CORPORATE GOVERNANCE AND FIRM PERFORMANCE:

THE CASE OF PAKISTAN

Abstract

Contemporary interest in corporate governance is related to extenuate the
conflicting interests of firm managers and firm owners, known as the agency problem.
Due to economic crisis around the world this area has received much attention from the
last three decades. The objective of this study is set to investigate that which corporate
governance mechanisms can mitigate the agency problem and resultantly improve the
firm performance in Pakistan. The robustness of results is also checked through various
identified models. The corporate governance mechanisms examined in this study include
insider shareholding, blockholding, institutional shareholding, board independence,
reliance on external labor market and use of debt. Results are based on 18-year data
(2004-2021) of 300 non-financial firms listed on the Pakistan Stock Exchange (PSX).
Due to endogeneity between governance mechanisms and firm performance relationships
were estimated through two-stage least square (2SLS) regression. Together, study found
that blockholding, institutional shareholding and use of debt are effective corporate
governance mechanisms in constraining agency problem and their presence enhances the
firm performance.
Keywords: Corporate governance mechanisms, Endogeneity, Firm Performance,
Pakistan Stock Exchange