CORPORATE GOVERNANCE, INTELLECTUAL CAPITAL AND FINANCIAL PERFORMANCE: EVIDENCE FROM NON-FINANCIAL FIRMS LISTED ON THE PAKISTAN STOCK EXCHANGE

Abstract

The focus of this study is to analyze the effect of corporate governance and intellectual capital on the financial performance of non-financial companies listed on Pakistan Stock Exchange (PSX). The study uses a board characteristics model with three measures of financial performance: return on assets (ROA), return on equity (ROE) and the price-earnings ratio (P/E), with three measures of board efficiency to cope with endogeneity and heteroscedasticity and serial autocorrelation: the Generalized Method of Moments (GMM). The financial performance models account for a significant proportion of the financial performance variation: ROA (78.3%), ROE (68.6%) and P/E (57.8%). Board independence and board ownership are important in all three models but with different directions of impact, depending on whether accounting or market performance measures are used. The major components of intellectual capital, namely structural capital efficiency and capital employed efficiency, are generally the most important factors, with board size and CEO duality being relatively unimportant. The results validate the agency theory notion that governance arrangements reduce conflicts between owners and managers and validate that the role of intellectual capital is a material one, which has been under-researched in an emerging market environment. The study is methodologically important for the inclusion of the study of endogeneity (GMM), which was missing in the previous studies conducted in Pakistan, and substantive for studying the non-uniform effects of governance and intellectual-capital on the accounting and market-based performance metrics.