International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 93 (2012)

© EuroJournals Publishing, Inc. 2012
http://www.internationalresearchjournaloffinanceandeconomics.com

The Impact of the Corporate Governance and the

Ownership Structure on the Firm’s Financial
Performance and Its Risk Taking Behavior

Abid Ali Shah

Faculty of Management Science, Ph.D. Scholar
International Islamic University, Islamabad, Pakistan
E-mail: [email protected]
Tel: 0923326098330

Rehana Kouser
Assistant Professor, Department of Commerce
Bahauddin Zakariya University, Multan, Pakistan
E-mail: [email protected]
Tel: +92-333-6102638

Muhammad Aamir
Assistant Professor, Bahauddin Zakariya University
Multan, Pakistan, Ph.D. (Finance) Scholar
International Islamic University, Islamabad, Pakistan
E-mail: [email protected]
Tel: +92-322-6184006

Ch. Mazhar Hussain

Assistant Professor, International Islamic University
Islamabad, Pakistan
E-mail: [email protected]
Tel: +92-301-8500945

Abstract

In the developing country like Pakistan the Agency Problem may have different
dimensions as it may not only be among the Ownership and the Management but also
regarding the expropriation of the corporate profits by the largest shareholder at the cost of
the many small shareholders. This paper examines the relationship between the Ownership
Structure with its two dimensions i.e. Ownership Type and Concentration with the
Corporate Governance adaptation level by the firms and its Financial Performance and Risk
Taking Behavior judged by the Stock Market Returns. The analysis was conducted in three
sections using Panel Data Estimation using the data from 2006 to 2010 for 40 listed KSE
firms. The results indicates that the improvement in the Corporate Practices increase the
firm’s financial performance and reduction in the level of risk during undertaking of the
riskier ventures. The Corporate Governance also has negative relationship with the
Ownership Concentration proving the fact that the increase in the level of the ownership
concentration results in the reduction of the level of good practices by the firms. These
International Research Journal of Finance and Economics – Issue 93 (2012) 45

results also provided a view of the Corporate Structure of the Pakistani firms and prove the
fact that the Ownership Concentrated in single largest owner results in the reduction of
Corporate Governance level and the Financial Performance of the firms and also results in
the increase in the level of the risk undertaken by the firms.

Keywords: Corporate Governance, Ownership Structure, Market Risk, Financial

Performance
JEL Classification Codes: G32, M1

1. Introduction
Within the corporate governance framework the different ownership structures plays a dominant role in
the determination of the behavior of the firm regarding the financial and investments decision making.
One of the key parameter in the process of that decision making is the level of risk the owners and the
management of the firms are ready to take. The firms may find itself in a conflicting situations during
the decision making process when the managers and the owners start seeking their own personal
interests and objectives, that ultimately jeopardizing the firms profitability, its future prospects and
survival. Within the contemporary corporate setup today there are different corporate governance
structures through which the ownership structure is subdivides into rival systems of dispersed and
concentrated ownership structure. During the last few decades there has been an intense academic
debate over possible explanations for the different systems of ownership and control in key developed
economies.
Corporate governance is explained as a processes and structure through which the management
of corporate affairs is conducted for the purpose of enhancing business prosperity and corporate
accountability and ultimately it enhances the shareholder value and intern protects the interest of
individual as well as collective interest of all the stakeholders. Good corporate governance practices
may have significant influence on the strategic decisions of the firms, e.g. External financing. Though
the implementation of the corporate governance mechanisms has come with the agency problems
initially indicated by (Berle and Means, 1932). Agency problems arise as a result of the relationships
between shareholders and managers and are based on conflicts of interest among the owners and
management within the firm. Similarly conflict of interests between controlling shareholders and
minority shareholders is also at the heart of the corporate governance literature.
An important agency issue, however, that got a limited attention of policymakers and scholars
is the role played by the firm's ownership structure in the firms overall risk-taking behavior and the
performance. Shareholders having significant stakes in a company can shape the nature and the level of
its decision making regarding its corporate risk-taking behavior, which affects the firm's ability to
compete and eventually its survival and performance. Excessive risk-taking by firms may result in
bankruptcies, causing repercussions that affect the economy as a whole. According to (Wright et al.
1996), shareholders with considerable stakes in a company can shape the nature of its corporate risk-
taking behavior, which may affect a firm's overall ability to compete and ultimately its survival. The
separation of ownership and control in modern corporations bring an irregularity of risk-taking and
rewards between managers and shareholders. Managers may avoid risky projects to make safe their
non-diversifiable human capital in firms, while owners may choose risky projects to increase the value
of their equity holdings. Thus the firms held by single large shareholder may be induced in to taking
more risky projects rather than the firms with more dispersed ownership. On the other hand the large
shareholders may become more risk-averse as they may give more value to their private benefits
obtained from more control in the firm and in order to secure them they will invest in safer projects
(john et al. (2008).
A vast literature on the corporate governance makes an important division between ownership
of voting rights and ownership of cash flow rights, in which the corporate ownership is measured by
46 International Research Journal of Finance and Economics – Issue 93 (2012)

cash-flow rights of the shareholders, and the corporate control is measured by their voting rights. In
this study the objective is to evaluate the impact of the ownership concentration and ownership mix
with respect to the level of percentage of the large share holders and the different types of the owners
controlling the rights of a firm on its risk taking behavior and its financial performance. The ownership
concentration is the extent to which large shareholder are in control of the shares. The proxies for that
is the percentage and the number of the share held by the large share holders, the total percentage of
the shares held by the other shareholders and the cash flow rights of the controlling share holders.
While the different ownership types includes institutional ownership, foreign ownership, government
ownership and the stakes of the parent or the associated companies within the firms.

1.1. Ownership Structure in Pakistan

With in the developing countries the agency problem is that control is often obtained through an
ownership structure of complex pyramidal structures such as interlock directorship, cross
shareholdings and voting pacts and/or dual class voting shares that allow the ultimate owner to
maintain (voting) control while owning a small fraction of ownership (cash flow rights). In Pakistan,
the firms are owned by family or state-controlled firms or firms held by corporations and by financial
institutions that dominates the trade and industry settings. The agency problem is not due to the
conflicts rising among the manager and shareholder but rather due to the risk of confiscation by the
governing or controlling shareholder at the expense of minority shareholders. The dominant
shareholder makes the decisions but does not bear full cost. When the family members holds the top
executive positions in the corporation in addition to their large shareholdings that may have negative
impact on the firms value, that effect is exacerbated if that family member as the CEO of the firm does
not have the talent, expertise or competency to run the business.
In Pakistan ownership is concentrated; most firms are held either by families, directors and
executives, foreign or institutional owners and government ownership. In this study the categorization
of ownership is conducted by taking them as four separate groups of owners: top managerial ownership
as CEOs, directors and executives, foreign ownership, institutional ownership and government,
ownership held by public sector companies and by parent or associated companies.

1.2. Objective of the Study

This study serves two main purposes these are regarding the impact of the Corporate Governance
structure on the Ownership with different level of Concentration and different Ownership types, and
the impact of the Ownership Structure and the Corporate Governance on the firm’s Financial
Performance and its Risk Taking Behavior judged by the market returns.

2. Literature Review
Most of the corporate governance literature had studied the agency problem regarding the composition
of the ownership within the firms, usually control by a large shareholder or a mixture of small
shareholders. There are studies in which the focus is on the issues arising from the conflicts between
the management and the corporate owners which again give rise to the agency problems. The study by
(Berle and Means, 1932) had been the focus within the literature that elaborated their claim of the
separation of the Corporate Ownership from the control of the firm given in the study due to which the
management may take actions that may not be in alignment with the shareholder’s interest. The only
way is to align the interest of both the parties by allowing the shareholders with an option to nominate
their directors and having control over the selection of the officers entrusted to run the enterprise
(Hasan, 1983).
The level of the ownership concentration has its consequences for both the shareholders and the
managers, as concentrated ownership with single large shareholder can divert the share of the small
shareholders through their power over the corporate decision making (Kuznetsov and Muravyev,
International Research Journal of Finance and Economics – Issue 93 (2012) 47

2001). Also high levels of the ownership concentration can reduce the cost of capital and lowers the
level of the liquidity or the opportunities through the diversification in investor’s perspective that is
available with the diffused ownership structure with large number of owners increasing the market
liquidity and the level of monitoring through the stock market investors (Holmstrom and Tirole, 1993)
(Fama and Jensen, 1983).
(Jensen and Meckling, 1976) argue that the separation of the ownership and the control add up
the additional cost of the monitoring of the managers by the shareholders and the managerial activities
that contradicts the value creation that causes reduction in the value of the firm, the introduction of
managerial share is in the best interest of both the managers and the owners due to the alignment of the
interest and reduces the agency problems. Although (Stulz, 1988) demonstrate that sufficiently high
levels of managerial ownership that allows the managers to block the takeover bids, which ultimately
can lower the firm value, the same results were obtained by (Hermalin and Weisbch, 1991) that
increasing the shares of the managerial ownership reduces the value of the firms.
Likewise, markets for corporate control, if they function properly, are expected to serve as an
incentive for managers to act in the best interest of owners (Jensen and Ruback, 1983). Baker and
wurgler (1963) presented the other side of the picture in their catering theory and argued that
management should give incentives to shareholders according to their demands, this is the way to cater
the investors by paying smooth dividends when investors put premium on dividend paying companies
and by not paying dividends when they prefer non-paying companies. (Mayers 1984) presented
pecking order theory, according to which a company follows a sequence in utilization of funds for
investments, primarily retained earnings are used which are less costly source of funds followed by
debt and equity as the sources of funds.
A rather too much diffused ownership might create some other level of problems regarding the
power exercised by the managers working in their interest rather than the value maximization of the
shareholders that ends up by allowing the managers to hold some stake within the firms which also
aligns the interest of the owners and the managers (Himmelberg et al. 1999). The financial institutions
may have their role in the firms decision making as owners as equity holders and their inclusion in the
supervisory board, as they are effective in providing additional debts for the firms (Chirinko et al.
1999).
The institutional owners are mainly well informed investors and may work as joint ownership
both as equity owners and the debt providers that increases the level of the monitoring by these
institutional owners and creates strong incentive mechanism for the managers to work in the best
interest of the firms and value maximization (Jensen, 1989). (Gedajlovic and Shapiro, 2002) also
support the view that financial institutions are well positioned to monitor the manager of the firm
within their network.
(Grossman and Hart, 1982), on the other hand, point out that if ownership is widely dispersed,
no individual shareholder will have the incentive to monitor managers since each will regard the
potential benefit from a takeover to be too small to justify the cost of monitoring. On the other hand,
(Shliefer and Vishny, 1986) suggested that large shareholders have the potential of monitoring and
controlling the managerial activities. Thereby, they are responsible to contribute to corporate
performance. But they can also redirect funds for their own private benefits in the form of special
(hidden) dividends and privileged deals with their other businesses putting a direct cost on the interest
of the stakeholders giving rise to an ambiguity in the role played by the large shareholders.
(Short, Keasey and Duxbury, 2002) examine and find a positive relationship between
managerial ownership and leverage of the firms, also a negative relationship is found between the
ownership held by large external equity holders and financial leverage. However, due to the presence
of the large outside equity holders relationship between management ownership and leverage ratio is
not significant. Their findings suggested that outside equity holders affects the agency costs of equity
financing and debt financing.
48 International Research Journal of Finance and Economics – Issue 93 (2012)

(Subrahmanyam and Titman, 1999) evaluated the importance of the insider and the outsider
ownership in the context of the importance of the information from the two sources. If the insider
information becomes less important and advantageous for the firm than the outsiders ownership is
more advantageous for the firms with the relevant information set for the purpose of the managerial
decision making.
Maug (1998) examines the role of the institutional investors in accordance to the level of their
shareholdings and their incentive for the monitoring, the incentives from the monitoring is related to
the level of ownership as if the ownership is high than institutions can monitor the management with
the share that are less marketable and with low ownership they have the option to liquidate their
investment in the company with poor performance and low incentives for monitoring.
According to (Loderer and Martin, 1997), when the firms are performing well than the
management of the firms are induced in holding fewer shares and ownership in the firm, as its more
beneficial for the management with high performing firms. The negative relationship obtained by their
study strongly supports the argument. When the ownership of the owners and the management is
merged with the concentration of the ownership the performance of the firms improves. As the
ownership concentration is high requiring high shareholdings with control which cannot be disputed
which eliminates the problems relating to the agency costs (Agrawal and Mandeike, 1987).
The literature suggests two differential views of the relation between corporate risk-taking and
equity ownership. One is of the views that justify a positive relationship between risk-taking and
ownership is associated with monitoring. Shareholders with large equity stakes in the company have
incentives to monitor the manager with the purpose of maximizing the value by under taking projects
that bears more risk with higher expected returns (Shleifer and Vishny 1986).
(Downs and Sommer, 1999) while examining the relationship between the managerial
ownership and risk taking behavior of the firms finds a positively significant relationship between
them. They are of the point of view that as the managers have their stake in the ownership of the firms
the risk preferences of managers may adjust in order to align the conflicting interests of managers and
owners. Also, shareholders with significant ownership stake might be reluctant to take more risk due to
securing their private benefits of control as they might desire to maintain good reputation and/or to
increase the control (Jensen and Meckling, 1976).
(Amihud and Lev, 1981) suggest that managers will support for conglomerate mergers to
decrease their exposure to “employment risk" (i.e., risk of losing job, reputation). Managers with
higher equity ownership will have higher incentives for risk-reduction, which justifies more active
diversification by these managers. Shareholders face a trade-off between taking (value-enhancing)
risky projects and incurring costs of forgone diversification. On the one hand large equity ownership
motivate investors to be risk-takers, on the other hand they are exposed to idiosyncratic fluctuations,
which makes them risk-averse.

3. Research Methodology
3.1. Data
The analysis in this study is conducted on the basis of finding the relationship among the Corporate
Governance, Ownership Structure, Firm’s Performance and the Firm’s Risk Taking Behavior. The data
for the 40 firms is obtained from the Annual Reports and the Brecorder website from 2006 to 2010.
The estimation of the models is conducting the Panel Data Regression.
The corporate governance index is used which is developed by the authors in their study (Javid
and Iqbal, 2007). In order to construct corporate governance index for the firms listed on KSE, a broad,
multifactor corporate governance rating is done which is based on the data obtained from the annual
reports of the firms submitted to SECP. The index construction is as follows: for every firm, twenty-
two governance proxies or indicators are selected; these indicators are categorized into three main
themes i.e. the board composition index, ownership and shareholdings index, disclosure and audit
International Research Journal of Finance and Economics – Issue 93 (2012) 49

index. By taking the average of three sub-indices the aggregate corporate governance index for each
firm in the sample is obtained.
The Ownership in this study is taken with regards to the cash flow rights rather than the voting
rights. The Ownership Structure is taken in two dimensions; first the ownership Concentration is
measured with the proxy of the percentage shares held by the single largest shareholder and the number
of shares held by the largest five shareholders. Indicating the level of shares concentrated in single and
the top five shareholders second is the ownership type variables are the identity of the owners holding
the percentage of shares in the firms. The owners can be categorized as the Government Ownership,
Institutional Ownership, Family and foreign ownership.
The firm’s performance is the measured in two dimensions; first the accounting based
performance measures that includes ROE (Return on Equity) and ROA (Return on Assets), while the
second is the market based performance measures including the variables of Earning per Share and the
average yearly Market Returns of the stock prices.
The risk taking behavior of the firms are measured by the overall Standard Deviation of the
stock returns as the total risk for the last three years of the stock returns of the firms and the Beta
calculated by applying the market model on the stock returns of each of the firm.

3.2. Methodology
3.2.1. Corporate Governance and Ownership Structure
The first part of the analysis is regarding the relationship between the Corporate Governance and its
impact on the Ownership Structure of the firms. The Corporate Governance Index is tested with the
two dimensions of the Ownership Structure; first the Ownership Concentration and second is the
Ownership Type. The model is given by:
OStructureit = β 0 + β1CGIit + β 2 beta it + β 3 Invit + β 4sizeit + ∈it
The Ownership Structure has its two dimensions i.e. the Ownership Concentration (OConit in
Panel A of Table 1.) and Ownership Type (OTypeit in Panel B of Table 1). The CGI is the Corporate
Governance Index, the control variables are: Beta represents the market risk calculated by the market
model by the data of the current and the preceding two years Stock Returns, Inv representing the
Investment opportunities calculated by the growth rate of the sales over the years and the size
measured as the natural log of the total assets of the firms.

3.2.2. Corporate Governance, Ownership Structure and Firm’s Performance

The second estimation is regarding the model to test the impact of the Corporate Governance and the
Ownership Structure on the Firm’s Performance that is measured as two accounting based i.e. the
Return on Assets (ROA) and Return on Equity (ROE) and two market based measures of Earning per
Share (EPS) and Stock Returns. The model is presented as:
Perit = β 0 + β1CGIit + β 2 OStructureit + β3 Risk it + β 4 Invit + β 5Sizeit + ∈it
Per represents the four performance measures while the OStructure represents the two
Ownership Structure dimensions. The control variables are Risk, Investment opportunity and the Size
as are used in the first model.

3.2.3. Corporate Governance, Ownership Structure and Firm’s Risk Taking Behavior
The third model is regarding the testing of the impact of the Corporate Governance and the Ownership
Structure on the Firm’s Risk Taking Behavior. The Risk Taking Behavior is measured by the Betas
(calculated by the market model) and the Standard Deviation (SD) calculated by the simple standard
deviation of the last three years including the current year stock Returns. The model is given as:
risk it = β 0 + β1CGIit + β 2 OStructureit + β3 Invit + β 4Sizeit + ∈it
50 International Research Journal of Finance and Economics – Issue 93 (2012)

Risk represents the Beta and the Standard Deviation of the Stock Returns. The OStructure is the
two dimensions of the Ownership structure with the Inv (Investment Opportunities) and Size as the
control variables.

4. Results and Discussion

4.1. Corporate Governance and Ownership Structure
The analysis regarding the impact of the Corporate Governance on the ownership Structure presented
in the Table 1 reveals a significantly negative relationship between the two as the coefficient for the
1LSH (percentage of shares with Single Largest Shareholder) is negative and significant showing that
the increase in the Ownership Concentration reduces the level of the good practices within the
organizations as the it increases the intensity of the monitoring by the largest shareholder and with it
the result is the managerial entrenchment that in turn decreases the quality of the Corporate
Governance. However the results are insignificant but again negative for the 5LSH (the percentage of
shares held by the five largest shareholders).

Table 1: Corporate Governance and Ownership Structure.

Panel A: OCon it = β 0 + β1CGIit + β 2 beta it + β 3Invit + β 4sizeit + ∈it

CGI Risk (Beta) Inv Size Intercept R2 F-test
-0.257 -0.179 1.9453 2.897 5.459 5.301
1LSH 0.689
(-2.038)* (-1.855)** (1.829)*** (1.879) (1.202) (0.000)
-0.095 -0.023 1.552 3.394 3.516 5.243
5LSH 0.687
(-0.494) (-0.199) (2.966)* (2.323) (0.224) (0.000)
Panel B: OTypeit = β 0 + β1CGIit + β 2 beta it + β 3Invit + β 4sizeit + ∈it
3.112 -1.286 1.695 1.912 88.27 5.435
Govt 0.703
(3.007)* (-1.814)** (1.944)** (2.843)* (1.605)** (0.000)
2.657 -0.989 3.897 1.612 25.27 4.655
Inst 0.673
(2.009)* (-1.032) (2.665)* (1.943)** (2.005)** (0.000)
1.098 -0.923 1.011 1.120 72.27 6.715
Fam 0.733
(1.097) (-1.332) (1.092) (1.843)** (1.905)** (0.000)
2.390 -0.897 1.325 2.004 90.690 4.623
Forgn 0.659
(3.588)* (-0.629) (2.276)* (2.623)*** (1.471)* (0.000)
Note: *, **, *** represents the significance at 0.01, 0.05 and 0.10 levels.
CGI represents the Corporate Governance Index.
Inv is the Investment Opportunity measured by the growth in sales.
1LSH represents the percentage number of shares held by single largest shareholder.
5LSH represents the percentage number of shares held by five largest shareholders.
Govt: Shares held by Government. Inst: Shares held by Institutions. Fam: Shares held by Family Owners. Forgn:
Shares held by Foreign Shareholders.
Risk (Betas calculated by using the Market Model)

The result regarding the risk indicates that as the Ownership Concentration increases the level
of the firm’s Risk Taking Behavior reduces evident from the significant negative coefficients, it might
represent the scenario that as the concentration of the ownership is with the single largest shareholder
the decision making rest on that shareholder who ultimately for his own interest might not be ready to
undertake riskier investment ventures. The coefficients for the investment opportunities and the size
are positive with significance for the investment opportunities, indicating that the increase in the
investment opportunities is in line with the increase in the ownership concentration. As the largest
single shareholder has the power and control to divert the resources towards the more suitable and
likely profitable ventures with less perceived risk.
The results presented in the panel B of the Table 1 indicates that the firms belonging to the
State, Institutional and foreign Ownership shows higher level of the Corporate Governance as the state
International Research Journal of Finance and Economics – Issue 93 (2012) 51

with abundance of funds and the institutions and foreign parent companies has more inclination
towards the promoting of the Good Corporate Governance Practices. The risk shows negative
coefficients for all the Ownership Types with significant coefficient for the State Ownership. The
Investment Opportunities and the Size both shows significant and positive coefficients for all the
Ownership Types. The R2 and the F-test for all the regressions tested in the Table 1 are on the higher
satisfactory side with the R2 with in the 60 and the 70 percent levels and the F-stat being significant for
all the tested models.

4.2. Corporate Governance, Ownership Structure and Firm’s Performance

The results regarding the impact of the Corporate Governance and the ownership Structure are
presented in the two panels of the Table 2. The first panel is showing significant coefficients of the
Corporate Governance for the four performance measures i.e. for the accounting and the market based
measures. The performance of the foreign owned firms is highly significant also for the firms with
significant institutional ownership are also significant for all the four performance indicators.
Although the coefficients of the risk are insignificant but these are negative which indicate that
the perceived level of the Risk Taking from the firms has inverse relationship with the financial
performance of the firms. The coefficients of both the Investment Opportunities and the Size of the
firms are significant and positive indicating the fact that the firms with more investment opportunities
ultimately shows higher performance and provides superior financial results. The significant
coefficients of the size of the firms indicate that larger firms with in the market achieve better
performance. The results regarding the control variables are all the same for both the models presented
in the two panels.
The results for the Ownership Concentration also provides significant and positive results for
all the coefficients indicating that the firms with higher Ownership Concentration achieve higher
performance while the coefficients for the 5LSH are negative showing an inverse relationship. The
results’ regarding the risk shows positive and significant coefficients for the Stock Returns indicating
that an increase in the perceived Risk also increases the Market Returns.
52 International Research Journal of Finance and Economics – Issue 93 (2012)

Table 2: Ownership Structure, Corporate Governance and Firm’s Performance

Panel A: Perit = β 0 + β1CGIit + β 2OTypeit + β 3Risk it + β 4 Invit + β5Sizeit + ∈it

Foreign Governme
Institutional Family Risk
CGI Ownershi nt INV Size Intercept R2
Ownership Ownership (Beta)
p Ownership
0.159 0.306 0.408 0.209 0.156 -1.553 4.111 1.165 -21.12
ROA 0.697
(3.024)* (2.431)* (1.844)** (1.895)** (1.933)** (-0.988) (2.940)* (1.805)** (-2.626)*
0.559 0.620 1.427 1.168 3.727 -1.714 3.399 1.369 -22.63
ROE 0.694
(1.880)** (2.006)* (2.572)* (3.941)* (1.837)** (-1.085) (2.416)* (2.160)* (-2.663)*
0.196 0.768 0.005 0.634 0.069 -1.549 3.481 1.460 -21.10
EPS 0.687
(2.506)* (2.108)* (0.014) (1.604)*** (0.509) (-0.967) (2.340)* (1.901)** (-2.636)*
0.00095 0.0002 0.002 0.090 0.081 1.642 3.463 1.690 -20.98
SRs 0.689
(0.927) (0.890) (3.075)* (1.645)*** (2.729)* (2.012)* (2.403)* (2.293)* (-2.678)*
Panel B: Perit = β 0 + β1CGIit + β 2OMix it + β 3Risk it + β 4 Invit + β 5Sizeit + ∈it
Risk
CGI 1LSH 5LSH INV Size Intercept R2
(Beta)
0.258 0.179 -0.523 -1.6453
2.171 89.028 -5.604
ROA 0.658
(3.024)* (1.955)** (-2.199)* (-1.029)
(2.040)** (1.873)** (-0.621)
0.169 3.286 -0.897 -5.325
2.376 88.565 -6.106
ROE 0.664
(2.480)* (1.814)** (-2.629)* (-0.276)
(2.116)** (1.469)* (-0.690)
0.196 0.020 -0.185 -2.828
4.543 91.278 -5.075
EPS 0.660
(2.506)* (0.087) (-1.838)** (-0.530)
(3.840)*** (1.502)* (-0.628)
0.0435 0.037 0.014 0.007
3.223 90.265 -6.546
SRs 0.671
(0.622) (1.766)*** (1.785)*** (1.982)**
(2.003)** (1.533)* (-0.690)
Note: *, **, *** represents the significance at 0.01, 0.05 and 0.10 levels.
CGI represents the Corporate Governance Index.
ROA (Return on Assets), ROE (Return on Equity), EPS (Earning per Share), SR (Stock Returns) and Risk (Betas calculated by using the Market Model)
Inv is the Investment Opportunity measured by the growth in sales.
1LSH represents the percentage number of shares held by single largest shareholder.
5LSH represents the percentage number of shares held by five largest shareholders.
Govt: Shares held by Government. Inst: Shares held by Institutions. Fam: Shares held by Family Owners. Forgn: Shares held by Foreign Shareholders.
Risk (Betas calculated by using the Market Model)
International Research Journal of Finance and Economics – Issue 93 (2012) 53

4.3. Corporate Governance, Ownership Structure and Firm’s Risk Taking Behavior
The results regarding the impact of the Corporate Governance and the Ownership Structure on the
firm’s Risk Taking Behavior measured by the market betas and the Standard Deviation of the Stock
Returns are shown in the two panels of the Table 3. The Corporate Governance showed negative and
significant coefficients yet again providing the fact the improvement in the corporate practices results
in the reduction of the risk level of the firms. The improvement in the Corporate affairs also provide
the firms with the luxury of attaining better performance with being engaged in to extra Risk Taking
activities.
The different Ownership types also provide mix results regarding its impact on the Firm’s Risk
Taking Behavior. Significant results are obtained for the Foreign and the State Ownership with
negative coefficients. While for institutional Ownership the coefficients are positive but insignificant,
for family Ownership its insignificant and negative coefficients proving the fact that the increase in the
family Ownership reduces the Risk level or the Risk Taking activities of the firms.
The analysis regarding the control variables provide positive and significant results for the
relationship with the Investment Opportunities which provide the fact that when the firms had new
Investment Opportunities and these firms are engaged in the activities of capitalizing on these
opportunities the firm also take up the extra risk associated with the Investments. Hence the increase in
the firm’s Investment Opportunities results in the increase in the perceived risk or the Risk Taking
activities of the firms.
The results for the relationship between the Ownership Concentration and the Risk Taking
Behavior provided positive and Significant coefficient for the 5LSH (the percentage of shares held by
the top five shareholders) which suggest that the reduction or the diffused Ownership results in the
increase in the Risk Taking Affairs of the firms. Within this model again the Investment Opportunities
and the Size provided the same results as was provided by the model in the panel A.

Table 3: Ownership Structure, Corporate Governance and Firm’s Risk Taking Behavior

Panel rist it = β 0 + β1CGIit + β 2OTypeit + β 3Invit + β 4sizeit + ∈it

A:
Foreign Government Institutional Family
CGI INV Size Intercept R2
Ownership Ownership Ownership Ownership
-0.159 0.408 -0.306 0.209 -0.156 4.111 -1.165 -51.34
Beta 0.697
(-3.024)* (1.244) (-2.431)* (1.495) (-1.333) (2.940)* (-0.505) (-0.621)
-0.132 1.668 0.432 0.137 -0.213 3.541 -0.713 -71.64
SD 0.712
(-1.234) (1.744)*** (2.612)* (1.331) (-1.256) (2.780)* (-0.405) (-1.321)
Panel rist it = β 0 + β1CGIit + β 2OMix it + β 3Invit + β 4sizeit + ∈it
B:
CGI 1LSH 5LSH INV Size Intercept R2
-1.139 0.408 0.306 2.123 -2.028 -16.64
Beta 0.658
(-1.824)** (1.244) (2.431)* (2.626)* (-2.473)* (-0.331)
-0.710 0.361 0.128 1.328 -1.221 -21.71
SD 0.673
(-2.014)* (1.196) (1.451) (1.826)** (1.513)*** (-0.291)
Note: *, **, *** represents the significance at 0.01, 0.05 and 0.10 levels.
CGI represents the Corporate Governance Index.
Risk (Betas calculated by using the Market Model), SD (the Standard Deviation of Stock Returns of last two
years).
Inv is the Investment Opportunity measured by the growth in sales.
1LSH represents the percentage number of shares held by single largest shareholder.
5LSH represents the percentage number of shares held by five largest shareholders.
Govt: Shares held by Government. Inst: Shares held by Institutions. Fam: Shares held by Family Owners. Forgn:
Shares held by Foreign Shareholders.
54 International Research Journal of Finance and Economics – Issue 93 (2012)

5. Conclusion
The paper examined the relationship among the four main aspects of the firms structure and its market
position i.e. the firm’s adaptation of the Corporate Governance practices, its Ownership Structure, the
firm’s Financial Performance and the Level of its Risk Taking Behavior. The analysis was conducted
on 40 firms selected from the Karachi Stock Market with data from 2006 to 2010and in three sections
first regarding the relationship between the Corporate Governance and the Firm’s Ownership Structure
that provided significant results regarding the impact of the Corporate Governance on the Firm’s
Ownership Structure, proving the fact that increase in the Ownership Concentration results in the
reduction in the level of better Corporate practices.
The second set of analysis was regarding the impact of the Corporate Governance and the
Ownership Structure on the firm’s financial performance measured by four variables two accounting
and two market based measure of the performance level. The results again provided the fact that the
increase or the improvement in the Corporate Practices results in the improvement in the Financial
Performance, while different ownership Styles also provided significant results for different
performance measures. Also the availability of the Investment Opportunities and the increase in the
Size of the firm also results in the better Financial Performance. The ownership Concentration also had
an impact on the performance level. The results regarding the impact of the Corporate Governance and
the Ownership Structure on the firm’s Risk Taking Behavior also proved the fact that the adoption of
better Corporate Practices results in the reduction of the risk level during the undertaking of the riskier
ventures by the firms, while the increase in the Ownership Concentration results in the increase in the
perceived Risk Taking Behavior of the firms.

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