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Impact of Excess Control, Ownership Structure and Corporate Governance on Firm Performance of Diversified Group Firms in Pakistan

Author

Listed:
  • Waseem Ullah

    (Capital University of Science and Technology, Islamabad)

  • Shahid Ali

    (Institute of Management Sciences, Peshawar)

  • Sajid Mehmood

    (University of Gujrat, Gujrat)

Abstract

This paper attempts to explore the effect of excess control, ownership structure and corporate governance on firm performance in Pakistan. The study takes a sample of 184 non-financial sectors’ group firms listed on the Karachi Stock Exchange (KSE) covering a period from 2004 to 2012. The multiple regression models are applied using panel data framework to test the significance of relationship. The results are consistent with the findings of the prior studies conducted in both advanced and emerging economies. The results show that firm ownership is a strong influential factor in affecting firm performance in Pakistan. Both inside ownership and ownership concentration are negatively related to firm performance consistent with divergence of interest effect and entrenchment effect. However, inside ownership squared is strongly positively related to firm performance indicating that inside ownership beyond a certain threshold level started to influence firm performance positively consistent with incentives effect. Ownership disparity affects strongly negatively the financial performance of group firms consistent with the divergence of interest effect. Institutional ownership contributes positively towards firm performance. Noticeably, board independence and outside block holdings play a significantly positive role in affecting financial performance of the group firms in Pakistan. The results show strong evidence that ultimate controllers in group firms use complex ownership and pyramidal structures to extend their ultimate control over many firms with least cash flow rights. The higher the divergence between ownership and control, the greater the potential of the ultimate controllers exerted their entrenched behavior in group firms. These results highlight the internal corporate governance problems faced by the group firms and suggest the need for strengthening the corporate governance mechanism in Pakistan.

Suggested Citation

  • Waseem Ullah & Shahid Ali & Sajid Mehmood, 2017. "Impact of Excess Control, Ownership Structure and Corporate Governance on Firm Performance of Diversified Group Firms in Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(2), pages 49-72, June.
    • Handle: RePEc:bec:imsber:v:9:y:2017:i:2:p:49-72
    DOI: dx.doi.org/10.22547/BER/9.2.3
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    2. Waseemullah & Arshad Hasan, 2018. "Business Group Affiliation and Firm Performance—Evidence from Pakistani Listed Firms," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 57(3), pages 351-371.
    3. Fiaz Ahmad Sulehri & Mohammad Ahmed & Amjad Ali, 2022. "Proprietorship Structure and Firm Performance in the Context of Tunneling: An Empirical Analysis of Non-Financial Firms in Pakistan," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(4), pages 115-124, December.
    4. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    5. Sattar Khan & Yasir Kamal & Shahid Hussain & Muhammad Abbas, 2022. "Corporate governance looking back to look forward in Pakistan: a review, synthesis and future research agenda," Future Business Journal, Springer, vol. 8(1), pages 1-32, December.
    6. Imad Rahim & Attaullah Shah, 2019. "Corporate Financing and Firm Efficiency: A Data Envelopment Analysis Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 1-25.
    7. Rihab Kriaa & Taher Hamza, 2021. "Control dilution of an initial owner post-IPO: the impact of characteristics of ownership structure," SN Business & Economics, Springer, vol. 1(3), pages 1-35, March.

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