The impact of corporate governance compliance and capital structure on firm performance: Evidence from Pakistan

Author Identifiers

Irfan Haider Shakri
ORCID: 0000-0001-9967-1100

Date of Award


Degree Type


Degree Name

Doctor of Philosophy


School of Business & Law

First Advisor

Dr Jaime Yong

Second Advisor

Dr Erwei Xiang


Background: Over the past decades corporate governance (CG) has emerged in importance for academics and practitioners in terms of its determinants and its impact on several firm level attributes. However, the importance of the issue has yet to be advocated in emerging markets where capital markets are still evolving, and the rights of shareholders are less protected. Pakistan is no exception to this scenario, where the capital market is yet to mature, CG practices are only recently widely adopted and regulatory CG guidelines on compliance are relatively new and developing.

Purpose: Code of Corporate Governance of Pakistan (CCGP) for listed companies was first issued in 2002 by the Securities and Exchange Commission of Pakistan (SECP) and was further revised in 2012, which provide a sound context in which the impact of corporate governance compliance can be examined. The purpose of this thesis is to measure CG compliance in accordance with the guidelines devised by SECP and its relationship with capital structure (CS) and firm performance (FP) of non-financial companies listed at Pakistan Stock Exchange (PSX) during 2008 – 2018. It also tests for the impact of revisions made in 2012 in the SECP guidelines.

Method: The literature has examined CG from two perspectives: the first being a measure of individual characteristics of CG and the second a complete mechanism. This thesis uses the term formative for the former and summative for the latter. The formative measures of CG discussed in thesis are ‘board size’, ‘board independence’, ‘CEO duality’, ‘audit committee size’, ‘managerial ownership’ and ‘ownership concentration’. For the summative measures of corporate governance, this thesis uses CG guidelines issued by the SECP to construct two compliance indices using two different methodologies, namely, weighted and unweighted indices. For this purpose, the data was collected manually from published annual reports of all the non-financial companies listed at the PSX during the sample period (2008–2018). System generalised method of moments (SGMM) was used to analyse the relationship and to control for econometric issues, especially endogeneity bias.

Findings: The results of the summative measure – that is, the CG compliance index (CGCI) – demonstrated improved firm performance of the non-financial listed companies of Pakistan. Among the formative measures, ‘board size’ was positively associated with accounting-based performance and negatively associated with market-based performance. These results are reverted for board independence. ‘Managerial ownership’ tended to reduce the overall performance of firms. ‘CEO duality’ and ‘ownership concertation’ showed a positive relation to firm performance in Pakistan. No conclusive results were found for the size of the audit committee. Meanwhile, the summative measure of CG tended to reduce the extent of external debt in Pakistan during the sample period. All formative measures of CG showed a positive association with capital structure variables, except ‘audit committee size’. Interestingly, the revision of the code in 2012 did not significantly improve firm performance; moreover, no impact of revision was observed on choice of capital in the non-financial sector of Pakistan. Capital structure strongly mediated the association of CG and firm performance.

Contributions: Primary contribution of this thesis is the construction of two different compliance indices for Pakistan listed non-financial companies. The two indices are constructed using weighted and unweighted methodologies for more robust results and accuracy. Another contribution to the literature is the econometric analysis using SGMM to control for potential endogeneity. Furthermore, most of the prior studies have used short-term and long-term debt ratios for the analysis of capital structure and Tobin’s Q, ROA and ROE for the analysis of firm performance. This thesis uses the ‘degree of financial leverage (DFL)’ and ‘share return (SR)’ as additional proxies for capital structure and firm performance, for robustness. This thesis uses both formative and summative measures of CG both at market and sector levels to highlight the sectors that are more compliant to the CG guidelines. Furthermore, this thesis contributes to the limited literature on the impact of revisions made by SECP in CG guidelines after 2012. This thesis also contributes to the existing literature on the inter-relationship between CG compliance, capital structure and firm performance in Pakistan context.

Implications: The findings of this thesis provide support for policymakers, practitioners and academicians by explaining the importance of CG in maximizing firm performance. In a developing economy like Pakistan, CG has an important role to play for the success of capital markets. Policymakers may need to formulate further to benefit all the stakeholders. Academicians and researcher may use the given framework and approach of this thesis to conduct a similar or multi-country study to examine the impact of CG compliance on capital structure and firm performance using data from the developing economies of the South Asian region.

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