Corporate governance, related party transactions and firm performance among family owned firms in Pakistan / Fazli Azim

Fazli , Azim (2019) Corporate governance, related party transactions and firm performance among family owned firms in Pakistan / Fazli Azim. PhD thesis, University of Malaya.

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Abstract

Ownership concentration is one of the major issues in Pakistani family-owned firms. The controlling shareholders expropriate funds through related party transactions (RPTs) and exploit the interest of minority shareholders, despite the introduction of corporate governance code in 2002. This motivates the study to examine the relationship between corporate governance and firm performance with moderation role of RPTs. Using panel data of 150 family-owned firms listed on the Karachi Stock Exchange from 2004 to 2014, the study examines three CG factors - independence of non-executive director, family directorship and family ownership as independent variables and firm performance as the dependent variable. RPTs are used as a moderating variable between CG and firm performance. It has categorized all RPTs in three types i.e. RPTs Benefit-based, RPTs Expense-based and RPTs Other-based. This categorization of RPTs has empirically examined. RPTs Benefit-based include bonus, convertible, and right issue shares. RPTs benefit-based transactions have positive effect on the family-owned firm performance. RPTs Expense-based includes organizational expenditure, insurance, royalty payments, and other expenses. RPTs Other- based includes ordinary shares, dividends, donations, interests, investments, purchase of assets, sale of assets, employee benefits, lease, loans, and advance payments. RPTs other based transactions have negative effect on firm performance. The study has also developed index of independence non-executive directors comprising three dimensions, namely, board composition, financial expertise, and tenure of the independent non-executive director. The result shows that 90% of family-owned firms in Pakistan scored low for independent non-executive director’s index. The study also found that independence directors has significant positive effect on firm performance while RPTs, family directorship and family ownership have negative effect on firm performance. It was also found that RPTs positively moderate the relationship between independent non-executive directors and firm performance. Similarly, RPTs negatively moderate the relationship between family ownership and firm performance. However, there is no moderation of RPTs on the relationship between family directorship and firm performance. The result implies that the introduction of corporate governance has less impact on firm performance due to the RPTs being exercised by family firms in Pakistan. Findings of the study should help the regulatory authority body such as the Securities and Exchange Commission of Pakistan (SECP) to further enhance significant disclosure and enforce the code of corporate governance about role of the independent non-executive director and family directorship

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