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Abstract
Good corporate governance instills investors' trust in the financial market. Good governance creates goodwill, enhances firm financial performance but if the companies are governed poorly then they lose confidence of each stakeholder due to suboptimal financial performance. The main objective of this research study is to analyze the impact of corporate governance on financial performance of cement sector firms on the Pakistan Stock Exchange (PSX). For accomplishment of research objective, 20 cement sectors firms listed on the PSX, Pakistan, constituting 83% of the entire cement industry was used from year 2005 to 2014. Hypotheses were tested using correlation and regression analysis. Corporate governance is measured through the fraction of insider directors, institutional shareholdings and board independence. Whereas, return on assets and return on equity is used to measure financial performance. The findings reveal that corporate governance positively effects financial performance. This study not only contributes to understanding the effect and relationship between corporate governance and financial performance but at the same time proves the results of earlier research work that have shown a significant effect and relationship between corporate governance and financial performance.
Key words: Corporate Governance, Financial Performance, Pakistan Stock Exchange
1.Introduction
Corporate governance is one of the key areas of business which enhances the courage of investors and allow for protecting their interest. The significance of corporate governance is realized by the investors, corporations and governments for competing domestically and internationally (Owen, 2003). In academic researches, corporate governance has got great concentration in developed and developing countries (Mallin, 2004; Reed, 2002; Solomon & Solomon, 2004; Weir & Laing, 2001). A need was felt for sound corporate governance practices especially in developing countries due to financial scandals in past (Baydoun, Maguire, Ryan & Willett, 2013). Great consideration has been devoted to corporate governance in under-developed economies as many of these lacks appropriate corporate governance practices (Ekanayake, Perera & Perera, 2010).
Corporate governance is important for economic development of Pakistan as it plays a key role in economic growth of a country. The Securities and Exchange Commission of Pakistan (SECP) has centered its regulatory measures in promoting investors confidence to uphold sound corporate governance to make sure transparency and accountability in the corporate sector and protect all stakeholders particularly minority stakeholders. Code of...