Do Cash Holding and Corporate Governance Structure Matter for the Performance of Firms? Evidence from KMI 30- and KSE 100-Indexed Firms in Pakistan

Abstract

The objective of the study is to investigate the combined impact of cash holding and corporate governance on the performance of non-financial firms. The sample consists of 30 Islamic-based firms from Karachi Meezan Index (KMI) 30 index and 42 non-Islamic firms from Karachi Stock Exchange (KSE) 100 index in Pakistan over the period of 2010–2014. The results show that corporate cash holding has negative and significant relationship with earnings per share and returns on assets (EPS and ROA), while it has a positive and statistically significant relationship with Tobin’s Q and market share price (TQ, MSP) in both KMI 30- and KSE 100-indexed firms. In addition, we find that the structure of corporate governance is poorly performed in KMI 30- and KSE 100-indexed firms. This poor governance structure leads to the firms dispelling cash quickly, which significantly reduces the performance of these firms. So the firms can increase their performance by establishing effective corporate governance structure.

Do corporate governance structure and capital structure matter for the performance of the firms? An empirical testing with the contemplation of outliers

“…Subsequently, we used the GLS random effect (REGLA) estimator of the panel OLS model because it helps to protect our results from heteroscedasticity and autocorrelation problems as our model consist of time-variant and time-invariant variables, So this type of variable usually has heteroscedasticity and autocorrelation problem [21]. The rationale behind the randomeffects model is that it is assumed that the variation across entities is to be random and uncorrelated with the explanatory or independent variables included in the model [104].…”

“…Similarly, the other studies also confirm a significant increase in the value of firm performance in the results of the good structure of governance [19]. However, the most recent studies recounted that firms in Pakistan try to build a diverse board and compose a good structure of governance at the workplace, but there is no certain evidence to establish the positive relation of good structure with the performance of the firms [20][21]. On the contrary, much of the evidence is overwhelming that poor board governance and corrupt formation have proven to be the root cause of business failures.…”

“…Likewise, the fixed effect is an appropriate model where we want to constant the within-group properties of the firm. Whereas, GLS is more appropriate to encourage the likeness of the outcomes where we have time-variant and time-invariant variables [21]. Table 3 shows the results of our estimation and the Hausman test significance show that the fixed effect is more appropriate in terms of share prices, and the random effect is more appropriate in the case of ROA.…”

“…Another study found that the application of principles of governance helps to increase the return from equity and return from assets of the company [38]. A recent study in Pakistan's context reveals that good governance structure helps to reduce agency costs and also controls its negative impact on firms' performance [21].…”

“…Recent studies have focused on various aspects of corporate governance and its relationship with the sustainable development of the entire industry and economy. A study on governance and sustainable performance of firms have established that different component of governance in an organization cause sustainable performance [21]. Likewise, a study about corporations' governance and climate change management found that different governance mechanisms help effectively mitigate and implement climate change management strategies [52].…”