45 0.62 0.97
2009
0.45 0.57 0.51 0.75 1.05
2010
0.31 0.43 0.33 0.52 0.79
2011
0.39 0.48 0.47 0.58 0.62
2012
0.44 0.51 0.48 0.62 0.85
2013
0.47 0.63 0.53 0.76 0.98
2014
0.49 0.52 0.47 0.67 0.75
2005 Dada Cement 0.21 0.33 0.29 0.41 0.63
2006
0.23 0.41 0.31 0.53 0.68
2007
0.31 0.38 0.36 0.49 0.65
2008
0.3 0.41 0.34 0.52 0.62
2009
0.27 0.33 0.29 0.41 0.63
2010
0.21 0.42 0.39 0.53 0.68
2011
0.23 0.37 0.33 0.49 0.66
2012
0.35 0.47 0.41 0.51 0.78
2013
0.1 0.21 0.19 0.38 0.42
2014
0.21 0.38 0.22 0.47 0.53
2005 Dandot Cement 0.1 0.23 0.14 0.32 0.48
2006
0.19 0.33 0.29 0.41 0.53
2007
0.21 0.44 0.27 0.49 0.52
2008
0.23 0.47 0.33 0.51 0.63
154
2009
0.31 0.35 0.41 0.42 0.62
2010
0.22 0.41 0.37 0.51 0.66
2011
0.27 0.48 0.33 0.52 0.71
2012
0.34 0.59 0.41 0.68 0.85
2013
0.21 0.37 0.31 0.43 0.56
2014
0.3 0.41 0.35 0.52 0.62
2005 Dewan Cement 0.35 0.45 0.37 0.53 0.74
2006
0.21 0.29 0.22 0.35 0.52
2007
0.17 0.33 0.21 0.41 0.56
2008
0.23 0.29 0.27 0.41 0.56
2009
0.21 0.41 0.32 0.52 0.74
2010
0.16 0.33 0.29 0.47 0.52
2011
0.02 0.13 0.01 0.21 0.42
2012
0.11 0.27 0.15 0.39 0.58
2013
0.13 0.22 0.17 0.31 0.47
2014
0.19 0.31 0.22 0.42 0.59
2005 Fauji Cement 0.09 0.21 0.13 0.35 0.55
2006
0.12 0.29 0.22 0.48 0.61
2007
0.19 0.33 0.27 0.41 0.57
2008
0.21 0.41 0.39 0.52 0.75
2009
0.27 0.47 0.33 0.59 0.77
2010
0.22 0.43 0.34 0.51 0.74
2011
0.31 0.52 0.41 0.61 0.75
2012
0.43 0.61 0.52 0.73 0.86
2013
0.12 0.35 0.26 0.42 0.62
2014
0.44 0.61 0.58 0.78 0.98
2005 Fecto Cement 0.15 0.31 0.23 0.46 0.75
2006
0.12 0.23 0.19 0.39 0.62
2007
0.22 0.35 0.27 0.45 0.68
2008
0.21 0.31 0.28 0.44 0.69
2009
0.2 0.34 0.31 0.42 0.58
155
2010
0.18 0.29 0.26 0.39 0.51
2011
0.11 0.23 0.17 0.34 0.49
2012
0.17 0.48 0.37 0.57 0.62
2013
0.21 0.29 0.27 0.35 0.49
2014
0.32 0.47 0.41 0.63 0.78
2005 Flying Cement 0.19 0.25 0.21 0.38 0.56
2006
0.22 0.36 0.31 0.47 0.68
2007
0.15 0.32 0.21 0.41 0.61
2008
0.21 0.41 0.38 0.51 0.69
2009
0.22 0.39 0.33 0.51 0.69
2010
0.31 0.45 0.42 0.62 0.75
2011
0.29 0.51 0.48 0.75 0.75
2012
0.41 0.63 0.57 0.76 0.79
2013
0.26 0.48 0.49 0.56 0.62
2014
0.27 0.44 0.32 0.53 0.59
2005 Gharibwal Cement 0.31 0.51 0.39 0.68 1.06
2006
0.27 0.38 0.34 0.42 0.78
2007
0.31 0.46 0.41 0.53 0.86
2008
0.23 0.41 0.31 0.51 0.81
2009
0.29 0.43 0.33 0.62 1.01
2010
0.21 0.39 0.27 0.57 0.99
2011
0.15 0.33 0.17 0.43 0.85
2012
0.23 0.41 0.338 0.47 0.82
2013
0.19 0.39 0.27 0.48 0.88
2014
0.35 0.58 0.42 0.61 0.98
2005 Javedan Cement -0.17 -0.09 -0.3 -0.21 0.03
2006
-0.17 -0.04 -0.01 -0.12 0.03
2007
0.23 0.33 0.26 0.47 0.57
2008
-0.41 -0.21 -0.19 -0.03 0.12
2009
-0.05 -0.01 -0.03 -0.23 0.3
2010
-0.32 -0.17 -0.21 -0.13 0.19
156
2011
-0.18 -0.13 -0.2 0.02 0.48
2012
-0.09 -0.01 -0.47 0.18 0.47
2013
0.23 0.36 0.3 0.45 0.58
2014
0.26 0.43 0.37 0.52 0.68
2005 Kohat Cement 0.41 0.53 0.49 0.61 1.19
2006
0.33 0.42 0.37 0.49 0.81
2007
0.51 0.68 0.53 0.71 0.87
2008
0.53 0.71 0.62 0.85 0.95
2009
0.47 0.53 0.5 0.62 1.25
2010
0.37 0.41 0.31 0.51 0.84
2011
0.33 0.44 0.38 0.3 0.65
2012
0.45 0.56 0.41 0.63 0.78
2013
0.47 0.51 0.48 0.66 0.87
2014
0.51 0.63 0.52 0.72 0.91
2005 Lafarge Pak Cement 0.13 0.23 0.19 0.35 0.68
2006
0.08 0.21 0.15 0.36 0.71
2007
0.11 0.33 0.21 0.39 0.76
2008
0.14 0.29 0.26 0.35 0.68
2009
0.21 0.33 0.23 0.41 0.77
2010
0.17 0.35 0.35 0.43 0.79
2011
0.22 0.39 0.31 0.52 0.82
2012
0.27 0.41 0.33 0.49 0.75
2013
0.33 0.52 0.41 0.62 0.97
2014
0.41 0.55 0.49 0.66 1.16
2005 Lucky Cement 0.46 0.59 0.39 0.71 0.41
2006
0.57 0.68 0.63 0.73 0.51
2007
0.41 0.57 0.44 0.68 0.47
2008
0.44 0.56 0.47 0.62 0.5
2009
0.48 0.62 0.51 0.78 0.53
2010
0.47 0.55 0.53 0.62 0.45
2011
0.55 0.61 0.58 0.71 0.41
157
2012
0.61 0.73 0.68 0.82 0.62
2013
0.58 0.66 0.61 0.71 0.58
2014
0.51 0.68 0.63 0.79 0.61
2005 Mapple Leaf Cement 0.04 0.19 0.11 0.34 0.53
2006
0.02 0.15 0.11 0.39 0.61
2007
0.01 0.14 0.09 0.21 0.34
2008
0.01 0.14 0.05 0.23 0.39
2009
-0.13 -0.01 -0.06 0.01 0.11
2010
-0.07 -0.02 -0.19 -0.04 0.09
2011
-0.03 -0.01 -0.14 0.01 0.11
2012
0.02 0.09 0.03 0.18 0.21
2013
0.1 0.21 0.19 0.28 0.39
2014
0.11 0.25 0.15 0.27 0.42
2005 Poineer Cement 0.11 0.29 0.18 0.31 0.68
2006
0.19 0.33 0.22 0.41 0.73
2007
0.21 0.39 0.27 0.48 0.77
2008
0.27 0.41 0.32 0.63 0.79
2009
0.31 0.44 0.37 0.73 0.86
2010
0.22 0.38 0.31 0.51 0.75
2011
0.18 0.22 0.19 0.42 0.55
2012
0.17 0.26 0.21 0.39 0.63
2013
0.41 0.51 0.39 0.65 0.78
2014
0.43 0.57 0.51 0.68 0.84
2005 Power Cement -0.21 -0.12 -0.19 -0.09 0.05
2006
-0.14 -0.01 -0.12 -0.01 0.01
2007
-0.11 -0.01 -0.69 -0.01 0.01
2008
-0.1 -0.06 -0.03 -0.03 0.27
2009
0.08 0.19 0.13 0.26 0.34
2010
-0.01 -0.01 0 0.01 0.21
2011
-0.16 -0.05 -0.09 -0.1 0.11
2012
0.21 0.31 0.23 0.42 0.47
158
2013
0.21 0.33 0.27 0.44 0.53
2014
0.23 0.46 0.31 0.51 0.44
2005 Tatta Cement 0.19 0.34 0.31 0.49 0.59
2006
0.21 0.41 0.23 0.48 0.56
2007
0.12 0.33 0.19 0.45 0.47
2008
0.19 0.31 0.23 0.38 0.58
2009
0.33 0.41 0.37 0.52 0.78
2010
0.37 0.52 0.42 0.62 0.78
2011
0.33 0.47 0.41 0.66 0.81
2012
0.34 0.51 0.48 0.72 0.83
2013
0.37 0.43 0.34 0.58 0.49
2014
0.41 0.63 0.45 0.71 0.88
2005 Zeal Cement 0.1 0.21 0.14 0.36 0.53
2006
0.19 0.35 0.21 0.42 0.67
2007
0.24 0.47 0.35 0.56 0.71
2008
0.38 0.44 0.39 0.51 0.65
2009
0.33 0.51 0.42 0.63 0.78
2010
0.41 0.62 0.48 0.75 0.86
2011
0.39 0.52 0.44 0.68 0.81
2012
0.33 0.47 0.41 0.57 0.69
2013
0.22 0.33 0.27 0.45 0.72
2014
0.31 0.49 0.39 0.61 0.77
159
Solvency Risk Protection, Firm Size, Firm Age and Firm Growth
Year Cement Firms
Solv
ency
Risk
Pro
tectio
n
Firm
Size
Firm
Age
Firm
Gro
wth
2005 Attock Cement 89.44 3.41 1.51 37.61
2006
85.13 3.54 1.51 34.25
2007
53.31 3.66 1.51 31.30
2008
42.12 3.70 1.51 9.67
2009
56.25 3.88 1.51 50.17
2010
78.36 3.88 1.51 2.10
2011
54.26 3.93 1.51 11.55
2012
45.51 4.03 1.51 24.36
2013
51.26 4.06 1.51 8.81
2014
48.5 4.10 1.51 9.03
2005 Best Way Cement 32.12 3.55 1.32 22.31
2006
33.31 3.66 1.32 28.51
2007
45.25 3.75 1.32 24.32
2008
47.56 3.87 1.32 32.54
2009
51.35 4.06 1.32 54.95
2010
55.63 4.12 1.32 15.20
2011
58.15 4.12 1.32 0.01
2012
35.98 4.26 1.32 18.12
2013
33.87 4.25 1.32 12.89
2014
41.59 4.15 1.32 2.87
2005 Cherat Cement 58.32 3.38 1.51 15.16
2006
33.12 3.39 1.51 1.46
2007
54.21 3.42 1.51 7.55
2008
63.25 3.48 1.51 15.04
2009
56.96 3.66 1.51 51.33
160
2010
57.25 3.54 1.51 -24.40
2011
63.25 3.63 1.51 22.40
2012
41.25 3.84 1.51 28.58
2013
43.24 3.80 1.51 15.34
2014
44.25 3.81 1.51 2.49
2005 DGK Cement 13.89 6.90 1.44 50.69
2006
15.6 6.81 1.44 -19.31
2007
17.12 7.10 1.44 93.87
2008
16.25 7.26 1.44 44.79
2009
22.36 7.21 1.44 -9.68
2010
21.35 7.27 1.44 14.14
2011
27.12 7.36 1.44 23.54
2012
27.78 7.40 1.44 8.57
2013
29.12 7.51 1.44 6.53
2014
21.32 7.42 1.44 -1.65
2005 Dada Cement 7.13 2.88 1.54 36.57
2006
8.23 2.77 1.54 22.65
2007
9.32 2.85 1.54 2.36
2008
7.28 2.58 1.54 15.36
2009
8.23 2.60 1.54 5.74
2010
6.24 2.77 1.54 45.98
2011
8.14 2.85 1.54 23.56
2012
9.56 2.58 1.54 12.00
2013
8.62 2.48 1.54 20.21
2014
8.14 3.70 1.54 20.67
2005 Dandot Cement 4.12 6.04 1.53 5.33
2006
3.12 6.15 1.53 29.98
2007
4.26 5.95 1.53 35.27
2008
5.26 5.75 1.53 39.19
2009
6.25 6.01 1.53 83.60
2010
7.21 6.05 1.53 10.99
161
2011
5.12 5.89 1.53 31.78
2012
3.25 6.04 1.53 42.75
2013
4.25 5.16 1.53 23.58
2014
6.32 5.03 1.53 13.68
2005 Dewan Cement 8.41 3.72 1.5 8.16
2006
7.32 3.75 1.5 6.25
2007
6.25 3.61 1.5 23.10
2008
5.14 3.66 1.5 6.19
2009
7.98 3.75 1.5 23.60
2010
4.65 3.57 1.5 38.50
2011
8.71 3.71 1.5 45.61
2012
11.32 3.85 1.5 38.51
2013
12.25 3.94 1.5 22.86
2014
11.69 4.30 1.5 15.07
2005 Fauji Cement 45.32 6.45 1.34 4.12
2006
47.85 6.63 1.34 50.65
2007
41.25 6.65 1.34 19.02
2008
39.52 6.73 1.34 53.45
2009
42.78 6.55 1.34 33.28
2010
44.63 6.75 1.34 49.85
2011
27.62 6.58 1.34 28.34
2012
29.14 6.68 1.34 24.53
2013
24.63 7.18 1.34 15.25
2014
22.87 7.20 1.34 41.93
2005 Fecto Cement 11.12 6.63 1.77 1.11
2006
10.36 6.39 1.77 6.82
2007
9.62 6.38 1.77 1.92
2008
8.52 6.37 1.77 5.47
2009
11.63 6.87 1.77 48.81
2010
6.32 6.87 1.77 16.10
2011
9.98 6.89 1.77 13.52
162
2012
13.25 6.91 1.77 5.25
2013
12.21 6.95 1.77 3.36
2014
15.57 6.98 1.77 2.68
2005 Flying Cement 8.12 8.74 1.34 0.23
2006
7.52 8.74 1.34 0.25
2007
6.32 8.25 1.34 1.39
2008
9.65 8.20 1.34 1.36
2009
11.25 8.05 1.34 -12.65
2010
13.95 8.52 1.34 -5.75
2011
14.25 7.91 1.34 15.25
2012
13.25 7.82 1.34 10.20
2013
18.32 8.12 1.34 25.33
2014
17.25 7.92 1.34 35.88
2005 Gharibwal Cement 15.12 7.93 1.73 2.55
2006
17.15 6.17 1.73 12.25
2007
14.78 6.20 1.73 7.55
2008
15.85 5.72 1.73 27.52
2009
13.41 5.39 1.73 13.89
2010
7.62 5.33 1.73 17.25
2011
6.62 5.52 1.73 36.98
2012
7.52 5.72 1.73 49.52
2013
8.59 5.79 1.73 25.30
2014
9.14 5.93 1.73 37.19
2005 Javedan Cement 4.36 5.89 1.72 34.52
2006
5.61 6.11 1.72 1.02
2007
6.32 5.17 1.72 1.36
2008
5.21 5.87 1.72 -15.63
2009
6.33 5.99 1.72 -6.56
2010
6.98 5.82 1.72 -2.55
2011
4.32 4.79 1.72 -7.83
2012
3.21 5.21 1.72 -1.25
163
2013
2.22 5.07 1.72 -23.12
2014
3.12 5.38 1.72 1.23
2005 Kohat Cement 45.62 6.23 1.47 22.72
2006
47.41 6.37 1.47 35.67
2007
49.52 6.19 1.47 5.85
2008
52.25 6.17 1.47 11.36
2009
53.69 6.38 1.47 23.69
2010
55.51 6.57 1.47 31.62
2011
54.52 6.78 1.47 17.25
2012
51.35 6.77 1.47 25.69
2013
49.58 7.19 1.47 21.36
2014
52.36 7.23 1.47 13.12
2005 Lafarge Pak Cement 45.62 6.91 1.76 5.32
2006
47.41 6.84 1.76 7.63
2007
49.52 6.89 1.76 12.68
2008
52.25 6.98 1.76 10.25
2009
53.69 6.99 1.76 5.63
2010
55.51 6.99 1.76 9.35
2011
54.52 7.12 1.76 10.58
2012
51.35 7.23 1.76 15.39
2013
49.58 7.25 1.76 23.23
2014
52.36 7.30 1.76 7.85
2005 Lucky Cement 15.32 3.60 1.32 15.69
2006
18.32 3.90 1.32 45.63
2007
31.25 4.10 1.32 25.36
2008
27.62 4.23 1.32 49.14
2009
25.36 4.23 1.32 23.36
2010
23.63 4.39 1.32 5.26
2011
22.41 4.42 1.32 13.91
2012
27.79 4.52 1.32 15.25
2013
32.14 4.58 1.32 13.35
164
2014
33.85 4.63 1.32 13.95
2005 Mapple Leaf Cement 8.12 6.13 1.73 18.13
2006
7.63 6.18 1.73 10.23
2007
8.62 6.16 1.73 5.12
2008
1.43 6.39 1.73 12.66
2009
2.63 6.50 1.73 -10.63
2010
2.45 6.52 1.73 -2.81
2011
1.68 6.55 1.73 -13.53
2012
3.68 6.46 1.73 -14.52
2013
4.25 6.42 1.73 -7.41
2014
4.98 6.42 1.73 1.48
2005 Poineer Cement 12.68 3.3. 1.44 23.55
2006
25.36 3.49 1.44 35.15
2007
27.69 3.51 1.44 3.54
2008
33.41 3.69 1.44 43.63
2009
31.25 3.70 1.44 3.01
2010
25.21 3.59 1.44 15.68
2011
26.52 3.72 1.44 36.51
2012
24.87 3.81 1.44 23.21
2013
26.63 3.88 1.44 15.30
2014
23.25 3.91 1.44 6.30
2005 Power Cement 8.12 5.77 1.44 -15.36
2006
7.63 5.96 1.43 1.36
2007
8.62 5.31 1.43 -23.61
2008
1.43 6.07 1.43 -46.85
2009
2.63 6.47 1.43 15.36
2010
2.45 6.34 1.43 -8.61
2011
1.68 6.35 1.43 1.00
2012
3.68 6.47 1.43 22.97
2013
4.25 6.55 1.43 19.47
2014
4.98 6.59 1.43 12.68
165
2005 Tatta Cement 8.12 6.19 1.43 29.78
2006
7.52 6.05 1.53 5.36
2007
6.32 6.15 1.53 7.51
2008
9.65 6.25 1.53 14.35
2009
11.25 6.19 1.53 12.85
2010
13.95 6.27 1.53 7.23
2011
14.25 6.36 1.53 13.65
2012
13.25 6.39 1.53 2.03
2013
18.32 6.38 1.53 7.58
2014
17.25 6.36 1.53 5.59
2005 Zeal Cement 36.12 6.01 1.75 21.24
2006
33.15 6.06 1.75 3.61
2007
34.58 5.67 1.75 14.53
2008
32.69 5.50 1.75 15.20
2009
31.96 5.76 1.75 5.02
2010
32.69 6.01 1.75 1.03
2011
35.52 6.06 1.75 3.68
2012
33.76 6.87 1.75 4.89
2013
39.41 5.77 1.75 5.87
2014
38.58 5.79 1.75 13.99