There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

CHAPTER#1 INTRODUCTION

Background

Corporate Governance

The Corporate Governance is a structure on which firm practice its business inside the limits

recommended by the administrative body. This framework determines the strategies, run and

controls, rights and obligations among partners. These principles and methodology give the

direction to the organization to set their destinations and methods for achieving and checking them

(B. Jackling, 2009). As indicated by Berle and Means (the writer of the outstanding book on

corporate governance the proprietor of mechanical riches is left a unimportant image of

possession), presumes that the idea of Corporate Governance is only the unbelievable strain

between corporate administrators and its investors. At root, corporate affiliation is determined to

relate to on account of its endless contention on authenticity: the degree of likeness between what

the organization does and what the general public anticipates that the organization will do and this

is the reason partners wrangle on corporate governance closely. (Roche 2005).

Corporate Governance and its Importance

The concept of corporate governance is not new but its popularity can be seen in last few decades

due to diverse cataclysm, various fraudulent activities in the business world (Davies A. 2006).

Therefore, every country acquainted that good corporate governance is very much important or

indispensable for the productivity and effective development of economy. To get control over

external factors is flattering more problematic than before and therefore, corporate governance is

receiving eminence (Gillan, Stuart and Starks, Laura T, 2003).

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

While numerous individuals are sentient about corporate governance but few actually recognize

its importance for the progress and prosperity of an organization. Corporate governance is a

balance of supremacy between managers, shareholders and board (Malik F. 2006). It provides the

transparency with international requirements to shareholders that board and auditors are

independent. It not only protects the rights of the shareholders but also protect long term

premeditated aims of the firm. The significance does not restrain only till the protection of rights

and objective but it also ensures that the firm/corporation have careful management which can take

various important decisions which in return give the stability of stock prices (Solomon. 2005).

Corporate governance also confers keen interest towards the training of the directors, to what

extent there will be the involvement of stakeholders and also ensures the check and balances in the

organization i.e. market discipline, regulatory discipline and self-discipline (Fleisher, B. 2008).

Corporate Governance in Pakistan

For over 10 years, there is an emphasis on corporate legitimate duty and on its money related

revealing guidelines (Fulbright 2005). At first, partnership who needed themselves to be taking

care of business on corporate administration were urge to consent willfully on the corporate

administration sets of principles. Extra minutes, however, the consistent claim for corporate

answerability and clarity demonstrate the path to a fulfillment from a deliberate conviction of

corporate administration to one in which firms have an approved obligation to "go along or clarify"

(Khalid Ahmed 2004).

To implement transparency and principles of reporting and accountability, nationwide

governments have ratified a variety of legislation. Pakistan’s legislature delegated the task of

issuing the code of corporate governance to the Securities and Exchange Commission of Pakistan

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

(SECP), which endorses the rules for the corporations on which companies have to act upon (Code

of Corporate Governance 2002).

Introduction to Cement Industry

Cement industry is one of the massive and vital enterprises in Pakistan. This industry is having an

enormous impact in development of economy, to indorse the export and to decline the redundancy

from the nation by providing the ways to skilled and unskilled manpower. Pakistan is graded 5th

all over world’s cement export.

Cement market can be categorized into two dimensions

1. Product type

As cement requires perched infrastructure therefore utmost of the cement plants are situated near

rocky areas due to opulent in terra-cotta, iron, and inanimate capacity.

2. Geographic area

The geographic area doesn’t affect much due to flexibility of demand. For instance, if DG cement

in DG KHAN hoist its price and MAPLE LEAF CEMENT in Daud Khel will also raise its price

to match DG cement’s to have alliance in cement manufacturers in Pakistan. Thus the customer

will not be able to switch between two brands of cement.

Cement factories are enjoying their boom period due to commercial and manufacturing edifice

within Pakistan. Consumer’s facade problems in choosing the brands as of the formation of cartel

which led industry towards the strenuous notch of oligopoly, where businesses act as a particular

unit to create cartel.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Problem Statement

Globally we have seen that there have been many corporate collapses and financial crises in recent

years linked to a lack of effective corporate governance (Fakoya, 2017). After the frauds and

scandals of Taj Company, Crescent Bank, Pakistan Telecommunication Company of Pakistan

(PTCL), ENGRO Group of Companies, Mehran Bank. We are going to do the research on impact

of corporate governance on firm performance to prevent the effects of the uncertainty towards

future frauds and financial crises in cement sector of Pakistan. Overall the endorsement of

Corporate Governance principles has upgraded the organization by ensuring transparency &

accountability in reporting framework (Rais & Saeed, 2005)

Research Question

Whether Code of Corporate Governance has some influence constructive or destructive on the

company’s performance?

Research Objective

The focal of this research is to determine the relationship between corporate governance and firm

performance with means of board size (BOD), Audit committee (AC), and Board Meetings (BM).

Significance of the Study

This study will provide firms with the opportunity of knowing the benefits derivable in having

sophisticated corporate governance methods in place. The study will also provide the sense that, it

will add to existing system this subject, thus it becomes the basis for further research on areas not

roofed here or need improvement in any other dimension of this research boundary.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Scope of the Study

The scope of this study is to increase or decrease the enthusiasm regarding corporate governance

and get awareness whether the agency cost and other governance cost worth or not. And to improve

the corporate governance mechanisms if it shows the relationship amongst the dependent variables

to protect the rights and returns of the shareholders.

Limitations of the study

This study is limited in respect of variables, sectors and country as well. We have taken a limited

variables because of the time and convenience and also targeted only cement sector from Pakistan

stock exchange and the word Pakistan stock exchange explains itself that this research is limited

to Pakistan

CHAPTER# 2 LITERATURE REVIEW

Major Contributions in Corporate Governance

Corporate Governance has a key impact of the below reports which are the basis of corporate

governance

Cadbury Report (December 1992)

“The Report of the group on the monetary features of corporate governance”, similarly recognized

as Cadbury-report, was circulated in December 1992. After the financial disgraces in 1980’s, in

May 1991 the financial reporting councils the London stock exchange and the accountancy

profession created a board. The code of paramount exercise has been created in the corporate

governance monetary characteristics by that board, director remuneration, tenancy and

accountability was interrelated in the all UK listed companies.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Some of the endorsements were as follows.

The mainstream of Independent directors should be sovereign of administration and unrestricted

from business or other connection.

Independent directors must be selected for the definite rapports.

Managerial staffs recompense should be matter to the commendation of a recompense board made

up completely or primarily of non – executive directors.

Greenbury Report (1995)

After the Cadbury Report in 1992, Greenbury Report has been released by United Kingdom

Confederation of Business and Industry on corporate governance in 1995 results in creating the

code of Finest Practice on Director's Recompense to secure the interest of shareholders as well as

stakeholders and to stop the growing anxiety for shareholders and the public at huge particularly

for listed companies.

Hampel Report (1998)

Hampel report was the continuation of cadbury report and Greenbury report to judge that the code

laid down by the Cadbury report has achieved its goals or not because after Greenbury report in

1995, the board announced that the corporate governance has need to induct an additional

application to recognize the state of individual companies.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Hampel in 1998 identifies that there is no need of revolution in the UK goverance system because

he observed that the code is in the favor of shareholder wealth.

Combined Code (1998)

By organizing the endorsements of Cadbury, Hampel and Greenbury reports the combined code

has been formed. The combined code defined the tremendous treatment which was not mandatory

for companies to provide suitable evidence to the investors about its policies and practices.

Higg's Report

The Higg’s report was devoted in the direction of defining the character, freedom and recruitment

of independent directors. Higgs recognized Independent director’s part contributing to commercial

approach, set recompense of independent directors, observing the enactment of executive

managers. And suggested that one third 1/3 board must include of independent directors.

Essential Theories of Corporate Governance:

Theory on Agencies

Dissimilarity of opinions and perspective of shareholders (proprietors) of a company or a

corporation also denoted by “the principles” and the management or directors hired for the

succession of the association known as “the agent” arises the Agency Theory. Agency Theory says

that there is a huge dissimilarity in the objective of the principle and the agent, that’s the reason

they are disagree from the decision. (Johnson, Daily, & Ellstrand, 1996). There is a belief that if

the management experience the organization loss, which can be a smaller return on investment

because the shareholder or an agent is no managing the firm or a business directly. If the company

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

directly handled by the agent or a shareholder so the part of the yield or an income which they

could have had can be earned. Thus, agency theories propose monetary recompenses which can

support incentivize executives to make the most of the income of proprietors (Eise.nhardt, 1989).

In order to defend the benefits and profits of the principles or shareholders, a company from the

insight of agency theory tries to apply stringent mechanism, performance observations and

administration (Hillman & Dalziel, 2003). In other disputes, the board is vigorously intricate in

most of the managerial decision making procedures, and is answerable to the stockholders. A

nonprofitmaking board that functions through the lens of agency theories will demonstrate a

practical managing methodology on behalf of the shareholders.

Theory on Stewardship

Theory on Stewardship discuss that the proprietors and agents both parties share the mutual goals,

and the directors and executives of a company are the managers of the proprietor or shareholder

(Davis, Schoor.man, & Donaldson, 1997). Consequently, as advised in agency theories, the panel

or board would not be too observing. For increasing the potential of higher enactment, managers

and other executive should be authorized by the board sympathetic (Hendry, 2002 ; Shen, 2003).

Stewardship theories deal with the relations amongst board and directors that implicate

preparation, mentoring, and collective decision making (Shen, 2003; Sundar.amurthy & Lewis,

2003).

Theories on Resource-Dependence

Resource - dependence philosophies contend that a panel occurs as a supplier of resources to

leaders in edict to aid them succeed organizational objectives (Hillman , Ca.nnella , & Pa.etzo.ld,

2000; Hillman & Da.ziel, 2003). Resource-dependence th.eories endorse interferences by the

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

board while supporting for sturdy monetary, human, and intangible supports to the managers. For

instance, board associates who are specialists can use their knowledge to train and mentor

managers in a way that progresses org.anizational perform.ance. Board members can also hit into

their nets of sustenance to attract resources to the corporation. Resource-dependence theories

endorse that most of the assessments be made by directors with some authorization of the board.

Stakeholders Theories

Stakeholder theories are grounded on the hypothesis that stockholders are not the merely group

with a stake in a business or a company. Stakeholder theories contend that clients or customers,

contractors, and the immediate groups also have a stake in a company. They can be exaggerated

by the success or disappointment of a corporation. Consequently, executives have distinctive

responsibilities to guarantee that all stake.holders (not just the shareholders) obtain a fair return

from their stake in the corporation (Donald.son & Preston, 1995). Stakeholder theories support for

some form of corporate social responsibility, which is a responsibility to function in moral ways,

even if that means a reduction of long-term return for a corporation (Jones, Freeman, & Wicks,

2002). In that framework, the board has an obligation to be the guardian of the interests of all

stakeholders by confirming that company or organizational practices take into account the values

of sustainability for contiguous groups.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Corporate Governance and Firm Performance Empirical Evidences:

There are many studies has been done on the corporate governance mechanism variables impact

on firms profitability or performance across the world. Some relevant studies in some way has

been discussed below from different sector of different cities of different countries.

There is no relationship exists in board independence and firm performance (Cahit Yilmaz and Ali

Hakan Buyuklu 2016)….. In general, we may conclude that firms with more independent boards

do not perform better than other firms. On the other side, we found no relationship found in public

listed corporations between foreign ownership and other corporate governance variables. There is

no significance relationship between performance indicators and other corporate governance.

Asset mass is absolutely related to EBITDA (Earnings before interest, tax, depreciation and

amortization), PBV (price to book value), and relation between ROA is sometimes either be actual

or concrete. The direction cyphers of relations are all projected. The outcomes of the archetypal

show that the EBITDA of the companies is positively and considerably la-di-da by firm size which

is reliable with previous pragmatic works. Instead of this, upsurge in foreign ownership escalate

leverage.

Ece Oguz and Halide Hande Dincer (2016) This study shows us that implementation of virtuous

corporate governance expressively demonstratiing firm performances of tested corporations as

some p-values clearly provide the understanding and represent the general connotation of multiple

regression analysis (P-values; R.O.E.; 0.032, Tobin’s Q.; 0.0003, R.O.A.; 0.0046). Corporations

should understand from these investigations that successful corporate governance mechanism is a

considerable tool to achieve financial stability, betther financial performances and high market

value. Unfortunately, various previous investigations in the same field indicated that the firm’s

market value regarding return on equity and Tobin’s Q can be improved by increasing the board

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

size. Thus, the firms in Turkish should increase the number of board of directors in their

corporations in order to get more diversified ideas to increase or improved the firm financial

stability and other performances. Likewise, there is a most positively significance association and

meaningful in all capacities has been found between the board of director’s freedom and the

company’s performance. Thirdly, there is a significant relationship of all the financial tools and

the board committees which indicated that the small number of board committees is generating

less profit than the companies with large number of board committees. Lastly, it has been

investigate that the position of CEO and Chairperson of the board of directors should be detained

by different directors in order to protect the interests of shareholders and improve the firm’s

performance and value as there is a negative impact with all the measurements Esra Ahmed and

Allam Hamdan. (2015) there are two of Corporate Governance characteristics namely size and the

independency of board of directors were found to have a positive significant impact on ROE and

ROA. In ROE it is clearly showed a positive relation with company profitability with corporate

governance and manager’s property. However, ROE has a clear negative relationship with the

biggest shareholder ownership. Further the variables of corporate governance have not

significantly related to the variables of firm’s performance ROE and ROA. Performance measures

return on equity has a clear impact due from the company’s leverage. Further, it has been indicated

that there is a positive association between return on asset and total assets. Though, return on assets

having a negative association with financial leverage.

Dr. A. A. Azzez (2015) results on the listed companies of Sri Lanka reveled that size of board of

directors has negative association with firm profitability. It is possible through close monitoring

management that small board size are highly positively associated with the great firm profitability.

Furthermore, the result indicates a significant positive association of the separation of CEO and

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Chairman’s posts with the firm profitability. Though, there is no significant relationship of the

presence of non-executive directors on the board.

Amer “Mohammad. Jaser.”Qasim (2014) Investigation indicated that Government ownerships,

board size and Institutional ownership (The corporate governance measures) has a positive

association on firm’s performance. The Positive impact on Firm’s market prices and firm’s

profitability are the two dimensions of the said investigation results. Hence, the results of this

investigation indicate that company’s stock market prices are positively related to the strong

corporate governance mechanism. Also, company’s performance in terms of increasing

profitability can be manage by the strong corporate governance mechanisms. Overall the strong

corporate governance mechanisms are the most considerable tool for the betterment of company

performance.

The research study has been conducted by Sayla Siddique (2014) on the basis of 25 previous

studies to explore the impact on firm’s performance by corporate governance characteristics. In

the study author is concerning the effect of three particulars (I). Governance structure, (II). Legal

Organisms and (III). Accounting or market performance measures. Finally the findings indicated

that the market value of the performance of business which was measured by Tobin’s Q in the

market place and found that the ratio of market to book is the essential value of the said association.

There is a limited impact on the company’s financial performance and share prices by the corporate

governance. This result statement has been demonstrated by (Pooja, Gupta and Aarti Mehta

Sharma in 2014 after the investigation to determine the impact of corporate governance variables

on firm’s performance in the firms of South Korea and India.

One more investigation has been conducted in 2014 by S.Danoshana and T.Ravivathani to find the

impact of corporate governance on company performance in Sri Lanka’s 25 financial institutions

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

which were listed in Sri Lanka Stock Exchange for the sample period of 2008 – 2012. ROE (Return

on Equity) and ROA (Return on Assets) are the key variables which were used to investigate the

study with the belief that these variables can define business performance. The findings shows the

significance relationship in between business’s performance and corporate governance variables

in which the size of board of director and the size of audit committee having a positive effect on

business performance, but there is a negative relationship of business performance with board of

director meeting frequency.

A research on the association between national culture, corporate governance mechanism and firm

profitability has bee carried out by Dale Griffin , Omrane. Guedhami, Chuck C.Y. Kwok , Kai Li

and Liang Shao (2014) in 2014 in which the data for the period of 2006-2011 has been used of a

new database of governance metrics international measures of corporate governance practices

from large number of countries. In the said research, author found a bad or negative impact of

transparent disclosure and minority shareholder protection on financial system of a country

according to the stock market of the related countries.

Another research has been conducted on the connection of value and firm’s performance and the

corporate governance by Jackie Krafft , Yiping.Qu, Francesco Quatraro , and Jacques-Laurent

Ravix. (2013) . The investigation was based on mergers, which investigates how the US best

practices have been adopting by the systems of US Corporations. The research was based of

empirical analysis and it founds that the US Corporations are expressively adopting the best

practices of corporate governance.

Guo and Kumara (2012) in Sri Lanka carried out a research to investigate the effects on firm

performance by corporate governance. Listed firms from the stock exchange of Colombo were the

samples of that investigation. And they found the high association between the board of director’s

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

size and the firm’s value and outside director’s proportion on operating performance of the

corporations.

Fati Mohammed (2012) shows the results that there is a significant relation between corporate

governance and bank’s performance by conducting a research on the impact of corporate

governance mechanism on bank performance in Nigeria by taking sample of 9 Nigerian Banks for

the period of 2001 – 2010 (ten years). Further, Fati Mohammad. (2012) also revealed that the poor

quality of asset and loan deposit ratios have an adverse impact of corporation performance.

Definition and Dimensions of Key Variables:

Independent Variables

We have analyzed literature review and we are followed 3 main key variables that influential for

company performance

Board Size

According to the study in 2008, in the internal governance of a company, board of directors is

central institution. And also they provide crucial monitoring function in dealing with agency

problems which are defined by various authors in the firm. (Lefort and Urzua 2008). Setting up

the firm’s strategic goals, and achieve that goals effectively by providing the leadership,

management supervision of the business and report shareholders on their stewardship are the

responsibilities of board of Directors (Cadbury Report 1992). Board of Directors are an effective

internal control mechanism, and it is board of directors due to the problems in internal control

systems starts, because in the firm’s where board of directors are at the top of the internal control

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

system has the final accountability for operating in that firm. So, as many authors presented

explanations, board size may affect corporate performance directly (Jensen 1993). According to

the study of Sanders and Carpenter (1998), Complexity of firm’s environment can be affected by

board size. To improve the performance of the firm, they should keep their board small. And

further investigate that it is easy for the CEO to control if the board size gets beyond seven or eight

members because they are less likely to function effectively. (Jensen 2012). Another research has

been conducted with parallel view of thought by Yermack 2016 in which he investigate the

association between Tobins Q performance measures and the board size in US Corporations with

large sample and found the inverse association between the firm and the board size, where the

board size grows and financial ratios related to operating efficiency and profitability appear to

decline. Another investigations show the negative relationship between the board size and

company’s performance (Eisenberg, Sundgren, and Wells 1997 According to the above discussed

studies, we conclude that Board size can be one of the Independent variable in our Study and

relating to this variable we can comprehend the impact on dependent variable which is conferred

later. And it will be denoted by BOD in this study.

Board Meeting

In the code of corporate organization number from claiming official get-togethers need aid

expressed, the greater part of researchers get BOD meet. Similarly as self-sufficient variable on

their survey paper(Saad, 2010) Similarly as for every as much review, there will be a paramount

association between get-togethers of the load up Furthermore debt Ratio, debt to equity Ratio,

interest Coverage, On similar to way (Tahir, 2015)specifies that get-togethers of the load up need

an inverse companionship for execution of an association. How usually gathering held On

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

association it might a chance to be inside the association and nation, might be out about country

or organization, conventionally four chance held for an entire year, that relies on four fourth about

cash related quite a while yet it may be not limited it will be movement association to association

in any case rather association ought define that On their yearly report card.

According to the above discussed studies, we conclude that Board Meetings can be one of the

Independent variable in our Study and relating to this variable we can comprehend the impact on

dependent variable which is conferred later. And it will be denoted by BM in this study.

Audit Committee

The main functions of audit committee is to regularly review internal audit control, audit processes

and financial statement in collaboration of auditor either internal of external. And this function

clearly contributes to the information manipulation and agency cost reduction by disclose the

accurate information of verified accounts timely to the shareholders. (Klein 1998). By monitoring

of audit committee the chances of fraud in financials are being minimized which results in the

confidence of investors and the firm’s value (Klein, 1998), further it minimizing the agency

problem to the shareholders. To examine the functions like audit plans and to found some negative

behaviors and mistakes, it is essential for audit committee to understand the internal control

evaluation process clearly. (Caplan, 1999; DeZoort, 1998).

According to the above discussed studies, we conclude that Board Meetings can be one of the

Independent variable in our Study and relating to this variable we can comprehend the impact on

dependent variable which is conferred later. And it will be denoted by AC in this study.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Dependent Variables

After selection of independent variable and we have analyzed from literature review and from our

knowledge and from experience we are following 5 main key variables that help to measure

company’s performance.

Return on Assets

ROA reveals to how with convincing organization will be devour its assets for make benefit. Profit

for stakes is a way pointer about how gainful an association camwood be accomplishes its

objectives viably. With analyze about ROA for find the firm completing, ROA aides should figure

an establishment's yearly wage through will be helpful stakes. (Humera' Khatab, 2011) those

conclusions express that centered Also development bring a regulate relationship with firm

exhibitions and ROA outcomes suppose that those associations taking over the top management

execute fine when divergence with the firm Hosting no or lesquerella corporate organization

hones. Use bring down over expressed count on characterize the ROA of a corporate What's more

they get ROA Concerning illustration An subordinate variable (Nadeem Ahmed Sheikh, 2011) the

table gauge decidedly, revelation about their contemplate will be outer Head Also manageress

proprietorship recognized with ROA (Amba, 2011) ROA will be a standout amongst the

components about business heading effect on the variable for firm usage.

According to the above discussed studies, we conclude that Return on Assets can be one of the

Dependent variable in our Study. And it will be denoted by ROA in this study.

Ho: ROA is not directly related with Board Size, Board Meeting and Audit Committee. Ha: ROA

is directly related with Board Size, Board Meeting and Audit Committee.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Return on Equity

Return on Equity may be a yield that what amount of benefit from claiming association earned for

each. Shareholder. The roe mathematical statement said The following use beneath, (Humera

Khatab, 2011) point by point method on find ROE, that indicates firm usage from claiming firm

in the after-effects about investigation finish which development need inversed shaky impact for

ROE. The all results demonstrate that those associations presenting corporate organization perform

great Likewise contrasted with the individuals who bring no or less corporate practices.

According to the above discussed studies, we conclude that Return on Equity can be one of the

Dependent variable in our Study. And it will be denoted by ROE in this study.

Ho: ROE is not directly related with Board Size, Board Meeting and Audit Committee.

Ha: ROE is directly related with Board Size, Board Meeting and Audit Committee.

Earnings per Share

Earnings per share EPS is a profit division for all equity shareholders who has bought or purchased

ordinary shares. And most of the investors point of views EPS is the measure of firms performance

also it is commonly used as a base to analyze company’s performance or profitability. EPS and

net profit has been used around 85% - 90% to measure the accounting data. Besides, EPS can be

calculate by dividing company’s total earnings into ordinary shareholders. Although, it indicated

the potential income or return on each shareholder’s funds by comparing the same EPS with the

bench mark which can be industrial average, any other company EPS etc.

According to the above discussed studies, we conclude that Earnings per share can be one of the

Dependent variable in our Study. And it will be denoted by EPS in this study.

Ho: EPS is not directly related with Board Size, Board Meeting and Audit Committee.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Ha: EPS is directly related with Board Size, Board Meeting and Audit Committee.

Debt to Equity Ratio

Book Value or Market Value can be used to calculate Debt-to-equity ratios. In this this study we

have used and preferred financial leverage by book value in the balance sheet of particular

companies of Cement sector or State Bank of Pakistan Statistics. By the net off between the cost

and benefits of debt financing in the capital structure of a company an optimal level of financial

leverage can be determine. In the book “Value of Debt” is stated that it is a fact that the tax shield

is prime and major benefit of financial leverage. Furthermore, Use of total debt or long term debt,

both are allowed to calculate debt to equity ratio. In this study we have used the total debt to equity

ratios even after knows that long term debt to equity ratio is better option, because it is fairly

prevalent in Pakistan to use short term financing more than the tenure of long term financing needs.

According to the above discussed studies, we conclude that Debt to Equity Ratio can be one of the

Dependent variable in our Study. And it will be denoted by DERATIO in this study.

Ho: DERATIO is not directly related with Board Size, Board Meeting and Audit Committee.

Conceptual Framework

Where;

Dependent Variables:

Return on Asset = ROA

Return on Equity = ROE

Earnings per Share = EPS

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Debt to Equity Ratio = DERATIO

Independent Variables:

Board Size = BOD

Board Meetings = BM

Audit Committee = AC

CHAPTER# 3 METHODOLOGY

Research Design:

We use descriptive research design with deductive approach to understand the relationship

between corporate governance and performance of firm. We have been used dependent variable –

ROE, ROA, D/E ratio and EPS and independent variable – BOD, BM, and AC. The data has been

collected from the companies listed in Pakistan Stock exchange from 2004 to 2017. The data of

this period is being selected because to seek the effect of Rules and regulation imposed on the

firms by SECP. The Sample size of the data is 17 companies and total sample of fourteen years of

observation is 238.

The Data has been investigated in Eviews 9 Statistical Software in which Ordinary Least square

(OLS) Linear and multiple regressions has been used to investigate the associations between

independent variables on dependent variable. Multiple Regressions is used to determine the

relationship between more than one independent variables on dependent variables. (Zainodin et

al., 2011).

For the 238 observations Panel unit root test has been run on every variable either dependent or

independent to find out the stationary of the data. After determining the stationary of data, pooled

estimation equation has been run to determine the significance of the research variables along with

model into Random effect model and fixed effect model by Ordinary least Square (OLS) multiple

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Regressions. And then we run Hausman test to check the best fitted model either random or fixed.

There was a test which has been developed by Hausman in 1978 in which he clinch, if the null

hypothesis is rejected means the probability of Chi-Square (χ2) is less than the significance level

i.e 0.05 so the FEM (Fixed effect model) can be used better. (Chapter Sixteen, Panel Data

Regression, Damodar N. Gujarati, Basic Economics, fourth edition).

Test To Be Performed:

Panel Unit Root Test: Unit Root test is run to find the stationary of data to eliminate the time

series outliers.

Ordinary Least Square (OLS) Regression: Ordinary Least Square (OLS) Regression test shows

the relationship between dependent and independent variables.

a. Fixed Effect Model: Fixed Model is considered one of the most prominent to in statistic that

assist to signify the unit in expression in descriptive variables that are examined as if the units are

non-random. Fixed effect model allows the interpretations in the regression model to distinguish

between the characters to replicate the unfamiliar features of separate components. The fixed asset

estimator also recognized as within estimator and that is used to an estimate for the coefficient in

the regression model. For this model time independent effect for each objects that are feasibly

correlated with the repressors. The fixed effects are always reliable.

b. Random Effect Model: Random effect model is also recognized as variance components

model. It is a type of hierarchical linear model. It presumed that the data being analyzed is

illustrated from the hierarchical of the diverse populace. Random effect model widely applied from

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

panel records. The random model is also identified as error component model. It is only dependable

if the accurate model is combined but if the fixed model is not combined, the random effect

estimators are unpredictable.

c. Durbin-Watson Test: To check the autocorrelation or multi-correlation, Durbin-Watson model

is being used. Where the value of Durbin-Watson is 2, it shows that there is no auto-correlation.

And when the value go “+” and “–”, negative and

positive autocorrelation is assumed. Hence, the prediction cannot be made on such autocorrelation.

Hausman Test 1978:

There was a test which has been developed by hausman in 1978 in which he clinch, if the null

hypothesis is rejected means the probability of Chi-Square (χ2) is less than the significance level

i.e 0.05 so the FEM (Fixed effect model) can be used better. (Chapter Sixteen, Panel Data

Regression, Damodar N. Gujarati, Basic Economics, fourth edition).

Data Collection Method:

Secondary Data has been used in this research as all the data of Dependent Variables includes

Return on Asset (ROA), Return on Equity (ROE), Earnings per Share (EPS), Debt to Equity Ratios

and Independent Variables includes Board Size (BS), Board Meeting (BM) and Audit Committee

(AC) has been selected from Annual Reports published by listed Companies of Pakistan Stock

Exchange (PSX) and from state bank of Pakistan statistics. Fourteen years data from 2004 – 2017

22
There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

of seventeen out of twenty one corporations from cement sector have been composed on the basis

of convenience of required ratios for the time period of last fourteen years.

Definition of Variable and their proxies are as follows.

Variables Proxies

Return on Asset Return on Asset Ratio

Return on Equity Return on Equity Ratio

Earnings per share Earnings divided by Weighted average no.

of outstanding Shares.

Debt to Equity Ratio Debt divided by Equity.

Board Meetings Total number of meetings held in financial

year.

Board Size Total number of Board of Directors.

Audit Committee Number of Committee Member

Population or Sample

The more the sample data can be broad and descriptive of the population; the sampling error will

be decreased. (Bryman and Bell, 2011). There are 21 corporations in PSE functioning in public.

Seventeen companies out of Twenty one corporations have been selected through systematic

sampling. The basis of corporate selection is on convenience sampling Gathering of data of

Seventeen companies was challenging because most of data was not available. Fourteen years

23
There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

board data is available only of seventeen companies. Our sample is date of 17 firms, for which

fourteen years data have been composed. Two hundred and thirty eight observations of

individually variable have been measured from composed data. The businesses that are

encompassed in my sample are following

1. Attock-Cement-Ltd, 2. Bestway-Cement-Ltd, 3. Cherat-Cement-Ltd, 4. Dadabhoy Cement 5.

D.G.K-Cement-Ltd, 6. Dandot-Cement-Ltd 7. Fauji-Cement-Ltd, 8. Fecto-Cement-Ltd, 9. Flying-

Cement-Ltd, 10. Gharibwala-Cement-Ltd, 11. Javedaan-Cement-Ltd, 12. Kohat-Cement-Ltd, 13.

Lucky-Cement-Ltd, 14. Maple-Leaf-Cement-Ltd, 15. Pioneer-Cement-Ltd, 16. Power-Cement-

Ltd, 17. Thatta-Cement-Ltd.

Hypothesis:

Ho1: ROA is not directly related with Board Size, Board Meeting and Audit Committee.

Ha1: ROA is directly related with Board Size, Board Meeting and Audit Committee.

Ho2: ROE is not directly related with Board Size, Board Meeting and Audit Committee.

Ha2: ROE is directly related with Board Size, Board Meeting and Audit Committee.

Ho3: EPS is not directly related with Board Size, Board Meeting and Audit Committee.

Ha3: EPS is directly related with Board Size, Board Meeting and Audit Committee.

Ho4: D/E Ratio is not directly related with Board Size, Board Meeting and Audit Committee.

Ha4: D/E Ratio is directly related with Board Size, Board Meeting and Audit Committee.

Ho5: ROA, ROE, EPS and D/E Ratio is not directly related with Board Size, Board Meeting and

Audit Committee.

Ha5: ROA, ROE, EPS and D/E Ratio is directly related with Board Size, Board Meeting and Audit

Committee.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

CHAPTER# 4 DATA ANALYSIS

Panel Unit Root Test

The Unit root test is used to check the stationary whether the data can reject the null hypothesis or

not. The Unit Root Test has been run on all variables dependent and independent to check the

stationary of the data. And it is observed that all the variables are strong enough to reject the null

hypothesis. Following are the panel unit test we have run. The method which has been choose as

standard is PP - Fisher Chi-square on the basis of convenience.

Above is the unit root test result of all variables which show the Stationary of 0.0000 which is

strong enough to reject null hypothesis and shows an association with autonomous variables. And

if the probability was more than 0.0500, then the unit root test on first and second difference should

be run and then invalid speculation has to be reject.

Then we have run unit root test of ROE which probability was 0.0006 (less than significant level)

was again showed an association with autonomous variables.

After that the remaining dependent variables EPS and DERATIO has been go through from Panel

Unit root test which was also stationary as the probability for both the variables 0.0000 was less

than significance level 0.0500 and shows a positive association with autonomous variables.

Then we have also run Panel Unit root test on the independent variables Board Size, Board

Meetings and Audit Committees which was also less than significance level 0.05 and rejecting the

null hypothesis.

Every Variable either dependent or independent was tested by Panel Unit Root Test on Level. No

variable has been tested on first or second difference and every variable has a probability less than

25
There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

significance level and rejecting the null hypothesis which shows an association(s) between

autonomous variables.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

Analysis of Hypothesis:

The analysis of the above said hypothesizes are as follows in Table 7.

Hypothesis Analysis

27
There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

CHAPTER# 5 CONCLUSION AND DISCUSSION

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

5.1 Conclusion:

The purpose of this research was to determine the effects of corporate governance mechanisms on

the performance of the firm, we took some variables as proxies and test them by Ordinary Least

Square (OLS) Multi-Regression method and the overall findings of this study have a significant

relationship in between corporate governance and firm’s performances. Board Meetings (BM) and

Board of director’s size (BOD) are significantly related to the dependent variables Return on Asset

(ROA), Returns on Equity (ROE), Earnings per Share (EPS) and Debt to Equity Ratio

(DERATIO). While Audit Committee (AC) having no significant relationship to the said

dependent variables.

Further, the investigations we found from different model equitation are that the ROA and ROE

have significant relationship with BOD and BM. Though, ROA and ROE is not significantly

related to AC. But EPS and DERATIO has the opposite relationships among the ROA and ROE

like EPS and DERATIO is significantly related to AC. While EPS and DERATIO has no

relationship with BOD and BM.

Further, the findings of this research is tend to support the investigations of Zelluda Shamsuddin

(2007), Bernard S. Black, Woocha n Kim, Hausing Jang, Kyung Suh park (2008), Parveen P.

Gupta, Duane B. Kennedy, Samuel C weaver (2009), Laib. A Dar, Muhammad Akrami, Naseem

Rameez-ur-Rehman, Dr. GSK Niazi (2011), Guo and Kumara (2012), Fati Mohammed (2012),

Amer “Mohammad. Jaser.”Qasim (2014), S.Danoshana and T.Ravivathani (2014), Esra Ahmed

and Allam Hamdan. (2015), Ece Oguz and Halide Hande Dincer (2016) in some manner. Impact

of Code of Corporate Governance on Firm’s Performance: A Study on Listed Companies of

Cement Sector in Pakistan Stock Exchange.

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There is a Lack of Relationship between Corporate Governance and Firm's Performance in The Cement Sector of Pakistan

5.2 Future Recommendations:

Future study should add other variables as discussed in research gap that we have taken limited

variable due to time constraints, so CEO Tenure, Board Composition, CEO Duality, and Director’s

Status and others should include in their research in different sectors from different countries in

order to fulfil the research gap of this study.

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