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RM Proposal Nida
RM Proposal Nida
Abstract
nature of businesses and country or area wise. In today’s competitive and inflationary world the
corporate governance and financial risk are becoming the vital issues for the survival of
corporations in Pakistan. Corporate governance is all about the guidelines to run our business in
a smooth way. Financial risk is somewhat related to the financial structure of the corporation,
financial risk arises when a corporation is becoming unable to pay its debt. Corporate
governance is linked with the financial risk or uncertainty of a business. It is related to the
corporate hierarchy, top management and strategic decisions of the corporation. So, this study
will be an attempt to explore the corporate governance practices in Pakistan and its impact on the
governing the company like a sovereign state, instating its own customs, policies and laws to its
employees from the highest to the lowest levels. Failed energy giant Enron, and its bankrupt
employees and shareholders, is a prime argument for the importance of solid corporate
important as its primary business plan. When executed effectively, it can prevent corporate
scandals, fraud and the civil and criminal liability of the company. It also enhances a company’s
image in the public eye as a self-policing company that is responsible and worthy of shareholder
and debt holder capital. It dictates the shared philosophy, practices and culture of an organization
affairs unit, weeding out and eliminating problems with extreme prejudice. A corporation
conscience. Corporate governance keeps a company honest and out of trouble. If this shared
philosophy breaks down, then corners will be cut, products will be defective and management
will grow complacent and corrupt. The end result is a fall that will occur when gravity – in the
form of audited financial reports, criminal investigations and federal probes – finally catches up,
bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to
flee out of fear, distrust and disgust. So, the corporation could be travelled towards the downfall
and will become a victim of different risks, among these risks one can be the financial risk,
In Pakistan, the publication of the “Code of Corporate Governance” in 2002 by SECP for
publicly listed companies has made it an important area of research for the corporate sector. The
primary objective of corporate governance is to protect the rights of the shareholders in best
possible ways. Effective check and balance or governing system ensure the investors about their
rights protection. When the Company will achieve its objective, it will move on the track of good
The study is organized as follows. In first introduction section, first two paragraphs are
consists of the importance of the research topic, next two are related to the objective of the study,
which we are going to study, after these the problem of our research is discussed that actually
what we are going to surf with the support of theory, in the end the significance of our topic in
the academic and practical scenario. Second section lists the work already carried out by other
researchers in the form of a literature review. Third section is related to the methodology of
work.
Problem Statement
In today’s competitive and inflationary world the corporate governance and financial risk
are becoming the vital issues for the survival of corporations in Pakistan. Corporate governance
is all about the guidelines to run our business in a smooth way. Financial risk is somewhat
related to the financial structure of the corporation, financial risk arises when a corporation is
becoming unable to pay its debt. Early studies mainly focused on ownership structure and how
this structure can minimize the agency cost and other areas and this time a struggle to study the
relationship between corporate governance and financial risk in Pakistan and how the corporate
The literature on corporate governance suggests that there is a gap present regarding the
financial risk and corporate governance in Pakistan economy. Different organizations having
different corporate governance practices according to their nature of businesses and country or
area wise. Corporate governance is linked with the financial risk or uncertainty of a business. It
is related to the corporate hierarchy, top management and strategic decisions of the corporation.
So, this study will be an attempt to explore the corporate governance practices in Pakistan and its
Research Objectives
1. The relationship between the firm’s corporate governance and financial risk as an
2. That How the corporate governance and financial risk affect each other
manner or not
5. To know that how much work has done on this topic in literature, and in which direction I
Purpose of this study is to explore the impact of governance system of the corporations
on its financial risk, that how these are linked with each other and how we can control financial
Significance of Research
This study is significant in the scenario of Pakistan because in literature little research is
done regarding this topic of research. So, it will be beneficial for the public, especially for the
corporations, through this study they can understand the concept of the corporate governance and
financial risk that how they can control their financial risk through the corporate governance. It
will help out the policy makers for taking up the appropriate measures for governance and risk
management. It will also find out the weak areas for improvements and recommendations
regarding better governance system. If the corporation is properly controlled then it will effect
positively on the performance of the business. Secondly it will contribute the existing literature.
Literature Review
1. Operational definitions
companies are directed and controlled”. It means that through the proper corporate governance
the firm will be able to work efficiently. Another concise definition by La Porta et al. (2000)
“Corporate governance is to a certain extent a set of mechanisms through which outside investors
A general saying about financial risk by Van Horne (p. 252) “financial risk encompasses the risk
of cash insolvency. However this notion will be expanded to include the risk of being unable to
meet prior claims with the cash generated by the firm, which is determined by the dispersion of
net cash flows and the level of fixed obligations, as well as the firm’s pool of liquidity
resources”. (Van Horne & Wachowicz JR). The possibility that shareholders will lose money
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when they invest in a company that has debt, if the company's cash flow proves inadequate to
At the beginning of 21st century all the regulatory authorities from all over the world
introduced the codes of the corporate governance to be followed by corporate firms registered in
countries, it will change the overall environment of the corporations in the economies of world.
The practitioners, policy makers and legal experts, are striving to appraise corporate activity in
better ways and in helping to design rules and regulations to improve the way out companies are
Corporate governance, in the finance literature, is described as the set of rules, structures
and procedures by which investors assure themselves of getting a return on their investment
and ensure that managers do not misuse the investor’s funds (e.g., Shleifer and Vishny,
1997).
Financial Risk is the possibility that shareholders will lose money when they invest in a
company that has debt, if the company's cash flow proves inadequate to meet its financial
obligations. When a company uses debt financing, its creditors will be repaid before its
Corporate governance is related with the protection of the rights of the shareholders, which is
directly related to the Agency theory, while Agency theory is aligning the interest of internal
agents (executives/managers) who display strong self-interest with those of the shareholders
(owner). So, if we resolve the agency conflict then it will protect the shareholder’s rights.
meaningfulness should be managed and guided in the most opportune manner. It is related to the
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performance of the organization that how much we are motivated to enhance our firm’s
performance that will reduces the overall risk of the corporation. One other theory which relates
to our topic is transactional cost theory it says that we can reduce the cost of our transactional
hazards through our internal corporate governance, means it will effect on cost reduction that
Meanwhile, risk management is one of the key aspects of corporate governance. There is
a growing realization that corporate governance has an impact on enterprise risk management.
Without the corporate governance there is no check and balance in the firm that leads to the
financial risk. La Porta et al. (1998) said that good corporate governance leads to the protection of the
rights of the investors, which will urge in investors for further investment of his funds. It will also affect
positively on firm’s solvency, which will enhance its market value and create attraction for foreign
investments (as citsd in Anwar, 2012). According to OECD’s most recent report by Richard
Anderson, Corporate Governance alone is not the cause of the current Financial Crisis. However,
Corporate Governance could have prevented some of the worst aspects of the crisis. (How Can
Mr. Anwar’s view about corporate governance is that the firms with poor corporate
governance system will results in a increase in asset price and misallocation of the financial
resources, these firms are less attractive in the view of investors because they feel themselves as
insecure. (as citsd in Anwar, 2012). Corporate Governance country assessment (2005) Good
(1999) argues that an investor’s protection tends to be greater when the legal environment is
stronger, and therefore his willingness to invest tends to increase. They find strong positive
association between corporate governance and firm’s performance. (as cited in Khatab, Masood,
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Zaman, Saleem, & Saeed, 2011). As a famous economist, Dr Shahid Javaid Burki- a long
observer of Pakistan’s economy has recently stated “Pakistan can generate a greater bounce in its
economy than India by creating better governance. It has occurred before in the country’s
difficult economic history and could happen again.” Improved Governance: Dawn, 12th, October
2010). Vishny and Shleifer (1997) say that “Corporate governance concerns with the framework
wherein finance providers are reasonably assured to get the return on their investments made in
Catherine M. Daily and Dan R.Dalton (1994) examine the relationships among corporate
governance structures and corporate bankruptcy using data from 1972 to 1982. Logistic
regression statistical technique was used to measure the relationship between dependent and
independent variables. Profitability, Liquidity and, leverage are dependent variables and CEO
duality and proportion of affiliated directors are independent variables. The results show that
Sung Wook Joh (2003) examines the effect of corporate governance on firm’s
profitability using data from 1993 to 1997.Regression statistical technique was used to measure
the relationship between independent and dependent variables. Profitability is dependent variable
and ownership concentration is independent variable. The firms with low ownership
concentration show low profitability. (as cited in AZAM, USMANI, & ABASSI, 2011). The
findings show that corporate governance has significant and positive impact on firm’s
performance and it is concluded that firm’s performance can be increased by improving the
company’s chief risk officer to participate in board meetings. The same survey indicated
that, although is consider a sound corporate governance practice, only 8% of the boards
represented in the study regularly have the chief risk officer attend board meetings, and only
13% of directors say they believe the chief risk officer (CRO) should regularly attend.
Similarly, in the 2009 survey of the PWC (PWC, 2009) 15% of represented boards have a risk
management committee. In reverse to the above findings only 25% of the participants
believe they should institute a risk management committee for their board. Finally, in the
2010 survey (PWC, 2010) 83% of responding directors believe that audit committees are
(Vassileios, 2011) The Financial Stability Forum (2009) stated that compensation
practices at large financial institutions are one factor among many that contributed to the
financial crisis that began in 2007. High short-term profits led to generous bonus
payments to employees without adequate regard to the longer-term risks they imposed on
their firms. These perverse incentives amplified the excessive risk taking that severely threatened
the global financial system and left firms with fewer resources to absorb losses as risks
materialized. The lack of attention to risk also contributed to the large, in some cases extreme
Conceptual Framework
Variables
The variables for interest under study are measures of firm performance and proxies used
For measuring the firm performance, most of the authors preferred to use following
variables. Current study also focused on profitability, reason being availability of data and ease
1. Return on Asset
2. Return on Equity
3. Tobin’s Q
“Tobin’s Q, measured as the market value of equity capital and the book value of firm’s
Paul Gompers, Joy and, Andrew (2003) examine the relationships between EPS and
corporate governance using data from 1990 to 1999. Regression statistical technique was used to
measure the relationship between independent and dependent variables. The results show that
Reference of use
Most of the researchers have tried to analyze the link between any aspect of the corporate
(Ehikioya, 2009), Fosberg (1989), Hermalin and Weisbach (1991), Bhagat and Black (2002),
1. Outsider director
Presence of outsider director in the board is used as the tool for minimizing
agency problem. Different point of view exists on the relationship of Outsider director
and with performance measures. Fosberg (1989), Hermalin and Weisbach (1991), You et
al. (1986) and Bhagat and Black (2002) has identified that outsider director
representation have no significance positive effect on sales and ROE. Baysinger and
Butler (1985), Rosenstein and Wyatt (1990), Denis and Sarin (1997) and Brickley, Coles
and Terry (1994) reported positive relationship of outside director with firm performance.
2. Ownership structure
relationship between type of ownership structure and firm performance Demsetz and
Lehn (1985). But McConnell and Serveas (1990) and Sarkar and Sarkar (2000) and
3. CEO Duality
CEO duality means one person is holding two positions of CEO and chairperson.
Yermack (1996) and Brown and Caylor (2004) have linked absence of CEO duality
4. Board-Size
Different point of view exists on the linkage between the board size and firm
5. Audit committee
1) Debt Financing
Use of Institutional debt has been studied in the past as the mechanism for getting
control on management and for increasing firm performance. Ahuja and Majumdar
(1998) and Nishat (2004) have identified positive relationship between debt financing
2) Firm Age
“Firm’s age is defined as the number of years since its incorporation, Calculated
as observation year less incorporation year”. Ehikioya (2007) have used firm age as
3) Firm Size
“Firm size, the total assets owned by the firm. Measured as the natural logarithm
of total assets”
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Corporate
Governance
Outside Director
Firm Performance
CEO-Duality
Audit Committee
Board-size
Debt-Financing
Firm age
Firm Size
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The above model depicts the relationship of variables with one another and this model
concentration, Audit committee, outside director, board size, firm age, firm size and debt
financing having impact on firm’s performance. Moreover, the firm’s performance has been
determined by return on equity, return on assets, Earnings per share and Tobin’s Q in this model.
The literature provides differing view on their relationship with each other.
Research Design
1. Study type
Comparative Analysis
(An empirical study on the impact of corporate governance on financial risk in corporate
sector of Pakistan)
2. The Population
Population of the study comprises on the all 650 KSE listed firms in Pakistan.
Sample consist on the 30 selected firms with 5 years data of each firm from 2008
to 2012, random sampling technique is used for sample selection. KSE listed firms are
selected so that we can get easy access to their data plus they have to match with the
First we have selected the firms listed in the Karachi stock exchange
Statistical tools
Correlation
Statistical software
SPSS
6. Limitation of Study
size.
Budget
the study
Total 6 Months
1. Copyright waiver
2. Declaration
3. Title page
4. Abstract
5. Acknowledgments
6. Table of contents
7. Introduction
8. Literature review
9. Middle chapters
Theory
References
Appendices
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Bibliography
AZAM, M., USMANI, S., & ABASSI, Z. (2011). The Impact of Corporate Governance on Firm’s
Performance: Evidence from Oil and Gas Sector of Pakistan. Australian Journal of Basic and Applied
Khatab, H., Masood, M., Zaman, K., Saleem, S., & Saeed, B. (2011). Corporate Governance and Firm
Vassileios, K. (2011). The Relation Between Corporate Governance And Risk Management During The