Impact of Corporate Governance Code on Firm Performance: A Comparative Analysis of Pakistan Malaysia.


A series of high profile corporate collapses in the West due to fraud and inadequate system of check and balances, and 1997’s East Asian financial crises brought the issue of governance in the corporate form of business in the spotlight. Governments around the globe have started adopting and implementing codes of good governance based on recommendations by international forums, and organization like OECD, IFC etc. The de-facto realities of the corporate environment in Pakistan and Malaysia are in contrast to what is promulgated by their respective codes of corporate governance. In this context, this study investigates the effectiveness of code of corporate governance in Pakistan and Malaysia (introduced in 2000 and 2002 respectively) by exploring the relationship between the extent of compliance and multi-dimensional performance of publicly listed firms.

This study collected and analyzed data of 119 publicly listed firms from Pakistan and 100 firms from Malaysia over the period of eight years i.e. 2003 to 2010. The aim is to investigate the impact of compliance with code of corporate governance on firms’ financial performance and efficiency. The extent of compliance is measured through a custom built compliance index for Pakistan and Malaysia. This study uses ROA, ROE, ROCE and EPS to measure the financial performance and DEA efficiency scores for measuring technical and related efficiency for firms under investigation.

The compliance statistics showed that on an overall basis the level of compliance had increased over the period of eight years. The econometric analysis provides positive support for the compliance-performance hypothesis in the case of Pakistan and no support in case of Malaysia. In case of Pakistan CGCI is found to be positively related with ROA, ROE and ROCE. This study also finds that CGCI positively impacts technical efficiency. Further investigation exploring the weak impact reveals that high compliant firms, opposite to the expectations, are less profitable than average and low compliant firms. This could be attributed to the possible negative effect of high level of mandatory compliance, i.e. beyond a certain threshold, the mandatory compliance negatively impacts firm’s performance. However, in the case of Malaysia, although there is no relationship between compliance and performance, the evidence suggests that high compliant firms are more profitable than
average or low compliant firms.

To control the potential omitted variable bias and to isolate the impact of compliance on firms’ performance, this study uses ownership structure, ownership concentration, institutional shareholding, foreign shareholding, board size, CEO-Chairman duality, firm size, age, growth and dividend per share as control variables. It is found that firm size and DPS are positively related, whereas, firms’ age and leverage are negatively related with financial performance. In DEA efficiency performance models, foreign shareholding is significantly related with efficiency measures.

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