Corporate Governance And Financial Performance: A Comparative Study Of Developing And Developed Markets


This study has been conducted to compare the impact of corporate governance on various areas of performance between the USA (developed economy) and Pakistan (developing economy). Areas tested in this study are the dividend policy, capital structure, internal and external performance, and multifactor model of publicly traded companies in Pakistan. A specially constructed CG Scorecard and individual corporate governance factors have been used as the measures of corporate governance for the Pakistani perspective and the corporate governance index has been used for the analysis in USA. The Corporate Governance Scorecard has been developed on the basis of a literature review and by a survey of CEO’s, COO’s, and company secretaries of various listed companies in Pakistan. Dividend policy is measured by using the payout ratio and Lintner’s (1956) Model. A total of 120 listed companies in Pakistan and 1,035 listed companies in the USA have been investigated to analyze the relationship for the period 2002 to 2007. This study also analyzes separate proxies of corporate governance. In Pakistan the study found positive relationships between managerial ownership, institutional ownership, and CEO duality with dividend payout. We also found a positive relationship between the Corporate Governance Score and dividend payout. The same relationship has been found in the USA. Using Lintner’s Model, the study also found that companies with good governance have higher payout ratios. Descriptive statistics, the correlation matrix, and common effect models have been applied to test the panel data. For capital structure, the study found a negative relationship between leverage and CGI in Pakistan. Managerial ownership has been found positively associated with gearing ratio in both cases. It has also been found that the presence of CEO duality leads to more debt in capital structures. This may be due to the transitional phase through which the Pakistani companies passed after the promulgation of codes of corporate governance in 2002, but in the USA the study found positive relationships between leverage and corporate governance.

Internal and external performance were measured in both of the countries by taking ROE and ROA as internal performance measures and Tobin’s Q and Marris (Market to book value of equity) as external performance measures. Common Effect, Fixed Effect, Random Effect, and Fuller and Parks Effect have been used to test the panel data in this regard. In both the case of v Pakistan and the USA, the study found a positive relationship between the Corporate Governance Score and the performance measures.

The study also tested the Fama and French (1973) three factor model, the Carhart (1997) four factor model, and the CGI contained fifth factor model for the sample companies in Pakistan. The study found significant effects for all variables on stock returns.

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