Impact of Corporate Governance Quality on Financing Decisions and Profitability

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Velnampy and Niresh(2012) in their study “The relationship between capital structure & profitability” evaluated the relationship between dependent and independent variables. Researchers took the sample of 10 listed banks in Srilanka. The correlation analysis was used. The researchers found that capital structure decisions are important decisions since it influenced the firm’s profitability. The study found that corporate governance quality played an important role to influence firm’s capital structure decision and profitability. With the high quality corporate governance firm profitability increases and capital structure decisions were effected considerably.

Ganiyu and Aboidun (2012) in their study “ The impact of corporate governance quality on capital structure decision of Nigerian firm” investigated the relationship between corporate governance quality and capital structure decision of the firm.. Researchers took the sample of 10 firms from food and beverages sector. The study used the panel data analysis. Corporate governance quality was measured with CEO duality, Audit committee, board size, board Independence. The results found that corporate governance quality had significant impact on firms financing decision.

Coleman (2007) in their study “Corporate governance quality and firm performance in Africa: A dynamic panel data analysis” evaluated the relationship between corporate governance quality and firm performance. The sample of 103 firms was selected from Ghana, South Africa, Nigeria, and Kenya Ordinary least square analysis technique was used. The results found that corporate governance quality (CEO duality, independent audit committee and board size) had positive influence on a firm’s profitability and performance.

Srivastava (2011) in their study “ownership structure and corporate performance: Evidence from India” investigated the relationship between corporate governance quality and firm performance. The sample of 98 listed companies was selected from Bombay stock exchange of India. Researcher used the regression analysis technique. Corporate governance quality was measured with (ownership concentration, board size). Profitability was measured with return on asset, current ratio and EPS. The researchers found that corporate governance quality had positive influence on profitability

Rehman and Hussain (2013) in their study “Impact of corporate governance quality on overall firm performance” hypothesized that high quality corporate governance has very important impact on firm’s performance and profitability. The sample of 102 financial firms was selected. The pilot testing technique was used to test the hypothesis. Questionnaire was developed to collect the data. Corporate governance quality was measured with independent directors, board size. Profitability was measured with stock market performance and return on asset. The results found that corporate governance quality (independent directors, board size) had significant impact on firm’s profitability.

Leng(2004)in his study” The impact of corporate governance quality practices on firm performance: Evidence from Malaysian companies” investigated the impact of corporate governance quality on firm performance. The sample of 77 Malaysian firms was selected. Corporate governance quality was measured with (size of the firm, shares hold by institutional investors). Profitability was measured with return on equity (ROE). Regression analysis technique was used .The results found the significant impact of corporate governance quality on firm’s performance.

Problem Statement:

To determine the effect of corporate governance quality on financing decisions and profitability of the firms.

Objectives of the study:

- The main purpose of the study to investigate does corporate governance quality matter in Pakistan equity market

- Significance of high quality corporate governance for firm’s profitability.

- Implication of high quality corporate governance for firm financing policy.

Research Question:

Is the corporate governance quality effect the financing decisions and profitability of the firm?

Hypothesis:

On the basis of discussion derived from the extensive literature and theoretical framework, following hypothesis formulated:

Model 1:

H1=Firms with high quality corporate governance shows higher profitability

ROE= board size + audit committee

H1a: There is a negative relationship between board size and ROE

Ho: There is no negative relationship between board size and ROE

ROE= board size + audit committee

H1b: There is a positive relationship between audit committee and ROE

Ho: There is no positive relationship between audit committee and ROE

Model 2:

H2=Firms with high quality corporate governance are more likely to issue equity than long term debt

Total Equity= board size + audit committee

H2a: There is a negative relationship between board size and total equity

Ho: There is no negative relationship between board size and total equity

Total Equity= board size + audit committee

H2b: There is a positive relationship between Audit committee and total equity

Ho: There is no positive relationship between Audit committee and total equity

Model 3:

Total debt= board size + audit committee

H2c: There is a positive relationship between board size and total debt

Ho: There is no positive relationship between board size and total debt

Total Debt= board size + audit committee

H2b: There is a negative relationship between