Impact of Corporate Governance Code on Firm Performance A Comparative Analysis of Pakistan and Malaysia By Yasir Bin Tariq A research thesis submitted to the Department of Management & Social Sciences, Mohammad Ali Jinnah University, Islamabad in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES (FINANCE) DEPARTMENT OF MANAGEMENT & SOCIAL SCIENCES MOHAMMAD ALI JINNAH UNIVERSITY ISLAMABAD JUNE 2014 Impact of Corporate Governance Code on Firm Performance A Comparative Analysis of Pakistan and Malaysia By Yasir Bin Tariq A research thesis submitted to the Department of Management & Social Sciences, Mohammad Ali Jinnah University, Islamabad in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES (FINANCE) DEPARTMENT OF MANAGEMENT & SOCIAL SCIENCES MOHAMMAD ALI JINNAH UNIVERSITY ISLAMABAD JUNE 2014 i Copyright © 2014 by Yasir Bin Tariq All rights reserved. No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopy, recording or by any information storage and retrieval system without the permission from the author. iii Research Publications/ Acceptance 1. Compliance and Multidimensional Firm performance: Evaluating the Efficacy of Rule- Based Code of Corporate Governance. Accepted for publication in Economic Modelling (2013) (Published by ELSEVIER: impact factor 0.557) 2. Corporate Governance in financial sector companies of Pakistan: Current state and room for improvement published in World Applied Sciences Journal Vol. 21 No. 1 (2013), an ISI indexed Journal 3. Use or abuse of creative accounting techniques published in the International Journal of Trade, Economics and Finance, Vol. 2, No. 6, December 2011 4. Determinants of Capital Structure: A case for Pakistani cement industry, published in The Lahore Journal of Economics, Vol. 11 No. 11 (2006) Conference Publications 1. Impact of Corporate Governance Practices on Financial Performance: Empirical Evidence from Pakistan: Paper presented at 8th Annual Hawaii International Conference on Business, May 22-25, 200, held in Honolulu, Hawaii, USA vi DEDICATED TO (ﺻل ﷲ ﻋﻠﯾہ وﺳﻠم) PROPHET MOHAMMAD THE GREATEST SOCIAL REFORMER viii TABLE OF CONTENTS Table of Contents………...……………………………………………………………………………………………..…………………..vii List of Tables…………………………………………………………………………………………………………………………………….xii List of Abbreviations………………………………………………………………..………………………………………………………xiv Acknowledgement…………………………………………………………………...………………………………………….……….….xv Abstract…………………………………………………………………………………...………………………………………….………….xvi 1 INTRODUCTION ........................................................................................................................ 1 1.1 Background, Motivation and Statement of the Problem ............................................................ 3 1.2 Research Questions .................................................................................................................... 7 1.3 Objectives of the Study .............................................................................................................. 7 1.4 Significance and Justification of the Study ................................................................................ 8 1.5 Contributions of the Study ....................................................................................................... 10 1.6 Limitations of the Study........................................................................................................... 10 1.7 Outline of the Study ................................................................................................................. 12 2 LITERATURE REVIEW .......................................................................................................... 13 2.1 Defining Corporate Governance .............................................................................................. 13 2.2 Overview of the Pakistani Capital Market ............................................................................... 15 2.2.1 Karachi Stock Exchange (KSE) ....................................................................................................... 16 2.2.2 Lahore Stock Exchange (LSE) ......................................................................................................... 17 2.2.3 Islamabad Stock Exchange (ISE).................................................................................................... 17 2.2.4 SECP Code of Corporate Governance ............................................................................................ 18 2.3 Overview of Malaysian Capital Market ................................................................................... 18 2.4 Theories of Corporate Governance .......................................................................................... 19 2.4.1 Agency Theory............................................................................................................................... 20 2.4.2 Information Asymmetry and Managerial Signaling Theory .......................................................... 23 2.4.3 Institutional Theory ....................................................................................................................... 24 2.4.4 Stewardship Theory ...................................................................................................................... 26 2.4.5 Resource Dependency Theory ....................................................................................................... 27 2.4.6 Stakeholder Theory ....................................................................................................................... 27 2.4.7 Convergence Theory...................................................................................................................... 28 2.5 Corporate Governance Codes .................................................................................................. 29 2.6 Systems of Corporate Governance ........................................................................................... 31 2.7 Corporate Governance Compliance and Financial Performance ............................................. 33 2.7.1 Extent of Compliance with Codes of Good Governance & Disclosure ........................................... 34 2.7.2 Compliance with Codes and Corporate Behavior .......................................................................... 37 2.7.3 Compliance with Codes and Financial Performance ..................................................................... 38 2.8 Corporate Governance and Financial Performance ................................................................. 43 2.8.1 Governance Indices based Governance-Performance Studies ...................................................... 43 2.8.2 Corporate Governance and Firm’s Efficiency ................................................................................ 49 i 2.8.3 Internal Corporate Governance Mechanisms and Firm Performance........................................... 50 2.9 Firm Specific Control Variables .............................................................................................. 59 3 RESEARCH DESIGN & METHODOLOGY ......................................................................... 61 3.1 Population ................................................................................................................................ 61 3.2 Sample ..................................................................................................................................... 61 3.3 Study Period ............................................................................................................................. 61 3.4 Data Collection Methods ......................................................................................................... 62 3.5 Corporate Governance Compliance Index for Pakistan ........................................................... 63 3.5.1 Compliance Index Development Process ....................................................................................... 64 3.5.2 Measurement and Scoring Criteria ............................................................................................... 65 3.6 Corporate Governance Compliance Index for Malaysia .......................................................... 65 3.6.1 Measurements & Scoring Criteria ................................................................................................. 66 3.7 Measuring Firm’s Efficiency using Non-Parametric Data Envelopment Analysis ................. 66 3.7.1 Data Envelopment Analysis .......................................................................................................... 66 3.7.2 CCR Model (Global Technical Efficiency) ....................................................................................... 68 3.7.3 BCC Model (Local Pure Technical Efficiency) ................................................................................. 68 3.7.4 Scale Efficiency .............................................................................................................................. 69 3.7.5 DEA Inputs & Outputs ................................................................................................................... 69 3.7.6 Reasons for Using Firm’s Efficiency as a Measure of Performance .............................................