impact of corporate governance on capital …

IMPACT OF CORPORATE GOVERNANCE ON CAPITAL

STRUCTURE, FINANCIAL PERFORMANCE AND RISK OF

FIRMS OF KARACHI STOCK EXCHANGE

DOCTOR OF PHILOSOPHY (MANAGEMENT SCIENCES)

By

MAHBOOB ULLAH

Registration No. 1094-113028

Supervisor

DR. NOUMAN AFGAN

DEPARTMENT OF BUSINESS ADMINISTRATION

FACULTY OF MANAGEMENT SCIENCES

PRESTON UNIVERSITY, KOHAT

ISLAMABAD CAMPUS

2017

i




By

MAHBOOB ULLAH





ISLAMABAD CAMPUS

2017

ii




SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS

FOR THE DEGREE OF

DOCTOR OF PHILOSOPHY

(MANAGEMENT SCIENCES)

By

MAHBOOB ULLAH


Supervisor

DR. NOUMAN AFGAN




ISLAMABAD CAMPUS

2017

iii

SUPERVISOR CERTIFICATE

This is to certify that the PhD. (Management Sciences) thesis entitled “Impact of

Corporate Governance on Capital Structure, Financial Performance and Risk of

Firms of Karachi Stock Exchange” is submitted by Mr. Mahboob Ullah, Registration

No. 1094-113028 in partial fulfillment for the award of PhD. degree is a record of the

candidate’s own work carried out under my supervision and has been approved for

submission.

Associate Prof. Dr. Nouman Afgan

iv

CANDIDATE DECLARATION FORM

I, Mahboob Ullah

Son of Mahfooz Ullah


Discipline Management Sciences

Candidate of Doctor of Philosophy at the Preston University Kohat

(Islamabad Campus), do hereby declare that the dissertation Impact of Corporate

Governance on Capital Structure, Financial Performance and Risk of Firms of

Karachi Stock Exchange submitted by me in partial fulfillment of PhD degree in

discipline of Management Sciences is my original work, and has not been submitted or

published earlier. I also solemnly declare that it shall not, in future, be submitted by me

for obtaining any other degree from this or any other university or institution.

I also understand that if evidence of plagiarism is found in my dissertation at any stage,

even after the award of a degree, the work may be cancelled and the degree revoked.

August 28, 2017

Signature

Mahboob Ullah

v

COPYRIGHTS

All rights are reserved. Material of this manuscript is protected by copyright laws. Any

part of the document may not be reproduced or utilized in any form or means, electronic

or mechanical, photocopy, recording, information storage and retrieval system, without

the permission of the university authority.

vi

PLAGIARISM UNDERTAKING

I solemnly declare that research work presented in the thesis entitled “Impact of

Corporate Governance on Capital Structure, Financial Performance and Risk of

Firms of Karachi Stock Exchange” is solely my research work with no significant

contribution from any other person. Small contribution/help wherever taken has been

duly acknowledged and that complete thesis has been written by me.

I understand the zero tolerance policy of the HEC and Preston University Kohat,

Islamabad Campus towards plagiarism. Therefore I as an author of the above titled

thesis declare that no portion of my thesis has been plagiarized and any material used as

reference is properly referred / cited.

I undertake that if I am found guilty of any formal plagiarism in the above titled thesis

even after award of PhD degree, the University reserves the rights to withdraw/revoke

my PhD degree and that HEC and the University has the right to publish my name on

the HEC/university website on which names of students are placed who submitted

plagiarized thesis.

________________

Mahboob Ullah


vii

ABSTRACT

This research is conducted to examine the influence of corporate governance on capital

structure, financial performance, and risk of twenty cement manufacturing corporations

listed on Karachi Stock Exchange (KSE), Pakistan from the year 2005 to 2014.

Additionally, the mediating effect of capital structure with corporate governance,

financial performance, and solvency risk protection was analyzed. For accomplishment

of research objectives, annual audited reports were used for data collection. Agency

theory was the basis of this research, hence quantitative technique employed for testing

the theory. The research hypotheses were tested by deploying Pearson’s product-

moment correlation analysis and dynamic generalized method of moments (GMM)

panel data regression model. The findings revealed the positive and significant impact

of corporate governance (insider director, board independence, institutional

shareholdings, board size, and audit committee) on financial performance and solvency

risk protection, however negative and significant impact on capital structure. The

results indicated a positive impact of capital structure on financial performance,

whereas negative on solvency risk protection. Moreover, the outcomes document that

capital structure plays a partial mediating role between corporate governance,

financial performance, and solvency risk protection. This research is useful for

corporate policymakers and managers in general and particularly for the cement

industry in understanding the worth of corporate governance practices in developing

economies like Pakistan.

Keywords: Corporate Governance, Financial Performance, Capital Structure, Solvency

Risk Protection, and Karachi Stock Exchange

viii

CONTENTS

ABSTRACT ..................................................................................................................... vii

LIST OF TABLES ............................................................................................................ xi

LIST OF FIGURES ......................................................................................................... xii

LIST OF ABBREVIATIONS ........................................................................................ xiii

ACKNOWLEDGEMENT .............................................................................................. xv

CHAPTER 1 ....................................................................................................................... 1

INTRODUCTION ............................................................................................................. 1

The Cement Industry in Pakistan ..................................................................................... 7

Background ...................................................................................................................... 9

Problem Statement ......................................................................................................... 18

Research Questions ........................................................................................................ 20

Research Objectives ....................................................................................................... 20

Significance of the Research .......................................................................................... 21

Theoretical and Applied Significance ............................................................................ 22

CHAPTER 2 ..................................................................................................................... 24

LITERATURE REVIEW ............................................................................................... 24

Introduction ..................................................................................................................... 25

Corporate Governance ................................................................................................... 26

Theoretical Foundation .................................................................................................. 29

Agency Theory ........................................................................................................... 30

Stakeholder Theory .................................................................................................... 31

Stewardship Theory ................................................................................................... 32

Institutional Theory .................................................................................................... 33

Political Theory .......................................................................................................... 34

The Resource Dependency Theory ............................................................................ 34

Transaction Cost Theory ............................................................................................ 35

Systems of Corporate Governance ................................................................................ 35

Unitary System of Corporate Governance ................................................................. 35

Dual System of Corporate Governance ...................................................................... 37

ix

Dimensions of Corporate Governance ........................................................................... 39

Financial Performance ................................................................................................... 44

Dimensions of Financial Performance ........................................................................... 46

Corporate Governance and Financial Performance ....................................................... 48

Risk ................................................................................................................................ 51

Dimension of Risk ......................................................................................................... 53

Corporate Governance and Solvency Risk Protection ................................................... 54

Capital Structure ............................................................................................................ 55

Dimensions of Capital Structure .................................................................................... 57

Corporate Governance and Capital Structure ................................................................ 58

Capital Structure and Financial Performance ................................................................ 61

Capital Structure and Solvency Risk Protection ............................................................ 62

Corporate Governance, Capital Structure, Financial Performance, and Solvency ........ 64

Risk Protection ............................................................................................................... 64

Control Variables ........................................................................................................... 68

Firms Size ................................................................................................................... 68

Firm Age .................................................................................................................... 69

Firm Growth ............................................................................................................... 70

Agency Theory, Corporate Governance, and Cement Industry in Pakistan .................. 72

Rationale of the Study .................................................................................................... 72

Conceptual Framework .................................................................................................. 76

CHAPTER 3 ..................................................................................................................... 77

RESEARCH METHODOLOGY ................................................................................... 77

Research Philosophy ...................................................................................................... 77

Research Approach ........................................................................................................ 78

Research Strategy .......................................................................................................... 79

Research Design ............................................................................................................ 79

Population ...................................................................................................................... 80

Data Collection .............................................................................................................. 83

Type of Data and Statistical Analysis ............................................................................ 83

Measurement of variables .............................................................................................. 83

x

CHAPTER 4 ..................................................................................................................... 87

DATA ANALYSIS ........................................................................................................... 87

Descriptive Statistics ...................................................................................................... 87

Pearson Correlation Analysis ......................................................................................... 89

Corporate Governance, Financial Performance, Solvency Risk Protection, and

Capital Structure ......................................................................................................... 89

Regression Analysis ....................................................................................................... 93

Model Equations ........................................................................................................ 94

Corporate Governance and Financial Performance ................................................... 95

Corporate Governance and Solvency Risk Protection ............................................... 97

Corporate Governance and Capital Structure............................................................. 98

Capital Structure and Financial Performance. ......................................................... 100

Capital Structure and Solvency Risk Protection ...................................................... 101

Mediation Analysis ...................................................................................................... 102

Financial performance as Dependent Variable, Capital Structure as Mediating

Variable and CG as Independent Variable ............................................................... 103

Solvency Risk Protection as Dependent Variables, Capital Structure as Mediating

Variable and Corporate Governance as Independent Variable ................................ 104

CHAPTER 5 ................................................................................................................... 107

DISCUSSIONS AND RECOMMENDATIONS ......................................................... 107

Policy Implications ...................................................................................................... 115

Limitations and Delimitations ..................................................................................... 116

Contribution to Knowledge ......................................................................................... 117

Future Research Recommendations ............................................................................. 119

Research Conclusion .................................................................................................... 119

REFERENCES .............................................................................................................. 121

APPENDIX I: Sectors and Companies at KSE, Pakistan ......................................... 143

APPENDIX II: Measurement of Variables ................................................................. 145

Corporate Governance and Capital Structure .............................................................. 145

Financial Performance ................................................................................................. 152

Solvency Risk Protection, Firm Size, Firm Age and Firm Growth ............................. 159

xi

LIST OF TABLES

Number Page

Table 1 Cement Firms Listed on Karachi Stock Exchange 82

Table 2 Measurement of Variables 84

Table 3 Descriptive Statistics of Variables 88

Table 4 Correlation Analysis: CG, FP, Solvency Risk Protection, Capital

Structure, and Control Variables 92

Table 5 Regression Analysis: CG and FP 96

Table 6 Regression analysis: CG and Solvency Risk Protection 98

Table 7 Regression Analyses: CG and Capital Structure 99

Table 8 Regression Analysis: Capital Structure and FP 100

Table 9 Regression Analyses: Capital Structure and Solvency Risk Protection 101

Table 10 Mediation Analysis: FP and Solvency Risk Protection as Dependent

Variables, Capital Structure as Mediating Variable and CG as

Independent Variable 104

Table 11 Summary of Hypotheses Testing 105

xii

LIST OF FIGURES

Number Particulars Page

Figure 1 Unitary System of Corporate Governance 36

Figure 2 Dual System of Corporate Governance 38

Figure 3 The First Hypothesis of the Study 50

Figure 4 The Second Hypothesis of the Study 55

Figure 5 The Third Hypothesis of the Study 60

Figure 6 The Fourth Hypothesis of the Study 61

Figure 7 The Fifth Hypothesis of the Study 63

Figure 8 The Sixth and Seventh Hypotheses of the Study 67

Figure 9 Conceptual Framework 76

Figure 10 Mediation Model – 1 102

Figure 11 Mediation Model – 2 102

xiii

LIST OF ABBREVIATIONS

AC Audit Committee

BI Board Independence

BS Board Size

CACG Commonwealth Association for Corporate Governance

CG Corporate Governance

CIA Chief Internal Auditor

COC Cost of Capital

CS Capital Structure

CV Co-efficient of Variance

DTE Debt to Equity

DTA Debt to Assets

DV Dependent Variable

EBIT Earnings Before Interest and Taxes

EPS Earning Per Share

FAT Fixed Assets Turnover

FAG Firm Age

FATE Fixed Assets to Equity

FG Firm Growth

FP Financial Performance

FS Firm Size

GDP Gross Domestic Product

GMM Generalized Method of Moments

xiv

IDs Insider Directors

IS Institutional Shareholdings

IV Independent Variable

ISE Islamabad Stock Exchange

KSE Karachi Stock Exchange

LSE Lahore Stock Exchange

MT Million Tons

MV Mediating Variable

NED Non-Executive Director

NIM Net Income Margin

OECD Organization for Economic Co-operation and Development

OIM Operating Income Margin

ROA Return on Assets

ROE Return on Equity

SECP Securities and Exchange Commission of Pakistan

SRP Solvency Risk Protection

TAT Total Assets Turnover

TIE Times Interest Earned

YD Years Dummy

xv

ACKNOWLEDGEMENT

There is no God but ALLAH ALMIGHTY and MUHAMMAD Swal-Lal-Lahu-

Wasuwalum is the last prophet of ALLAH ALMIGHTY.

I would like to express my sincere gratitude and appreciation to a number of persons for

whose support and cooperation facilitated the successful completion of this thesis. First

and most important, to my beloved parents, brother, wife, and sisters for prayers,

encouragement, and support.

My gratitude to my supervisor, Dr. Nouman Afgan, Associate Professor, Preston

University, for his supervision. My sincere thanks to my ex-supervisor, Dr. Khurrum

Riaz, Associate Professor, Ulster University, London Campus, for the kind directions

and valuable guidance in building my research background.

I am greatly indebted to Miss Ayesha Khan Lodhi, Senior Faculty Coordinator-PhD

Program for her great cooperation and support.

My gratitude to Dr. Muhammad Ramazan, Associate Professor, Preston University,

Prof. Dr. Tahir Saeed, Preston University, Prof. Dr. Aziz Ullah, Preston University,

Prof. Dr. Aurangzeb, Preston University, Dr. Qaiser Risqué Yasser, Associate

Professor, Preston University, Dr. Muhammad Kashif Durrani, Dr. Sajjad Ahmad

Afridi, Dr. Muhammad Hashim, and Faiz-u-Rehman for cooperation and guidance.

1

CHAPTER 1

INTRODUCTION

The success of every firm depends upon the golden principles of directing and

controlling. History witnesses that organizations directed and controlled effectively

have touched the heights of the sky. The mechanism through which firms are directed

and controlled is termed as corporate governance (Velnampy & Nimalthasan, 2013).

Corporate governance (CG) consists of rules and laws which affect the way an

organization is directed and controlled (Gordini, 2012). CG establishes a set of

transparent rules in which officers, directors, and stockholders have aligned incentives

and firms grow with the passage of time. CG is one of the key mechanisms for instilling

investors’ trust and protecting their interests.

Proper application of corporate governance practices brings fairness,

transparency in entire matters of a firm and accomplishes the interest of all

stakeholders. Public organizations, companies, and investors have recognized the

significance of corporate governance across the globe as it brings transparency and

control frauds (Ahmed & Hamdan, 2015). CG plays a vibrant role in economic

development, instilling investors’ confidence and increasing corporate financial

performance through transparency and accountability. Enobakhare (2010) documented

that financial performance (FP) is how well an organization utilize assets from its main

source of business and produce revenue. FP is the monetary outcome of corporate

policies and operating activities. Investors purchase equity and debt instruments of

those organizations that yield high return for them.

2

Barbosa and Louri (2015) described that good practices of CG enhance firms’

FP. The outcomes of Todorovic (2013) research evidenced a positive association

between CG and FP of firms. The application of CG practices significantly affects

firms’ performance (Okiro, Aduda, & Omoro, 2015). Financially sound companies offer

handsome dividend and maintain a good amount of retained earnings to meet the future

operating and fixed assets needs. In addition, such firms keep a low level of debts and

do not require paying more interest. However, financially weak corporations use more

debts to meet its need. Such corporations pay high amount of interest on borrowed

funds and bear high risk and lose solvency.

High debt level in corporate capital structure increase firm risk. Investors prefer

organizations that yield more return at low risk. Good governed corporations ensure

optimal capital structure in order to meet the fixed assets and operating needs to

enhance FP and mitigate risk. Aries (2016) described capital structure as the mix of

equity and debt securities. The effective mechanism of CG plays a vibrant role in

capital structure decision to enhance corporate value and minimize risk. High

leveraging negatively affect corporate worth due to high risk and, hence firm solvency

decreases.

There are several studies presenting evidence that agency problem affects CG,

firm financing decision, corporate FP, and solvency risk protection. The corporate

effectiveness and efficiency can be maximized by deploying appropriate supervision

and control. CG contributes a significant role in aligning the stake of principal and

agent to minimize agency problem (Shleifer & Vishny, 2013). Good structure of CG

enable a firm to get loans easily, protect the stake of entire stockholders, escalate

3

transparency and minimize agency problems. Whereas, corporations with weak

corporate structure face more agency problem as the managers in such corporation

obtain personal benefits instead of firm (Jensen & Meckling, 1976).

The impact of CG on FP, capital structure and risk has been a matter of

empirical investigation in the field of finance. The CG has been a part of economics

studies since the influential publication of Adam Smith in 1776 “an inquiry into the

nature and causes of the wealth of nations” and certainly given a stimulus through the

classic publication of segregation of firm ownership from control (Berle & Means,

1932). The CG mechanisms varies from one country to another due to diverse structures

resulting from the different conditions of economic, social, and regulations.

Measuring corporate FP and risk has been elements of debate in CG across the world

(Rehman, & Raoof, 2010; Shoaib & Yasushi, 2017).

Good practices of CG bring transparency, fairness and boost the trust of

shareholders in the financial market, whereas weak practices of CG cast doubt on

corporate trustworthiness, reliability or obligation to stockholders (Solomon, 2010).

Problems have been experienced regarding FP, capital structure, and risk of firms due to

weak practices of CG. Corporations which support or tolerate illegal activities can

create scandals (Quang & Xin, 2014). Corporate scandals across the globe confirmed

that weak CG practices cannot prevent frauds, deception, complain of corruptions and

internal trading. Therefore, corporations require sound CG mechanism to instill

investors’ confidence by offering good return and mitigating risk. FP of the cement

industry of Pakistan depends upon good practices of CG (Shahid, Siddiqui, Qureshi &

4

Ahmad, 2017). Cement manufacturing firms governed according to the code of CG

maximize performance and mitigate risk (Cheema & Din, 2014).

The effect of CG on capital structure, FP and risk has been analyzed mostly in

advanced economies where the stock markets are highly developed. According to

Baydoun, Maguire, Ryan, and Willett (2013), the applications of CG mechanism is

important for developed economies and in particular to developing economies in order

to avoid financial scandals, mitigate risk and enhances FP. According to Ekanayake,

Perera, and Perera (2010), more contemplation has been given to implement CG

practices in under-developed economies because many developing countries lack

adequate exercise of CG.

CG is weak in Pakistan, however Securities and Exchange Commission of

Pakistan (SECP) is trying to enforce code of CG on Pakistani corporations to instill

confidence of national and foreign investors, accomplish corporate goal, and protect

entire stakeholders. Corporations adhering code of CG in Pakistan have been indicated

good financial performance and low risk. Cement sector is also one the sectors in

Pakistan that is adhering code of CG issued by the SECP and proved that most of the

cement sector firms are generating sound return at minimum risk. This industry is one

of the most pivotal sectors that contribute a huge part in the economic growth of

Pakistan. Due to the privatization of the cement industry in Pakistan in 1990, new plants

were set up. The cement industry has grown very rapidly in the last two decades

(Shahid et al., 2017). There were only four cement manufacturing firms in the year

1947 (Pakistan independence time) with the production capability of 470,000 tons

annually. However, in year 2014, there are 29 cement manufacturing firms in Pakistan,

5

out of them twenty firms are listed on KSE Pakistan with 44.09 MT production capacity

(Shahid et al., 2017).

In the light of significant contribution of cement industry in economic

development, it is indispensable to identify the impact of CG (insider directors,

institutional shareholdings, board independence, audit committee, and board size) on

capital structure, FP and solvency risk protection of cement industry of Pakistan.

Studies have proved that CG (audit committee insider directors, institutional

shareholdings, board independence, and board size) significantly impact FP and

solvency risk protection of firm. The agency theory offered by Jensen and Meckling

(1976) also documents that good practices of CG maximize corporate fairness and

transparency in firm affairs. The theory describes that FP and solvency risk protection

can be improved by controlling the agency problem. The theory documents that if

independent directors are entrusted by shareholders to represent them on company

boards that will lead to unbiased corporate judgments and decisions in the best interest

of corporation. As the number of independent directors’ increases, the FP and solvency

risk protection also increases.

Furthermore, the agency theory predicted that FP is maximized and solvency

risk is protected in the presence of institutional shareholding. The institutional

shareholding deploys their financial and analytical skills to fully utilize corporate

resources. The adequate percentage of institutional shareholding in the company board

improves FP and solvency protection due to strong financial insight. In addition, the

agency theory suggests that large board size positively impacts FP and improve

solvency protection. Corporate board properly advice and monitor management and

6

hence improve corporate FP and solvency protection. However, it is worth mentioning

that board size is not similar in all companies. Large size companies need large board

size and small companies need small, however cement companies are large in size,

therefore, there may be a high level of agency problem which requires large board size

to control agency problem.

Agency theory documents there must be proper functioning audit committee

who frequently check the financial records of the corporation to protect the interest of

entire stakeholders and enhance corporate worth. Proper functioning audit committee

ensures controlling management functions like financial reporting, risk management,

and internal auditing. As the numbers of the audit committee members and particularly,

the independent members with sound financial background increases, the FP and

solvency also improves. The pecking order theorem offered by Myers and Majluf

(1984) documents that firm prefer internal financing first (equity) than external

financing (debt) in order to maximize FP and protect solvency.

For accomplishment of research objectives, the entire cement corporations listed

on KSE, Pakistan are deployed to check the impact of CG on capital structure, FP, and

solvency risk protection from year 2005 to 2014. The cement sector is selected due to

its defined structure and likely to indicate an association between the variables of this

research. Besides this, studies are not found on cement industry across the globe

regarding CG, capital structure, FP and solvency risk protection jointly and in particular

to developing economies like Pakistan. In addition, cement sector is chosen because

during the era of 2005 to 2014, the industry was on boom and most of the companies

were indicating sound FP, there it was imperative to analyze the impact of CG on

7

capital structure, FP and solvency risk protection because fraudulent scandals could

happen that might influence the FP and solvency risk protection.

The Cement Industry in Pakistan

Some of the industries are contributing an important role in economic growth of

Pakistan. Among these industries, the role of the cement is highly significant due to its

good contribution to economic growth. This industry is one of the most pivotal sectors

that contribute a huge part in the economic growth of Pakistan. The cement

manufacturing firms operating in Pakistan are producing white, slag, grey Portland and

sulfate cement. Due to the privatization of the cement industry in Pakistan in 1990, new

plants were set up. The era of higher GDP growth and earthquake rehabilitation of

2005, the industry has indicated incredible growth in the last decade. The cement

industry fulfills not only local demand but is also exported to Afghanistan, India, South

Africa, Sri Lanka and the United Arab Emirates (Cheema & Din, 2014). Around thirty

billion rupees have been contributed by the cement industry to national income from

2012 to 2015 (Naz, Naqvi, & Ijaz, 2016).

The cement industry has grown very rapidly in the last two decades (Hijazi &

Tariq, 2006). There were only four cement manufacturing firms in the year 1947

(Pakistan independence time) with the production capability of 470,000 tons annually.

However, in year 2014, there are 29 cement manufacturing firms in Pakistan, out of

them twenty firms are listed on KSE Pakistan with 44.09 MT production capacity

(Shahid et al., 2017). According to Naz et al. (2016), the listed companies are

categorized on the basis of ownership into international corporations (four), armed force

8

corporations (three) and private corporations (thirteen). The cement manufacturing

facilities are segmented into the northern zone and southern zone on the basis of

geographical distribution. The northern zone consists of 19 units “listed and non-listed

firms” whereas, the southern zone consists 10 units “listed and non-listed firms” of

cement manufacturing plants (Economic Survey of Pakistan, 2013). Pakistan has

become self-sufficient in cement and is exporting to many countries. The competitive

environment of the cement industry adds general benefits to final users as well as the

cement industry. The cement product needs a favorable area and high infrastructure.

Majority of cement industries are located in the area of mountains that are rich in irons,

clays and minerals.

The cement industry is playing a magnificent role at the national and

international level in infrastructure development. Construction of dams, governmental

expenditures, rapidly increase in population rate, housing projects, urbanization,

changing living style are the factors that determine the growth of the cement industry of

Pakistan (Cheema & Din, 2014). The cement sector firms listed on KSE, Pakistan are

practicing the code of CG issued by SECP as is one of the pre-requisites for the firms to

be listed on the stock exchange(s) of Pakistan. The cement manufacturing firms with

good CG enhance FP and solvency risk protection (Aries, 2011). The companies must

exercise the code of CG to improve FP (Hasan, Kobeissi, & Song, 2011). Good

practices of CG ensure optimal capital structure decision (Ganiyu & Abiodun, 2012)

that maximize FP (Bernanke, 2008), and solvency risk protection (Aries, 2011).

Keeping in view the significant role of cement industry in several areas of

Pakistan’s economy, the present research was conducted to examine the influence of

9

CG on capital structure, FP and solvency risk protection of cement manufacturing

corporations listed on KSE, Pakistan.

Background

Good practices of Corporate Governance (CG) contribute to strengthening the

economy by enhancing corporate performance and increase access to the global capital

market. In developing economies good practices of CG provide several public policy

objectives. It minimizes the financial susceptibility, decreasing transactions cost, and

leads to the development of the capital market and economic condition. However, the

implementation of code of CG is indispensable in every country. Therefore, regulatory

authorities are established by the governments to issue, revise and ensure the proper

exercise of code of CG across the globe.

For the very first time, the code of CG issued by the USA in 1970s’ and

Pakistan in 2002. The SECP is responsible for issue, revise and ensure the effective

application of the code of CG. This is mandatory for firms to adhere the code in order to

be listed on stock exchange. The code of CG has been revised in different periods for

stronger regulation of companies and lastly updated and issued on 22nd

November 2017

in order to bring more transparency, fairness and boost the trust of shareholders in the

financial market (Code of Corporate Governance, 2017). The confidence of investors

could be instilled more if the firms are properly directed and controlled as per the rules,

laws, practices, and process. The mechanism which is employed to direct and control

corporate matters is called CG (Wanyoike & Nasieku, 2015). CG is the set of laws,

10

policies, rules, and institution-based system which are used to persuade managers to

increase corporate worth.

According to Barbosa and Louri (2015), CG is applied for attaining the interest

of stakeholders through persons interested in the improvement of a corporation by

ensuring that the corporate managers and insiders take necessary steps for this purpose.

Further, they described that stakeholders (shareholders, government, employees,

business associates, lenders, and society at large) have distinctive interest in

corporation. The interest of shareholders is a persistent rise in stock price, the

government looks for taxes, employees look for long service at smart conditions,

business associates seek additional profit, and the stake of lenders is investment’s

security as well as on-time interest reimbursement. It is apparent that stakeholders’

interest varies and clash with each other. Only a few among the stakeholders hold more

control in decision making, which mostly protects their personal stake rather than all.

The mechanism that secures and defends the interest of each stakeholder, minimize the

exploitation of minority stakeholder’s and minimize self-benefited decision of dominant

stakeholder(s) is termed as CG (Eling & Marek, 2011). CG is the mechanism employed

to accomplish the goal of each stakeholder and in particular of shareholders

(Enobakhare, 2010). The goal of every shareholder is to maximize his wealth. Good

practices of CG ensure maximization of Financial Performance (FP) and minimization

of risk and increase solvency risk protection.

Agyei and Owusu, 2014; Alam and Shah, 2013; Bernanke, 2008; Gaaniyu and

Abiodun, 2012; Okiro, 2014; Vo and Nguyen, (2014) employed various dimensions of

CG, capital structure, FP, and risk to analyze their association in different organizations

11

of developed and under-developed economies. Researchers have proved that CG

maximize FP and protect solvency by reducing debt level in capital structure and hence

pay less interest charges. CG is a useful instrument to help corporations for the

accomplishment of their objectives (Quang & Xin, 2014).

Gugnani (2013) conducted research to check the impact of CG (board

independence, board size, institutional shareholdings) on FP (ROA and ROE) of

Twenty-five firms enlisted on Bombay Stock Exchange, India. The outcomes proved

that CG positively affects FP. The research of Yasser, Entebang, and Mansor (2011)

also indicated a positive association between CG and FP of Pakistani listed companies.

Khan and Awan (2012) performed research to check the relation between CG (board

size and board independence, audit committee) and FP (ROA, Net Income Margin, and

ROE) of corporations enlisted on KSE, Pakistan. The results indicated that CG

positively affects FP. They described further that cement manufacturing firms governed

in accordance with the code of CG maximize wealth of stockholders and build

investors’ trust. Reddy, Locke and Frank (2015) checked the association between

dimensions of CG (audit committee and board size) and corporate performance (Net

Income Margin and ROA) of publicly enlisted firms in New Zealand. The outcomes

indicated a positive association between CG and firm performance.

Ehikioya (2009) checked the influence of CG on the FP of one hundred and

seven production corporations enlisted on the Nigeria Stock Exchange from 1998 to

2002. CG was measured through insider directors and audit committee members,

whereas FP was calculated through Net Profit Margin, ROE and ROA. The results

proved that the audit committee, insider directors, and board independence positively

12

impact FP. Gompers, Ishii and Metrick (2013) measured CG through board size,

institutional shareholdings, and managerial shareholdings, whereas FP ROA, total assets

turnover, and net income margin were used to analyze FP. The results documented that

facets of CG positively affects FP.

Good practices of CG enhance corporate FP and build a strong position in the

market, however weak CG negatively affects FP and firms bear massive financial

distress. Weak structured corporations face financial problems and hence depend on

leveraging to meet the operating and fixed assets needs and consequently become more

risky (Eling & Marek, 2011). The risk is inherent with debt financing as the level of

debt in capital structure increases, firms need to pay high interest charges due to which

cost of capital increases, solvency risk protection decreases, and firms become more

risky.

According to Prasetyo (2011), the failure of corporations to settle financial

obligation is termed as risk. Sheikh and Wang (2011) documented that risk arises when

a firm does not own adequate financial resources to cover debts and interest charges.

The inability of a firm to cover matured debts and interest charges is termed as risk

(Eling & Marek, 2011). Researchers have used different tools to measure risk. Lang

and Jagtiani (2010) measured risk with net income plus depreciation expense over total

liabilities. Roggi, Garvey, and Damodaran (2012) measured risk by solvency risk

protection ratio (dividing operating income on interest charges). Time interest earned is

one of the tools used by researchers to measure risk. This research also measure risk

through times interest earned as used by (Alam & Shah, 2013; Aries, 2016).

13

Researchers have provided evidences that good practices of CG increase firms’

solvency due to optimal capital structure decision (Ahmed & Hamdan, 2015; Wanyoike

& Nasieku, 2015).

Aries (2016) documented that risk could be minimized by risk-averse managers

by preferring equity financing over debt financing. A decision regarding the level of

debt and equity significantly affects FP and solvency risk protection (Todorovic, 2013).

The decision regarding the optimal capital structure (debt & equity) which enhance FP

and mitigate risk is one of the core functions of the corporate board. According to

Fosberg (2004), capital structure is the blend of a company short and long term debts,

preference shares and common stock. According to Zeitun and Tian (2017), CG is

primarily related to the capital structure decision which performs a key role in boosting

FP and mitigating risk.

Quang and Xin, (2014) analyzed the association between CG (board

independence, institutional ownership, and board size) and capital structure (debt to

equity). They documented a negative association between CG and capital structure.

Further, they described that the larger size of the corporate board exerts pressure on

management to use low debts while financing the corporate long term investments in

order to minimize the interest charges. In addition, independent directors, presence of

institutional shareholders, and proper functioning audit committee prefer minimum

leverage by deploying internal sources of financing to cut the cost of debt. Firms

efficiently utilize their entire resources to reduce the capital cost and maximize

corporate worth hence, do not prefer debt financing.

14

Ganiyu and Abiodun (2012) analyzed the association between CG and capital

structure of corporations enlisted on the Nigeria Stock Exchange. They documented that

CG (board size, institutional shareholding, and board composition) has a negative

relationship with capital structure. They described that as the board size becomes larger

and institutional shareholdings increases, firm finance assets and operating needs

through internal sources (equity) instead of external (debts). Further, they elaborated

that good practices of CG ensure to finance assets through equity rather than debt in

order to minimize company risk and create goodwill.

Masnoon and Rauf (2013) carried out a study to check the impact of CG on

capital structure of Pakistani corporations. The results indicated that CG (board

independence and managerial shareholdings) have a negative relationship with capital

structure. Further, they described that those organizations with more board

independence, managerial shareholdings, and larger board size concentrate on low debt

financing. These organizations deploy internal financing to meet the operating and

assets needs. Organizations properly adhere to the CG accomplish their goal easily by

minimizing the cost, maximizing the profit, and improving market share. Sound FP will

cover most of its needs through internal sources rather than the external.

Liao, Mukherjee, and Wang (2012) recommended that good practices of CG

help corporations in managing information efficiently due to which the entire cost of

capital decreases and corporations make optimal capital structure decision. Good

practices of CG help firms to finance operating and assets needs at low cost and

consequently reduce the cost of debt and solvency risk protection increases (Aries,

2016). According to Barbosa and Louri (2015), the optimal capital structure gives a

15

balance between debt to equity ratio and minimizes the corporate total cost of capital.

The optimum ratio of debt to equity is that which enhances corporate worth and

minimizes cost. Sunday (2010) analyzed the association between capital structure (debt

to equity) and FP (ROA and ROE). The outcomes revealed an affirmative association

between capital structure and FP. According to Eling & Marek, 2011; Roggi et al.,

2012), there is a negative association between capital structure (debt to equity) and risk

(EBIT divided by interest charges). They documented further that as the level of debt

increases, firms need to pay more interest charges on borrowed funds due to which

corporate solvency is negatively affected and firm become more risky.

Researchers have applied different facets of CG to evaluate its effect on capital

structure, FP and risk in developed and underdeveloped economies across the globe.

Corporate FP increases and risk decreases due to the application of CG mechanism, but

this effect changes more if intervened by capital structure. In this research, the author

has employed board size, insider directors, institutional shareholdings, board

independence, and audit committee to measure CG, whereas, capital structure is

calculated through debt to equity and debt to total assets. Furthermore, FP is analyzed

through ROA, ROE, operating income margin, net income margin, and total assets

turnover, however, times interest earned is used to measure risk.

Insider directors are members of the board with the fiduciary responsibility of

firms operation (Bhagat & Bolton, 2018). The Code of CG of Pakistan (2014) defined

insider directors as the directors who give more time to firm operation. They perform

the function of managing the corporate activities. The Code of CG of Pakistan (2014)

requires insider directors to be a maximum 1/3 of the board of directors of the firm

16

including a chief executive officer. Jensen and Meckling (1976) stated that as the

number of insider directors increases, the managers do not shift the resources of a

corporation away. They argued further that raising the number of insider directors will

impact the company positively by persuading the directors to work in the corporate

interest.

Independent board comprises of outside directors, not affiliated with corporate

top executives and has less or no business dealing with corporations. Independent

directors are those working with other organizations as well (Jensen & Meckling, 1976).

Increasing the number of independent directors maximize corporate worth (Khan &

Awan, 2012). The Code of CG of Pakistan (2014) requires that there must be one

independent director however one-third of the entire company board is more preferred.

Dalton and Dalton (2005) described board size as persons elected in a company for the

representation of entire stockholders. Researchers have provided evidence that large

size of company board positively affects FP and solvency risk protection. The code of

CG of Pakistan (2014) requires up to nine members in a company board. Hermalin and

Weisbach (2001) checked the association between the size of the company board and

FP and found an affirmative association. They documented further that large board size

boosts competitiveness due to better ideas for decision making and hence instill investor

confidence.

Okiro, Aduda, and Omoro (2015) defined the audit committee as corporate

board committee that oversees financial events, reports, and disclosures. Proper

functioning audit committee increases the worth of financial reporting and positively

17

affects the FP of the firm (Gordini, 2012). The Code of CG of Pakistan (2014) requires

at least three audit committee members, headed by an independent director.

According to Wahla et al. (2012), ROA indicates the company efficiency in

utilizing assets entirely. The firm FP increases as a result of high returns. ROE is

calculated to check the profit earned on shareholders’ equity (Enobakhare, 2010). As

more the return a company offers to its stockholders, greater the investment

opportunities for a firm. The ratio of ROE indicates effectiveness of a firm in using the

shareholders’ investment to generate dividends. ROE is measured by dividing net

income on Stockholders’ equity. According to Garcia-Meca and Sánchez-Ballesta

(2009), operating income margin shows the operating efficiency and pricing strategy of

a company. Operating income margin indicates the percentage of income before taxes

and interest that is generated by a company of from its sales. Enobakhare (2010)

described that net income margin is one of the profitability tools. This ratio shows the

conversion of one dollar revenue into profit. The total assets turnover designates the

managerial effectiveness in using its total asset to produce revenue (Ghabayen, 2012). A

high ratio indicates more sales in utilizing company total assets.

The debt to equity ratio shows the level of debts deployed to finance total assets

and other corporate needs as compared to stockholders’ equity (Ganiyu & Abiodun,

2012). Debt to total assets shows the fraction of total assets that are financed through

debts. A high ratio indicates that more assets are financed through debts (Adekunle &

Sunday, 2010). A very high ratio is not good for a company as high ratio indicates that

more assets are financed through debts and corporation can bear high risk (Abdul,

2012). The ratio of times interest earned indicates a firm ability to cover its interest

18

charges on accrued debts from the operation (Aries, 2016). Investors use the ratio of

times interest earned to measure the riskiness of a company. They make investments in

low-risk firms. Analyst predicts that at least twenty percent is a suitable ratio to meet

the interest charges of a company (Roggi, Garvey, & Damodaran, 2012).

Cement sector is one of the key sectors of Pakistan, performing a vibrant role in

economic development. The role of cement sector in the economic development of

Pakistan can be outlined through value addition to the gross domestic product,

employment creation for thousands of people, foreign remittances and huge income for

government in the form of tax. The cement industry of Pakistan has attracted domestic

and foreign investors due to abundant and cheap raw material, persisting rise in local

and foreign demand for cement and sound profit margin.

This research analyzes the influence of CG on FP, capital structure, and risk in

the light of the prevailing code of CG (2014) in Pakistan and the existing internal

system of cement sector firms listed on KSE. The regulatory authorities of Pakistan

have been made good efforts for improvement of the code of CG to strengthen the

entire sectors of Pakistan as it play a significant role in enhancing corporate FP, making

optimal capital structure decision, and mitigating risk.

Problem Statement

Proper application of CG practices plays a significant role in maximization of

corporate FP and mitigating risk. Most of the researches have been conducted to test the

impact of CG on firms’ FP and risk in developed economies (Ahmed & Hamdan, 2015).

According to Ekanayake, Perera, and Perera (2010), more attention should be given to

CG in developing economies as several economies lack proper system of CG. Pakistan

19

is also a developing economy and CG system is weak, therefore this study examines the

impact of CG practices on FP, capital structure, and risk of cement firms listed on KSE,

Pakistan.

One of the basic questions with respect to corporate finance is capital structure

decision; what can be the ideal debt to equity mix. As the fundamental objective of

corporate financing decision is maximize firm value, minimize cost, maximize market

share (Wanyoike & Nasieku, 2015). Corporate board is one of the facets of CG that is

responsible for making such optimal capital structure decision to maximize financial

performance and minimize risk (Jensen & Meckling, 1976; Shoaib & Yasushi, 2017;

Quang & Xin, 2014).

It is believed that CG is a noteworthy tool, deployed to make optimal capital

structure decision, increase FP, and mitigate risk. Researchers have analyzed the impact

of CG on FP (Aggarwal, 2013; Baydoun, Ekanaakey, Perera & Perera, 2010; Gugnani,

2013), impact of CG on capital structure (Baydoun, Maguire, Ryan, & Willett, 2013;

Zeitun & Tian, 2017) but very limited research work is done to examine the impact of

CG on risk (Barbosa & Louri, 2015; Muhammad, Shah, & Islam, 2014; Solomon,

2010).

According to the author's knowledge CG, capital structure, FP and risk with

addition of capital structure as mediator got very limited literature in particular to the

cement industry and specifically in Pakistan. Therefore, this research is conducted to

analyze the impact of CG on capital structure, FP and risk of cement manufacturing

corporations listed on KSE, Pakistan. Furthermore, the role of capital structure as a

mediator is also analyzed.

20

Research Questions

For accomplishment of the research objectives, the current study is conducted to

investigate the impact of CG on capital structure, FP, and risk of cement manufacturing

firms listed on KSE, Pakistan. Therefore, the beneath mentioned questions are designed:

What is the relationship between CG (insider directors, institutional

shareholdings, board size, board independence, and audit committee) and FP

(ROA, ROE, operating income margin, net income margin, and total assets

turnover)?

Does CG impact firms’ solvency risk protection (times interest earned)?

Is there any relationship between CG and capital structure (debt to equity and

debt to total assets)?

What is the relationship between capital structure, FP and solvency risk

protection?

Does capital structure mediate between CG, solvency risk protection and FP?

Research Objectives

The fundamental aim of current study is to explore the impact of CG on capital

structure, FP, and risk from a theoretical and practical perspective of cement

manufacturing corporations listed on KSE, Pakistan. For this purpose, the objectives are

marked as under:

Analyzing the impact of CG (insider directors, institutional shareholdings, board

independence, board size, and audit committee) on capital structure (debt to total

assets and debt to equity), FP (ROA, ROE, operating income margin, net income

21

margin, and total assets turnover), and solvency risk protection (Times Interest

Earned).

Evaluating the relationship between capital structure, FP and solvency risk

protection.

Analyzing the meditating role of capital structure between CG, solvency risk

protection, and FP.

Understanding the existing corporate practices of cement manufacturing

companies of Pakistan and signifying measures to improve these practices.

Significance of the Research

The financial scandals of giant corporations across the globe like Adelphia

Communications, Kmart, Chiquita Brands Int, Enron, World Com, One Tel, China

Medical Technology, Kabul Bank, Crescent Bank Fraud, PTCL, ENGRO Group of

Companies, and Mehran Bank shaken the investors, executives and government. The

fundamental reason behind the downfall and collapse of these organizations were weak

directing and controlling. In all these few bankrupt companies, the directors and

executives were involved in fraudulent affairs.







22

and foreign demand for cement and sound profit margin. Therefore, it is imperative to

check the CG practices of cement industry of Pakistan and its impact on capital

structure, FP and solvency risk protection based on code of CG of Pakistan (2014) from

2005 to 2014.

Theoretical and Applied Significance

This research attempts to examine the impact of CG (insider directors, board

independence, institutional shareholding, board size, and audit committee) on FP and

solvency risk protection of cement sector firms listed on KSE. This study would provide

an innovative and applied framework to examine and analyze the role of capital

structure as mediator between CG, FP and solvency risk protection.

This study will enrich the Agency theory in the context of Pakistan by

documenting how to minimize conflict of interest in a company. Agency theory

identifies the major causes of agency problem and suggests the principles which may be

applied to resolve it. Whereas, this research would reveal the mechanisms need to be

applied in cement manufacturing firms of Pakistan in order to overcome this

issue. Furthermore, this research will integrate a new model by enriching the existing

academic framework. The current research will examine that how the association

between CG (predictor) and FP and solvency risk protection (outcome variables) is

intervened by capital structure. This model will not only develop the current academic

structure of CG by integrating capital structure but also present a novelty to add other

significant mediating factors into CG as well.

23

The model used in this research would measure CG with more rich dimensions

(insider directors, institutional shareholdings, board size, board independence, and audit

committee) as compared to earlier studies to check its impact on capital structure, FP

and solvency risk protection. This research will measure FP with rich measures like

ROA and ROE, operating income margin, net income margin, and total assets turnover

to analyze in detail the role of FP as an outcome variable.

Corporations try to enhance CG rating so that the corporate worth can also be

enhanced. For this purpose, the current research will recommend the optimal size of

board, required number of independent directors, insider directors, and institutional

shareholding. This research will be useful for the corporate directors to identify the

usefulness of optimal capital structure decision keeping in view the corporate goal. The

SECP amends and issues the corporate regulations and policies to strengthen the

significance of CG. This research will provide evidences that how to improve the code

of CG practices in Pakistan to maximize corporate FP, enhance solvency risk

protection, bring transparency in corporate affairs, and instill national and international

investors.

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CHAPTER 2

LITERATURE REVIEW

CG exists as long as corporations but as an area of study, it is less than eighty

years old. In the last four decades, several activities, reports, codes, and laws have

emerged. CG came into vogue in the 1970s in the USA. Since that time it has become

the hot topic of the debate in the world among academicians, regulatory bodies,

investors and executives in this progressive and aggressive` corporate environment. It is

indispensable for the accomplishment of a new frontier of profitability and competitive

edge.

Due to the substantial worth and existing literature of CG, this chapter is

structured as introduction, CG, theoretical foundation, CG systems in the globe,

dimensions of variables used in this research, the cement industry in Pakistan are

discussed. Furthermore, other variables of this research including FP and its

dimensions, solvency risk protection and its dimension, and capital structure and its

dimensions are described. The association between CG and capital structure, the

relation between capital structure and FP, the association between capital structure and

solvency risk protection and influence of CG on capital structure, FP and solvency risk

protection are described. The control variables (firm size, firm age, and firm growth) are

also discussed. The rationale of the study, conceptual framework, and research

hypotheses are also discussed in this chapter.

25

Introduction

The fundamental goalmouth of every corporation is to enhance corporate value,

which occurs when stockholders get a high price for their existing stocks (VanHorne &

Harlow, 2009). The shareholders' wealth can be maximized if corporations exercise the

code of CG. The worth of CG has been realized globally due to financial crises in past

decades, technological advancement, the emergence of financial markets, liberalization

of trade, and capital mobilization (Reddy, Locke, & Frank, 2015). Good CG stabilizes

and strengthens capital market and protects investors. It helps corporations to enhance

FP, mitigate risk, and attract more investors across the globe. High investment in a firm

indicates investors’ trust due to good FP and low risk and greater solvency risk

protection (Khan & Awan, 2012).

The entire industries, particularly service and manufacturing contribute their

significant role in economic development. The contribution of the cement sector in

boosting economic growth cannot be overlooked. Those cement manufacturing firms

exercising the code of CG, produce a good return for shareholders and instill investors’

trust, however those firms do not adhere the code lose the trust of investors, bear loss

and suffer risk. Risk is related to the decision made by the corporate board regarding

capital structure as good decision ensures optimal capital structure, which in turn

enhance FP, mitigates risk, increase solvency risk protection, and instill investors’

confidence (Quang & Xin, 2014).

The work done on the cement industry of Pakistan is not that much as this

industry has been contributing in economic development, employment creation for

thousands of people, foreign remittances and huge income for the government. The key

26

drivers of the current study were to analyze the effect of CG (predictor) on capital

structure, FP, and solvency risk protection (outcome) as well as to test capital structure

as a mediator between the predictor variable and outcome variables of listed cement

manufacturing firms on KSE, Pakistan.

Corporate Governance

CG is the composition of laws, rules and management techniques deployed to

direct and control corporate affairs (Ganiyu & Abiodun, 2012). The code of CG

identifies the allocation of authority and responsibility among distinct members

(shareholders, auditors, creditors, managers, and other stakeholders) and consist the

rules and procedures for operation of listed firms (Agyei & Owusu, 2014). CG is a

system of governing corporate affairs to protect shareholders and other stakeholders that

increases performance. It contains procedures, rules, laws, and policies which influence

the manner a company is regulated (Shoaib & Yasushi, 2017).

The system and definition of CG differs across the globe. Therefore, it is

intricate to offer a universally accepted definition and system due to differentiation in

culture, legislative system, and historic growth (Ramon, 2011). Barbosa and Louri

(2015) described that CG has been defined and practicing in a diverse manner in most

of the countries, depending upon the owners’ power, managers and financiers. It pertain

laws, policies, and customs which affect how corporations are directed and controlled

for the accomplishment of organizational goal.

CG can be defined in relation of shareholders' perspective and the stakeholders’

orientation. Therefore, the discussion of CG rotates that whether corporations should be

27

operated by management in the interest of shareholders only (shareholders perspective)

or consideration should also be given to other constituencies (stakeholders’

perspective). According to the Anglo-American countries (USA and UK), the focus of

CG is to generate good return for investors (shareholders perspective), whereas, in the

Continental European countries (France, Greece, and Germany) CG refers to entire

corporate stakeholders' “stakeholders perspective” (Okiro, 2014).

CG explains the mechanisms, which have been employed since the subsistence

of corporations. These mechanisms seek to make sure that the corporate entities and

management are operated according to the existing corporate standards to protect and

uphold the interest of stockholders, and other stakeholders (Sanvicente, 2013). CG is

the mechanism employed by companies to direct and control its affairs in a transparent

manner (Australian Standard, 2003). This definition is assumed more absolute as it

identifies the pre-requisite of check and balance in managing the corporations. OECD

(2015) described that the CG system is the assortment of affiliation between the board,

management, stockholders and other stakeholders. The system used for directing and

controlling corporations is termed as CG (Cadbury, 1992). According to Butt (2012),

the mechanism used to direct and control the matters of a firm to serve and defend the

interest of each and entire stakeholders. Different mechanisms are used in different

countries by organizations in order to accomplish the organization's goal. The foremost

objective of every firm is to escalate FP which results in increasing return for

stockholders.

According to Bhagat and Bolton (2018), if the management is to operate the

firm, the governance is to watch that it is operated effectively. Todorovic (2013)

28

demarcated CG as the system benefited by external investors to secure themselves from

the expropriation of the internals (controlling stockholders and managers). According

to Okiro (2014), functions performed by the board of directors to ensure the proper

operation of business affairs is termed as governance, whereas what is performed by

employees hired by the board to run on a daily basis is called management. CG is the

system to support financial and economic stability, efficiency and sustainable growth. It

helps corporations in accessing funds for a long time and facilitates by making sure that

stockholders and other corporate stakeholders are fairly treated (Zeitun & Tian, 2017)

Code of CG formulate a transparent environment of accountability and trust for

nurturing long investments, integrity of businesses, financial stability and facilitating

sound growth (Wanyoike & Nasieku, 2015). The practices and rules of CG have been

improved in the majority of corporations in different economies in the last decade.

Nowadays policymakers and regulatory bodies are facing significant challenges

including increasing complexities of the investment chain, stock exchange varying role,

new investors’ emergence, trade practice, and investment strategies to adjust the CG

(OECD, 2015).

The SECP has concerted the regulatory activities to encourage national and

international investors in Pakistan. For this purpose, the code was issued by the SECP

for the first time in March 2002 and updated from time to time and lastly revised and

issued on November 22, 2017, to make sure the accountability and transparency in

firms for safeguarding the interest of the stockholders and other stakeholders. The

SECP has made it mandatory for corporations to exercise the code in order to be

29

enlisted on the stock exchange of Pakistan. All the listed corporations on KSE, Pakistan

are needed to operate according to the code (SECP, 2013).

It is obligatory for the listed Pakistani companies to exercise according to the

code as most of the corporations are family owned and in particular to the cement

industry. The management lies in the hands of a group who possess greater than fifty

percent of issued capital and dominate the board of directors. If these firms are not

regulated through the rules, laws, practices, and policies to conduct in accordance with

the CG mechanisms, the stake of other stakeholders will be impaired and eventually, the

economy as a whole will also be adversely affected.

Theoretical Foundation

Smith (1776) described that the corporate directors (managers) do not see the

money of other people (shareholders) with the same care as personal. Like a rich man’s

stewards, they are apt to deem minor issues as not for the stake of master and simply

give themselves a dispensation from having it. In managing the affairs of corporations,

more or less negligence always prevails. As the matter of fact, managers do not work in

the stake of shareholders due to ownership separation from its management. The

Stockholders want to maximize their wealth, whereas, managers work for their own

empire-building, spending money in wasteful projects, use corporate resources for own

benefits, and do not fire mediocrity subordinates. Therefore, to direct and control all the

matters of corporation effectively and achieve the goal of corporate stockholders and

other stakeholders, several theories of CG are offered by distinctive authorities; Agency

Theory, Stakeholder Theory, Stewardship Theory, Institutional Theory, Resource

30

Dependency Theory, Transaction Cost Theory, and Political Theory are the prominent

theories that base the theoretical framework.

Agency Theory. The ownership separation from management in the corporation

has created many debates on how to integrate the interest of corporate managers and

owners. Smith (1776) highlighted this question that ownership separation and control

raise incentives for managers in order to run the corporation effectively. The theoretical

foundations for the majority of the present structure of CG root from the study of Berle

and Means (1932). They revealed that the agency problem takes place due to

segregation of ownership and control. The center of agency problem is ownership and

control separation (Shleifer & Vishny, 2007).

CG is conventionally related to the agency problem: problem between principal

and agent. The problem between principal (shareholder) and agent (manager) arises

when those who own a corporation differs from those who manage or control (Jensen &

Meckling, 1976). The agency theory states that principal handover the company

operation to the agents and believes that they will exert their entire potential in the

optimum interest of the company. Besides this, the principals presume that the decision

made by the agents will build corporate worth. However, the agents’ interest deviates

from the principals’ presumptions.

Traditionally, CG emerged as a system to tackle the agency problem. Shleifer

and Vishny (2013) reviewed most of the literature which was concentrated on the

unitary system of CG prevailed in the UK, USA and Pakistan and so on, where

corporations are mostly akin to the classical effort of Berle and Means (1932), who

31

debated that agency problem arises as a result of segregation of corporate control and

ownership.

The system of CG which has been emerged and considered good practices in the

UK, USA and Pakistan, require board independence, unitary board system, and board

committees. According to the agency theory, these golden principles basically

concentrate on increasing stockholders worth, increasing executives reward, and have

been the core basis for CG across the globe.

The annual reports of Pakistani firms uncover the fact that the majority of

corporations are family-owned. The management is mostly in the hands of a group,

having greater than 50% of issued stocks. They govern corporations in the best interest

of stockholders as they are elected and answerable to the stockholders. This approach is

denoted as the shareholder approach. The shareholders' approach and the agency theory

lead the board to design policies to maximize shareholder value often at the cost of

other stakeholders.

Stakeholder Theory. Freeman (1994) introduced the stakeholder theory to

integrate corporation to a wider range of stakeholders. This theory states that managers

work and serve the entire stakeholders. The stakeholder approach is related to the Dual

system of CG (Continental European practices) where the law requires 50% seats on the

supervisory board for the representatives of the workforce and large block holders.

Shleifer and Vishny (2013) elaborated the Continental European practices of CG, where

corporations and institutional block holders contribute a significant role of monitoring.

The stakeholders’ theorists (Barbosa & Louri, 2015; Gordini, 2012) advocated that

agents have an association (employees, vendors and business partners) who work for

32

the corporate benefit. It was debated that this group of association is significant other

than principal and agent relations. According to Snyder (2007), the stakeholder theory

focuses on a class of stakeholders requiring the attention of management. The group of

stakeholders takes part in the corporation to get advantages. This group builds a

relationship with several other groups who impact decision making. The theory of

stakeholder is relevant to the nature of such relationship in regard to processes and

effects for corporations as well as stakeholders (Gordini, 2012). According to Smallman

(2004), the theory of stakeholder is an enlargement of agency theory, where the duties

of the board are expanded from the sole interest of stockholders to other stakeholders.

The ethical view of the stakeholder theory is that corporations should treat all the

stakeholders fairly and the managers must manage firm for entire stakeholders gain

(Barbosa & Louri, 2015).

The theory of stakeholder leads to stakeholders’ approach which demands

directors to formulate policies in the best stake of entire stakeholders, not for

stockholders only. This approach is very ideal as it considers all the stakeholders

including shareholders. However, this approach is not practical in Pakistan as the

directors are elected by shareholders and they are accountable to them only.

Stewardship Theory. Donaldson and Davis offered the theory of Stewardship

in 1995 that documents that top executives work as stewards in the stake of

stockholders (principals) and firm. The stewards formulate socialist decisions in the sole

interest of the firm rather than own. This theory presumes that improving an

organization FP is the fundamental responsibility of stewards. It is believed that

stewards get more as the firm grows.

33

The theory of stewardship was developed as the behavior of the firm

counterweight the normal actions of management (Donaldson & Preston, 1995). This

theory aligns the behavior/interest of agents with the principal. Stewardship theory is

basically related in identifying situations where interest of both principal and stewards

are aligned (Donaldson & Davis, 1997). This theory demonstrates situational factors

and psychological factors that persuade an individual to become an agent/steward.

Situational factors are the adjacent cultural environment rather than a firm working

environment, working in a participatory oriented management system instead of a

control-oriented management system. Donaldson and Davis (1997) argued that stewards

integrate their goals with the firm goal. The theorists argue further that stewards are

more motivated as the firm grows.

Institutional Theory. The broadly accepted Institutional theory centers on the

social cultural structure of a firm in deeper and greatly adaptable system. It reflects

procedures through which structures (systems, rules, and standards) are reliable

guidelines for social conduct (Scott, 2004). Various features of this theory elaborate that

how these are formed and followed. Sound legal settings boosts the application of good

CG practices as a result of more corporate incentives. All the countries own

distinguished codes of CG that serve as guideline for exercise (Stulz, Karoyli, &

Doidge, 2008). The fundamental notion of this theory is that firms are linked with

outside environment. CG must make sure a vibrant association among firms and

environment on the basis of its goal and objective. CG must possess influence and

contribution in identification and formalization of firm goal. Zeitun and Tian (2017)

proposed that for planning the compensation policy, upper management must know the

34

entire rules and culture of the firm. According to Weir, Laing and McKnight (2009),

CG entails internal and external governance systems that are associated with the

Institutional Theory. In addition, this theory describes more deeply the social system,

rules, norms and process that have developed as consistent guideline for social

behavior. It examines that how these are formulated and adopted.

It looks at how these elements are created, diffused, adopted over time, and how

they are rejected and neglected. Essentially, the Institutional theory proclaims that

structure and procedure of an organization is important as outside institutions desire.

Institutional systems are not virtuously regulated and coordinated mechanisms for

economics events, they socially formulates rules and principles for traditional standards

and return.

Political Theory. This theory presents the approach of mounting voting support

from stockholders instead of buying voting power. This theory documents the sharing

of company power, income and benefits are determined through the government favor.

The Resource Dependency Theory. The Theory of Resource Dependency

concentrates upon the board of directors’ role in the provision of access to corporate

required resources. This theory documents that directors (internal, support specialists,

business experts, and community influential) contribute a significant role in the

provision or acquiring necessary resources to firm by deploying ties with the outside

environment. The resources provision maximizes corporate functioning, performance,

and survival. The members of the board bring resources to the corporation in the form

of access to major constituents like purchasers, public policy formulators, social groups,

legitimacy, skills, and information.

35

Transaction Cost Theory. The Theory of Transaction Cost describes that

corporations own a number of contracts within the corporation or with markets in order

to create corporate worth. However, each contract is associated with cost with outside

parties; such cost is termed as transaction cost. If market transaction cost is rambling,

then corporations would use such transactions itself to maximize corporate worth.

Systems of Corporate Governance

The set of laws, rules, and processes to direct and control entire functions of a

corporation are termed as CG (Bhagat & Bolton, 2018). The systems of CG

significantly influence FP, capital structure, and solvency risk protection of companies.

CG involves balancing the stakes of various corporate stakeholders including

stockholders, management, clients, creditors, and government.

According Shoaib and Yasushi (2017), the system of CG varies depending upon

the systems that is deployed by the corporate stockholders for persuading managers.

The common objective of the global code of CG is to secure shareholders and other

stakeholders but all countries cannot adhere homogenous governance system (Clarke,

2004). However, all the systems have identical purpose but the design of governance

structure is considerably different. The systems of CG differs from country to country

(Ahmed & Hamdan, 2015). Various CG models are employed worldwide, having

separate and distinct traits (Hasan, Kobeissi, & Song, 2011). Gordini (2012) classified

these models into the unitary system and dual systems.

Unitary System of Corporate Governance. The unitary system also known as

Anglo Saxon Model of CG / Outsider Governance System, followed in the USA, UK,

36

Australia, Canada, Pakistan, and other English speaking economies. This model

highlights that the company view is based on fiduciary association between principals

and agents. The board is elected by stockholders. The board hires and fires managers.

The board is charged with in lieu of the stake of stockholders (Chugh, Meador, &

Kumar, 2009).

Cernat (2004) documented that the Unitary System is found on the notion of

capitalism market and based on the concept that the stake of ownership and

decentralized market can exercise in a controlled and balanced system. In the Unitary

system, the actions of management are monitored and controlled through independent

directors for maximization of stockholders wealth. According to Hasan, Kobeissi, and

Song (2011), ownership is concentrated in Unitary system of CG. Further, they

described that few people possess legitimate power upon the management team and

minority investors have meager protection, who seeks support from independent

directors.

Figure 1. Unitary System of Corporate Governance (Cernat, 2004).

37

The aforementioned diagram indicates that Anglo Saxon/Unitary system based

on the association between the stockholders and managers. The stockholders require

sound legal shields. According to the Anglos Saxon model, the CG function is to

provide protection to the interest and rights of shareholders (Hasan, Kobeissi, & Song

2011).

Dual System of Corporate Governance. The dual system also is known as the

European Continental Model of CG and Insider Governance System is charted in

France, Greece, Japan, and Germany. Donaldson and Preston (1997) described that the

Dual system/Continental model focuses on the association between the broader groups

of stakeholders. According to Chugh, Meador and Kumar (2009), the board is not

charged with the stake of stockholders only but other stakeholders as well. Usually, the

board also consists of a member of labor union and employees.

Craig (2005) described that the Dual system focus on scrutinizing the interest of

shareholders, managers, suppliers, unions, and crew which help in corporate innovation.

A similar notion is employed in the France as directors, managers and crew detain the

duties in the company (Snyder, 2007). Cernat (2004) elaborated that this model of CG

represents stakeholder’s theory. This model focuses not only stockholders’ interest but

also to protect other stakeholders. Several Europeans countries like France, Greece, and

Germany apply stakeholder’s model in large corporations as an element of economic

and social structure (Aries, 2016)

38

Figure 2. Dual System of Corporate Governance (Cernat, 2004).

The above diagram exhibits that the model of the Dual system is based on the

association between stockholders, directors, and supervisory board. The supervisory

board normally consists of several stakeholders including investors (stockholders and

creditors) customers, the crew (group of a union) and suppliers (Cernat, 2004; West,

2006). According to Hasan, Kobeissi, and Song (2011), the structure of CG in

Germany, primarily related to some large corporations, enlisted at stock exchanges and

operate on two levels (supervisory and management board system).

With the insider system of governance and combination of corporate control,

both the systems have grown-up from various environments of regulatory, political and

institutions. Pakistan has unitary CG system. However, there is a uni-boarded system.

39

Dimensions of Corporate Governance

To check the efficacy of CG in literature, researchers across the globe have

employed different facets. The mechanism of CG varies from country to country

therefore, researchers have used different measures. Core, John, and Larcker (2012)

measured CG with shareholders rights, disclosure and transparency, outside directors,

and board size in the context of Japan. DeAngelo, Harry, Linda and Douglas (2004),

measured CG with board characteristics, respect for investor interests, ownership

structure, and quality of disclosure, whereas Brown and Caylor (2006) measured CG

with social awareness, discipline and transparency, fairness, board independence,

accountability, and responsibility, However Ahmed and Hamdan (2015) measured CG

with CEO duality, audit committee, board independence, and transparency, whereas

Wahla, Shah, and Hussain (2012), analyzed CG with Family control, bank control and

ownership concentration in developed economies and recommended to measure CG

with the same facets of manufacturing sectors in developing economies.

Yasser, Entebang, and Mansor (2011) measured CG with board composition,

CEO duality, and board size, and audit committee, whereas Vo and Nguyen (2014),

measured CG with leadership structure, board committee, board meeting, board size,

and board composition, however Velnampy and Nimalthasan (2013), measured CG

with board independence, institutional shareholding, board size and quality of

disclosure in developing economies of financial and non-financial sector.

The aforementioned literature reveals the work done by the different renowned

researchers to measure CG in developed and underdeveloped economies with different

measures. Based on the previous researches, the current research has used important

40

facets of CG in the context of the code of CG of Pakistan (2014) and particularly to the

Cement sector of Pakistan. The dimensions include insider directors, institutional

shareholdings, board independence, audit committee, and board size. The earlier studies

show that CG has been measured with few dimensions (DeAngelo, Gugler, 2013;

Velnampy, 2013; Wahla, Shah, & Hussain, 2012). However, this research has used rich

dimensions of CG in the context of code of CG of Pakistan (2014). The researcher has

taken these dimensions as they prominently influence the FP, capital structure and risk

of cement manufacturing firms listed on KSE, Pakistan.

Insider Directors. The board of directors includes insider directors, also known

as a dependent directors or executive directors (Shah, Butt, & Hassan, 2009). According

to Lang and Jagtiani (2010), the shareholders who perform the function of firm’s

management. According to SECP (2013), insider directors are the members who are

assigned the managerial responsibilities. The insider directors are engaged in managing

the day to day corporate activities (Ahmed & Hamdan, 2015; Petrovic, 2008).

Jensen and Meckling (1976) stated that principals hire agents to fully utilize firm

assets for its profitability but in several cases, it is found that agents strive to increase

own powers. This principals and agent's conflict can be reduced or resolved by

increasing managerial shareholdings. When managerial shareholdings are reduced or

eliminated, managers' interest to increase firm value goes down. The Code of CG

Pakistan (2014) requires a maximum of 1/3 insider directors of the elected directors

comprising chief executive officer. This research measures insider directors as total

number of executive directors in the company board as measured by Ahmed and

Hamdan (2015).

41

Institutional Shareholding. Institutional shareholders are the business

organizations like banks, mutual funds or insurance companies, who purchase stocks in

listed corporations to earn a return (Quang & Xin, 2014). The institutional shareholders

consist of pension fund, insurance corporations, mutual funds, and banks. According to

Pound (1988), institutional shareholdings are corporations that collect individual

savings for re-investment in other corporations. The institutional shareholdings own

sound experience, proficiency, and intellectual skills. They are fully capable to govern

the entire corporation efficiently and consequently increase FP of the firm. The key

objective of institutional shareholdings is to minimize the cost of a transaction.

Institutional shareholdings reduce transactions cost and alleviate agency conflict (Berle

& Means, 1932). In this research, institutional shareholding is calculated as Shares held

by other institutions divided by outstanding shares as calculated by Otman (2014).

Board Independence. The board independence means company’s independent

directors. These independent directors are external directors having no affiliation with

executive directors and own minimal or no business dealing with corporations

(Masnoon & Rauf, 2013). Board independence means the independent board of

directors, who do not have any managerial responsibilities, merely work as directors

(McNutt, 2010). Independent directors carefully monitor the activities of executive

directors to reduce managerial opportunism and increase stockholders worth (Barbosa

and Louri, 2015)

Independent directors are those who also work with many organizations (Jensen

& Meckling, 1976). Independent directors perform a significant role in governance

practices and are responsible for formulating and monitoring the objective of a firm.

42

Agency theorists describe that agency cost is reduced if insider directors are supervised

well by the board. The monitoring is done through a balanced board. The board must

include most of independent directors to control the insider directors having an

opportunistic attitude. They described further that as the proportion of independent

directors’ increase, the activities of insider directors are monitor and control in a good

manner (Jensen & Meckling, 1976). The independent directors prevent the undue

exercises of authority by insider directors, protect shareholders’ stake in board decisions

and making sure competitive corporate performance (Todorovic, 2013).

According to Australian Standards (2003), the best practices of code recommend

more independent directors in a company board and a significant weight in decision

making. The Code of CG of Pakistan (2014) made it obligatory that there must be one

independent director, whereas one third of the company board is a preferred number.

However, in Code of CG of Pakistan (2017), the number of independent directors is

raised from 1 to 2 or 1/3 of the entire company board. The corporations are needed to

increase the number after two years. The independent directors should not join in stock

option. The presence of independent directors in a corporate board enhances

independence of board and firm FP (Cadbury Report, 1992). In this research, board

independence is computed as total number of independent directors in the company

board as measured by authors (Otman, 2014; Yasser et al. 2011).

Board Size. The board of directors is the group of individuals, elected to work

as agents of stockholders and other stakeholders for the formulation of corporate

policies and make decisions on key corporate matters. There are various assumptions

regarding the optimal size of company board to manage the organization

43

successfully. The size of the members of the corporate board should be eight to ten with

the same number of executives and non-executives (Cadbury, 1992). Seven to eight are

the optimum board size (Jensen, 1993). The UAE Code of CG quotes that the board size

must be from three to twelve. The Code of CG of Pakistan (2014) requires nine

members on the company board. According to Bhagat & Bolton (2018), six to fifteen

are the ideal board size in order to maximize corporate FP. The large board size is more

useful as compare to smaller board because larger board size is spread of specialist

opinions and it increases diversity of board in relation to experiences and skills and

nationality (Dalton & Dalton, 2005). Larger board size is feasible for multinational

firms as many advisory committees will be required for making several decisions.

According to the Code of CG of Pakistan (2014), the corporate board of

directors in Pakistan must consist of independent, executives and non-executive, with

the required level of knowledge, skills, experience, and competency and approach.

Furthermore, the presence of one female in the company board is mandatory. The

corporation must disclose all the directors in the annual report. In the current research,

the board size is measured as total number of directors in the company board as

computed by Cheng, Evans, and Nagarajan, 2008).

Audit Committee. According to Todorovic (2013), the audit committee is a

sub-committee of a company which is imperative for good CG. This committee checks

the entire matters of a corporation that increases worth of financial reporting (Garcia-

Meca & Sanchez-Ballesta, 2009). The agency problem arises when control and

ownership is owned by different group of persons, which require proper execution of an

44

audit committee to resolve the agency problems. The focus of the audit committee is to

evaluate management financial actions in order to analyze risk (Cohen & Hanno, 2010).

Australian CG Principles & Recommendations (2007) requires a minimum of

three members, including executive directors and independent directors in the audit

committee. Code of CG of Pakistan (2014) made it obligatory for the firm that the board

must develop an audit committee with 3 members having finance qualifications. This

committee should comprise of most of independent directors. The independent director

must chair the committee, not the chairperson. In this research, the audit committee is

calculated as the total number of audit committee members as measured by Okiro, et al.,

2015; Vo & Nguyen, 2014).

Financial Performance

FP is how well an organization can utilize assets from its main source of

business and produce revenue (Enobakhare, 2010). A corporate performance level in

terms of entire profit and loss for a particular time period is known as FP. The FP is a

monetary outcome of corporate policies and operating activities (Gugler, 2013).

According to Brown and Caylor (2004), the evaluation of performance is mostly based

on a firm FP and non-FP. FP is calculated by utilizing different measures such as net

income margin, ROA and ROE, whereas non-FP is assessed on the basis of quality,

innovativeness, and satisfaction of customers (Wanyoike & Nasieku, 2015). A number

of decisions regarding future business operations, policies, and strategies are made on

the basis of current FP.

45

Investors use various techniques to measure the FP of a corporation. FP of

corporation can be calculated via ROA, earnings per share, net income margin, market

capitalization, ROE, price-earnings ratio and dividend yield (Barbosa & Louri, 2005).

FP is enhanced due to sound practices of CG (Joshua, 2008). According to Adekunle

and Sunday (2010), any mathematical measure to analyze how efficiently a corporation

is utilizing its entire assets to generate profit is termed as FP. Further, they described

that a thorough analysis of corporate FP should be used instead of a single measure of

FP. Several measures including operating income margin, ROA, EBIT, and ROE are

required to be used as single ratio cannot reflect the true picture of the organization.

Assessing corporate FP permits decision-makers to check the monetary outcome

of its corporate strategies and firms’ operations. The term FP is applied as a common

tool of a firm entire financial position during specific time, which can be used to match

similar corporations for the same period or with the previous periods of same

corporation. Different means are used to calculate FP but all means must be used in

aggregate. The shareholders, creditors, bondholders, and management are different

corporate stakeholders’ and each group has its own stake in measuring FP.

Balance sheet and income statement are two of widely financial statements used

by existing and potential shareholders, creditors, and bondholders. In order to measure

FP, data from these financial statements are used individually or in aggregation to

analyze FP and get the true picture of a company and make investment decisions.

Arshaad, Yousaf, Shahzadi, and Mustansar (2014) carried research to check the

relationship between CG and FP of firms enlisted on KSE from 2008 to 2012. FP

calculated with net profit margin, ROA and ROE. Yasser, Entebang, and Mansor (2011)

46

carried research to check the association between CG and FP (ROA and profit margin)

of 30 indexed firms in Pakistan.

Dimensions of Financial Performance

The literature reveals that the most of the researchers have used only a few

dimensions in their studies to calculate FP in developed and under-developed

economies. The author has employed more rich dimensions of FP in the current

research to calculate FP in more depth as compare to previous researchers. A brief

description of FP measures are given as under;

Return on Assets. This ratio describe that how effectively corporations are

utilizing its total assets in producing profit (Wahla et al., 2012). In other words, it shows

that what a corporation can generate from each dollar of the firm’s asset. Alternatively,

this profit ratio shows how many dollars of income is derived from the assets of the

corporations. ROA is a valuable instrument used for comparison with competitive

corporations of same industry and measured as;

ROA = Net Income / Total Assets

Return on Equity. This ratio is used for calculating the profit earned on each

dollar of shareholders’ equity (Enobakhare, 2010). It exhibits how efficiently

corporations utilize shareholders’ investment to produce earning growth. This ratio is

calculated as;

ROE = Net Income / Total Stockholders’ Equity

47

Operating Income Margin. Operating income margin, also known as the

operating margin is a ratio, used to calculate corporate operating efficiency and pricing

strategy (Garcia-Meca & Sánchez-Ballesta, 2009). Operating income margin indicates

the proportion of corporate revenue that is remaining after paying the cost of goods

manufactured and sold and operative cost. This is an important ratio that helps to

analyze the solvency of a firm. This ratio is calculated as;

OIM = Earnings Before Interest & Taxes / Net Sales

Net Income Margin. This ratio is used to analyze a firm’s profitability. Net

income margin indicates how much of each revenue dollar is translated into income

(Enobakhare, 2010). This ratio is calculated as;

Net Income Margin = Net Income / Net Sales

Total Asset Turnover. This ratio specifies that how efficiently the management

has used its total assets in generating its revenue (Ghabayen, 2012). Total assets

turnover is a financial ratio that assesses corporate efficiency in utilization of its total

assets to produce revenue. The higher total assets turnover ratio indicates efficient

utilization of total assets whereas, the lower ratio predicts a dilemma with some of the

assets type. Total assets turnover is calculated as;

Total Assets Turnover = Net Sales / Total Assets

48

Corporate Governance and Financial Performance

Okiro, Aduda, and Omoro (2015) documented that the CG (insider directors,

board independence, and board size) increases FP (ROA, ROE, and net income margin).

According to Quang and Xin (2014), the application of good practices of CG (board

size, audit committee, and institutional shareholding) maximizes the FP (ROA, ROE,

total assets turnover). Gaaniyu and Abiodun (2012) described that CG (insider directors,

institutional shareholdings, and board independence) positively affects FP (operating

income margin, net income margin, and total assets turnover of corporation. Javed and

Iqbal (2008) proved that CG (insider directors, institutional shareholdings, and board

independence) positively influences FP (net income margin and total assets turnover) of

listed corporations of Pakistan.

Todorovic (2013) compared the association of CG (institutional shareholdings

and board independence) and FP of nineteen corporations enlisted on Banja Luka Stock

Exchange and corporations enlisted on Vienna Stock Exchange, Austria. The FP was

measured through the net profit margin and gross profit margin. The outcomes show

that the FP of firms listed on the Vienna Stock Exchange, Austria was stronger than

Banja Luka Stock Exchange, Srpska due to the fact that Austria’s firms were

implementing good CG practice, whereas, CG system was weak in Srpska. They proved

that CG positively associates FP.

Vo and Nguyen (2014) carried research to scrutinize the influence of CG on FP

of one hundred and seventy-seven enlisted corporations in Vietnam from the year 2005

to 2012. CG was measured through the audit committee, the board size, and board

independence. FP was peroxide by ROA, operating income margin, and ROE. The

49

findings revealed that CG has a positive association with FP. They elaborated that the

FP of firms can be more augmented by exercising sound CG practices. Hermalin and

Weisbach (2014) carried a study to evaluate the influence of CG (independent board,

institutional shareholdings, and board size) on corporate FP (operating income margin

and net income margin). The outcomes show an affirmative association between CG

and FP.

Ahmed and Hamdan (2015) analyzed the influence of CG (insider directors and

board independence) on FP of forty-two Bahrain’s corporations enlisted on the Bahrain

Stock Exchange from 2007 to 2011. They measured FP through earning per share, net

income margin, total assets turnover, and return on equity. The results proved that CG

positively influences FP. They argued that the sound application of CG is identified as

the most significant implication which instills shareholders' confidence and attracts

more investors in the corporation. Cheung, Connelly, Limpaphayom, & Zhou (2007)

examined the association between CG and financial performance) of fifty listed firms in

Hong Kong. The outcomes of their research revealed that CG (board size, board

independence and audit committee) positively influence FP (ROA and ROE).

According to Shahid et al. (2017), CG is very imperative for cement industry of

Pakistan. The outcomes of their study indicated an affirmative relation between CG

(audit committee and board size) and FP (operating income margin, total assets

turnover, and ROA) of cement corporations of Pakistan. Cheema and Din (2014) carried

research to check the relationship between CG (institutional shareholdings, board

independence, and audit committee) and FP (ROA and ROE) of cement industry in

Pakistan. The results proved that CG significantly and positively affects FP.

50

Selvam and Vanitha (2016) conducted a research to check the impact of CG

(insider directors, institutional shareholdings, and board independence) on FP

(operating income margin and net income margin) of the cement industry of Calcutta,

India. The findings of their research indicated that CG positively and significantly

impact FP of cement industry of India. The existing literature proves that good practices

of CG positively and significantly impact FP of companies in developed economies as

well as under-developed economies. In this research the author is striving to analyze the

impact of CG on FP of cement sector firms listed on KSE, Pakistan. Hence, this lead to

the first hypothesis of the research:

H1: CG (insider directors, institutional shareholdings, board independence, audit

committee, and board size) positively affect FP (ROA, ROE, operating income

margin, net income margin, total assets turnover).

Figure 3. The First Hypothesis of the Study


* Insider Directors

* Institutional Shareholdings

* Board Independence

* Board Size

*Audit Committee

Financial

Performanc

e

51

Risk

Investors purchase various securities in order to yield a return. A rationale

investment decision is that which earn high return at low risk. There are securities

which yield a constant return like bonds, treasury bills whereas, shares produce volatile

return. Hence, shares are considered riskier as compared to bonds and treasury bills

(Eling & Marek, 2011). According to Aries (2016), the chance that actual return will

deviate from the expected return of an investment is called risk. Ehrhardt and Brigham

(2009) defined risk as to the chances of occurrence a number of unfavorable incidents.

Companies also invest surplus cash in these securities (for short term and long term) as

well as in order projects to maximize shareholders wealth and protect against risk.

Therefore, companies use internal sources (equity) and external sources (debts) for this

purpose and meet other corporate needs (operating needs and fixed assets). Companies

face risk in case of high debt level in capital structure due to volatility in market

condition as they require reimbursing the principal and interest charges. The inability of

corporations to pay interest charges is known as risk (Brigham & Daves, 2005).

Brigham and Daves (2005) classified risk into systematic risk and unsystematic

risk. The systematic risk cannot be controlled or diversified, also known as

uncontrollable or un-diversifiable risk. Whereas, the unsystematic risk can be controlled

through diversification strategy, also known as controllable risk or diversifiable risk.

The systematic risk is influenced by outside factors like inflation, higher interest rate,

and recession, hence called market risk. Whereas, the unsystematic risk/business risk

arises due to internal factors and can be controlled (Quang & Xin, 2014). They

described further that the risk which affects an individual firm or a minor class of firms

52

is an unsystematic risk. This kind of risk can be mitigated through diversification by

buying stocks of different corporations in various industries.

Firms use different strategies to control the unsystematic risk. One of the key

strategies to minimize unsystematic risk (corporate solvency) is to minimize debt level

in capital structure. In order to protect corporate solvency, optimal capital structure

decision is made to minimize cost of debt (interest charges). Solvency indicates the

ability of a firm to pay interest charges that arise due to high leverage. An increase in

debt level in capital structure bound a company to pay more interest on the borrowed

funds. Increase in interest charges increase the risk of a firm and decreases solvency as

sales or cost may change due to internal or external factors and firm may not earn profit

to pay interest charges. As the level of debt increases, the company may be required to

pay more interest on the borrowed funds. Increase in interest charges, minimize

corporate solvency and firm bear high risk.

According to Heng, Azerbaijani, and San (2012), the inability of firm to pay

interest charges and debt is called risk. They described further that risk arises due to the

internal decision of corporate managers. These decision-makers may be risk-averse or

risk-takers. Sometimes the risk-taker managers invest in risky projects or use more

debts which generate a high return but risk also increases and firm solvency risk

protection decreases (Lang & Jagtiani, 2010). High debt financing increases corporate

risk that negatively impact solvency risk protection (Nguyen, 2011). Good governed

corporations ensure optimal capital structure decision in order to fulfill operating and

assets needs which in turn reduces risk and increases solvency risk protection (Eling &

Marek, 2011).

53

Corporations that are financed highly through debts may lose solvency. As the

level of debts increases, the solvency risk protection decreases due to high interest

charges on borrowed funds. The corporations which are highly financed through debts

are considered as high risky because sales may decline or input cost might increase.

Decrease in sales volume or increase in input cost creates serious problems for a firm to

pay matured debts and interest.

Dimension of Risk

Researchers have calculated risk with different measures. Lang and Jagtiani

(2010) measured risk with solvency ratio (earnings before interest and taxes divided by

interest charges). They described that as the level of debt in capital structure increases,

the company needs to pay more interest charges on the borrowed funds and

consequently firm solvency declines and it becomes more risky. Low interest coverage

ratio makes the firm more risky due to high interest charges. Reddy et al. (2015) proved

a positive association between CG (board size, board independence, and audit

committee) and solvency (times interest earned). They argued that due to good practices

of CG, firm do not cover its operating and fixed needs through leveraging and hence

protects its solvency. In this study, risk is calculated with solvency risk protection ratio;

Solvency Risk Protection. This ratio shows the company ability to pay interest

on the accrued debt (Aries, 2011). This ratio is significant for management to analyze

its ability against payment of interest charges (Bernanke, 2008). High ratio indicates

firm protection against risk. This ratio is calculated as;

Times Interest Earned= Earnings Before Interest and Taxes / Interest charge

54

Corporate Governance and Solvency Risk Protection

CG significantly affects the risk of corporations (Eling & Marek,

2011). Corporations with good practices of CG maximize solvency risk protection

(Prasetyo, 2011). Risk increases in the financial market of Turkey due to less legal and

regulatory systems (Ararat & Ugur, 2008). According to Brick and Chidambaram

(2008), organizations with a weak system of CG bear more risk. Those organizations

which are not properly controlled by regulatory authority lose the trust of investors and

indulge in high risk. Reddy et al. (2015) found a positive association between CG

(inside directors, institutional shareholdings and board size) and solvency risk

protection (times interest earned) . They argued further that institutional shareholders,

insider directors, and large board size prefer equity financing rather than debt financing.

Corporate executive directors prefer projects with minimum risk. Lesser number of

insider directors puts a firm into risky projects (Eling & Marek, 2011). Alam and Shah

(2013) carried research to check the relation between CG (board independence and

board size) and the risk (solvency ratio) of 106 companies listed on KSE, Pakistan for a

period of six years. They found a positive relationship between the CG measures and

risk. They described further that good practice of CG increases firm solvency.

Morck, Nakamura, and Shivdasani (2009) conducted research on Japanese

companies to test the influence of CG (bank ownership, independence of board, audit

committee) on solvency risk protection (interest coverage ratio). They concluded that

CG has positive association with solvency. They argued further that presence of audit

committee, the existence of institutional shareholders and independent directors

concentrate low risk-taking ventures and prefer equity financing first, retained earnings

55

second and debt financing at the end when retained earnings are exhaust as presented in

Pecking Order Theory (Myers & Majluf, 1984). Wahla et al. (2012) also proved

positive association between CG (insider directors, institutional shareholdings, and

board size) and solvency (times interest earned). According to Bernanke (2008), the

companies in United States minimize risk by deploying good practice of CG. The recent

researches have been proved that good practices of CG have a positive association with

solvency ratio. In this research the author is striving to analyze the impact of CG on

solvency risk protection of cement sector firms listed on KSE, Pakistan. Hence, this

lead to the second hypothesis of the research:

H2: CG positively effects corporate solvency risk protection (times interest earned).

Figure 4. The Second Hypothesis of the Study

Capital Structure

Companies use various sources of financing to replenish the operating and

financial needs for the accomplishment of its goal. Firms usually employ debt and

equity sources to meet corporate operating and asset requirements. Debts come in the

form of loan, bonds, and debentures, whereas equity from retained earnings, ordinary

stocks and preference shares (Sheikh & Wang, 2011). Capital Structure is the blend of


* Insider Directors



* Board Size

*Audit Committee

Solvency

Risk

Protection

56

equity capital, debt, and hybrid securities (Agyei & Owusu, 2014). The combination of

debt and equity capital is termed as capital structure (Aries, 2011). According to Hijazi

(2006), capital structure is the composite of debt and equity employed to increase the

worth of the organization at minimum cost. Saad (2010) defined capital structure as the

sources employed to meet firm assets and operating needs.

Capital structure is the amalgamation of company common stock, preferred

stock, retained earnings, total long-term liabilities and specific short-term

liabilities. According to Liao, Mukherjee, and Wang (2012), capital structure indicates

that how a corporation finances its entire operation and growth by applying different

sources. Firms that are highly financed through debts are considered more risky.

Therefore, the corporate board makes an optimal capital structure decision in order to

maximize shareholder wealth and minimize risk (Aries, 2011). A corporation which is

highly leveraged bears a more risk. Companies make optimal capital structure decisions

to minimize its cost and maximizes worth. There are several theories, offered by

distinguished authorities regarding capital structure.

Modigliani and Miller (1958) offered capital structure theorem also called MM

theorem. The theory describes that in an efficient market, capital structure does not

affect the corporate worth, wither it is financed through debts or equity. Although later

in 1963, they amended that agency cost and taxes do affects the corporate worth. Kraus

and Litzenberger (1973) presented the theory of Trade-off and documented that

companies are required to trade-off benefits and costs while choosing debt to equity

ratio for maximization of its worth. Firms balance bankruptcy costs and tax benefits by

choosing debts and equity capital.

57

Myers and Majluf (1984) offered Pecking Order theory, which presumes that

asymmetric information maximizes financing cost. They argued that corporate retained

earnings, debts and new equity are the major means of financing. Companies prefer

retained earnings first, then debts second (after exhaustion of retrained earnings) and

lastly issue new stocks for financing (when debts are no shrewd). Bokpin and Arko,

2009; Ganiyu and Abiodun, 2012; Shangguan, 2007; Sheikh and Wang, (2011)

concluded that board independence, audit committee, insider directors, institutional

shareholdings, and board size negatively affects capital structure.

Dimensions of Capital Structure

Capital structure is measured by researchers (Abdul, 2012; Ganiyu & Abiodun,

2012; Javeed, Hassan, & Azeem, 2014) through debt to equity ratio. Masnoon & Rauf,

2013; Mwangi, Makau & Kosimbei, 2014; Okiro, (2014) the measured capital structure

through debt to assets ratio. In the current research capital structure is calculated in line

with the earlier researchers and used debt to equity and debt to assets.

Debt to Equity. This ratio shows the level of debt employed to finance

corporate assets as compared to the shareholders equity (Okiro, 2014). In this research,

debt to equity ratio is calculated by as;

Debt to Equity = Total Debt / Shareholders’ Equity

Debt to Total Assets. According to Adekunle and Sunday (2010), debt to total

assets shows the proportion of total assets which are financed through debts. The high

ratio indicates that more of the total assets are financed through debts. High the ratio

increases company risk and negatively influences solvency risk protection (Abdul,

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2012). Debts may include current liabilities and long term liabilities, whereas, total

assets consist of short term assets, long term assets, and other assets. In this research

debt to total assets is calculated as;

Debt to Total Assets = Total Debt / Total Assets

Corporate Governance and Capital Structure

CG is mainly concerned with decisions regarding capital structure (Graham &

Harvey, 2011). Researchers have been checked the association between CG and capital

structure in developed and underdeveloped economies (Javeed, Hassan, & Azeem,

2014). Masnoon and Rauf (2013) carried research to check the influence of CG on

capital structure of Pakistani firms. The results indicated that CG (board independence,

managerial shareholdings, and board size) has negative association with capital

structure (debt to equity). They described further that those organizations with more

board independence, managerial shareholdings, and larger board size concentrate on

low debt financing.

Driffield, Mahambare, and Pal (2017) proved a negative association between

CG (board independence, the board size, institutional ownership, and audit committee)

and capital structure (debt to equity). They argued that holding of stocks in a company

by other institutional investors, the larger board size, proper functioning audit

committee and existence of high board independence will lead a firm to strict

monitoring over the corporate matters and managers will borrow less in order to

minimize company risk and create an image of the corporation. Ganiyu and

Abiodun (2012) analyzed the relationship between CG and capital structure of

59

companies enlisted on the Nigeria Stock Exchange, Nigeria. They concluded that facets

of CG (board size, institutional shareholding, and board composition) have a negative

association with capital structure (debt to assets). They found a negative association

between CG and capital structure. They described further that as the board size becomes

larger and ratio of institutional shareholdings increase, firm prefer to finance assets

through equity rather than debts. Further, they elaborated that good practices of CG

ensure the minimum utilization of debts which increases firm solvency and create

goodwill.

Muhammad, Shah, and Islam (2014) conducted a research to analyze the impact

of capital structure (Debt to Equity and Debt to Assets) on FP (operating income

margin, net income margin, and total assets turnover) of Pakistani firms. They found

that FP is affected due to debt financing. The outcome revealed that FP and capital

structure has positive association. The decision regarding the ratio between equity and

debt financing is one of the corporate important functions. Firm select an optimal

proportion of debt and equity, which maximize the return for shareholders and

minimize the cost of capital and reduce risk (Hijazi & Tariq, 2006). Agyei and Owusu

(2014) checked the association between CG and capital structure of corporations

enlisted on Ghana Stock Exchange from 2007 to 2011. They identified that CG

(managerial shareholdings, the board size, institutional ownership and board

independence) has a negative relationship with capital structure (debt to equity).

Sound practices of CG help the firms to access funds at minimum cost which in

turn minimize the entire cost of debts (Zeitun and Tian (2017). Shoaib and Yasushi

(2017) conducted research to examine the association between CG (board

60

independence, audit committee, and board size) and capital structure (debt to assets and

debt to equity). They proved a negative association between CG and capital structure.

Managers seek to get low debts in presence of sound practices of CG. Gaaniyu and

Abiodun (2012) analyzed the relationship between CG (board size, institutional

shareholdings, and board independence) and capital structure (debt to equity) of ten

beverages and food corporations of Nigeria Stock Exchange from the year 2000 to

2009. The results indicate that CG significantly affects capital structure. They

concluded that the presence of institutional shareholdings, the larger board size and

higher board independence reduce the debt level in a corporation.

The existing literature reveals a negative association between CG and capital

structure. Good practices of CG significantly impacts capital structure which in turn

minimize the cost of capital, maximize shareholders value, and improve FP. In this

research the author is striving to analyze the impact of CG on capital structure of

cement sector firms listed on KSE, Pakistan. Hence, this lead to the third hypothesis of

the research:

H3: CG negatively affects capital structure (debt to equity and debt to total assets).

Figure 5. The Third Hypothesis of the Study


* Insider Directors



* Board Size

*Audit Committee

Capital

Structure

61

Capital Structure and Financial Performance

Corporations need adequate amount of funds to meet the operating and assets

requirements. Funds may be acquired through debts or equity sources to meet the

corporate needs. Corporations strive to use that source of funds that can minimize the

cost. For this purpose, firms are required to understand the optimal capital structure that

makes FP stronger. Mwangi et al. (2014) performed a research to check the influence of

capital structure (debt to equity and debt to assets) on FP (operating income margin, net

income margin, and total assets turnover) of listed corporations of Nairobi Stock

Exchange, Kenya. They found that capital structure has positive and significant impact

on FP.

Capital structure positively correlates FP. The debt level increases FP of the

corporation due to tax deductibility as described by Kraus and Litzenberger (1973) in

Trade-off theory. Firms trade-off benefits of tax and cost of bankruptcy through debt to

equity ratio to maximize the corporate value (Ganiyu & Abiodun, 2012). In the light of

recent literature (Mwangi et al., 2014; Shoaib & Yasushi, (2017) the significance of

capital structure to maximize corporate FP is pivotal. In this research the author is

striving to analyze the impact of capital structure on FP of cement sector firms listed on

KSE, Pakistan. Hence, this lead to the fourth hypothesis of the research:

H4: Capital structure positively impacts FP.

Figure 6. The Fourth Hypothesis of the Study

Capital

Structure

Financial

Performanc

e

62

Capital Structure and Solvency Risk Protection

According to Kraus and Litzenberger (1973), firms analyze cost and benefit of

debts while choosing an optimal capital structure. Cost of debt is bankruptcy (financial

distress) and benefit is tax shield. The capital structure decision affects risk as more risk

is associated with highly leverage corporations. Brigham (1999) described the

applications of trade-off theory as:

a. Companies with heavy business risk uses less debt. If business risk seems to be

high and in that period the firm use high debts then it will make high constant

interest charges and consequently the firms will face financial distress in the

long run.

b. The use of debt can benefit the higher taxed firm through saving tax.

The capital structure management is not only to reduce the cost of capital but it

is required to manage it properly (Wanyoike & Nasieku, 2015). Optimal capital

structure is that which increase corporate value as well as decrease the cost of capital.

According to Quang and Xin (2014), optimal capital structure is that which enhances

the corporate worth and reduce the cost of capital. Companies select different blend of

financing that increase FP and solvency risk protection, and reduce risk. Prasetyo

(2011) proved that capital structure (debt to equity and debt to total assets) negatively

correlates solvency risk protection (times interest earned) of Indonesian listed

corporations. The corporations highly financed through debts bear more risk and hence

solvency decline due to high interest charges.

63

Practices of CG affect risk of firm as good governed corporation instill

investors’ confidence, boost FP (ROA, ROE, and net income margin) and reduce risk

(interest coverage) (Brick & Chidambaran, 2005). Good practices of CG ensure less

investment in risky ventures and a minimum debt level while making capital structure

decision (Driffield et al., 2007: Eling & Marek, 2011; Estrada, 2007). Good governed

corporations’ gain good market share and easily acquire fund at low cost in the

domestic and foreign markets (Aries, 2016). According to Zeitun and Tian (2017),

capital structure (debt to equity and debt to total assets) and solvency risk protection

(times interest earned) has negative associations. They described further that as the level

of debt in capital structure increases, firm need to pay more interest charges and hence

solvency protection decreases. Solvency risk protection is significantly associated with

capital structure decision and significantly affects investors’ trust. In this research the

author is striving to analyze the impact of capital structure on solvency risk protection

of cement sector firms listed on KSE, Pakistan. Hence, this lead to the fifth hypothesis

of the research:

H5: Capital structure negatively impacts solvency risk protection.

Figure 7. The Fifth Hypothesis of the Study

Capital

Structure

Solvency

Risk

Protection

64

Corporate Governance, Capital Structure, Financial Performance, and Solvency

Risk Protection

Heng, Azrbaijani and San (2012) conducted a study to analyze the impact of CG

on capital structure of thirty Malaysian manufacturing firms from 2007 to 2010. The

results indicated that facets of CG (institutional ownership, audit committee, and board

size) negatively and significantly affect capital structure (debt to equity). Further, they

documented that good practices of CG minimize debt level in the capital structure of

listed Malaysian manufacturing companies. Okiro et al. (2015) checked the association

between CG (insider directors, institutional shareholdings, and board independence) and

capital structure (Debt to Assets) and FP (ROA, ROE, and operating income margin) of

corporations listed on Uganda, Kenya, Burundi, Tanzania and Rwanda from 2009 to

2013. The results indicate that CG positively and significantly associates FP whereas,

negatively and significantly correlates capital structure. They described that due to good

practices of CG, firms do not require to borrow more and hence utilize internal source

(retained earnings) to meet the operating and assets requirement of company.

Saeedi and Mahmoodi (2011) evaluated the effect of capital structure (debt to

equity) on FP (ROA, ROE and net income margin) of firms listed on Tehran Stock

Exchange, Iran. They concluded that capital structure has positive and significant effect

on FP of corporations. Adekunle and Sunday (2010) used debt to equity for

measurement of capital structure however calculated FP through ROA and ROE. They

predicted that capital structure positively and significantly correlates FP. Alam and

Shah (2013) carried a research to check the relation between CG (board independence,

board size, and audit committee) and the risk (interest coverage ratio) of 106 companies

65

listed on KSE, Pakistan for a period of six years. They found a positive and significant

association between the measures of CG and risk. They described that due to good

practices of CG, the ability of firms’ pay interest expenses increases and hence firm

solvency increases. Morck, Nakamura, and Shivdasani (2009) conducted a study on

Japanese companies to test the impact of CG (board size, independence of board,

institutional ownership) on solvency risk protection (interest coverage ratio). The

outcomes of their study indicated that CG has positive and significant impact on

solvency risk protection. They argued further that the existence of institutional

shareholding, independent directors, and large board size focus on low risk-taking

ventures and prefer internal funds first (retained earnings), second external (debt) when

retained earnings are exhausted and new equity lastly as presented in Pecking Order

Theory by Myers and Majluf (1984).

Good governed corporations’ gain good market share and easily acquire fund at

low cost in the domestic and foreign markets (Farber, 2005). According to Hovakimian,

Hovakimian, and Tehranian (2004), capital structure (debt to equity and debt to total

assets) and solvency risk protection (times interest earned) has negative and significant

association. They described further that as the level of debt in capital structure

increases, firm need to pay more interest expense and hence solvency protection

decreases. Solvency risk protection is significantly and negatively associated with

capital structure decision (Todorovic, 2013).

Muthoni, Nasieku, and Olweny (2018) conducted a research to analyze the

mediating effect of capital structure (debt to equity) between CG (managerial,

institutional, government and retail ownerships) and financial performance (return on

66

capital employed and Tobin’s Q) for firms listed on Kenya Stock Exchange from 2008

to 2017. The outcomes of their study indicated that capital structure mediates the

association between CG and financial performance. Furthermore, they recommended to

test capital structure as mediating variable with other significant facets of CG according

to the prevailing code of CG in the country. Ullah, Malik, Zeb, & Rehman (2019),

carried a research to examine the mediating role of capital structure (debt to equity)

between CG (board independence, institutional ownership and audit committee) and

risk (interest coverage ratio) of listed firms on PSX, Pakistan. The results indicated that

capital structure mediates between CG and risk.

According to Quang and Xin (2014), two parties are highly concerned with

financial performance and risk of a company; equity holders and debt holders. Equity

holders are the real owners and carry the highest risk and are rewarded through

dividends and appreciation of the share value, whereas debt holders are rewarded with

interest and principal repayment. The equity holders take more caution by ensuring that

firm pursues financial plans that enhance firm performance and mitigate risk thus

influence corporate capital structure. Moreover, agency theory predicts that capital

structure is influenced by several factors including board composition (Myers & Majluf,

1984). Facet of CG: Board composition is the most significant influencing element of

capital structure that further affects corporate financial performance (Liang et al. 2011;

Wahla et al., 2012).

Studies have provided evidences that CG have significant impact on capital

structure, FP and solvency risk protection. The literature also reveals a significant

impact of capital structure on FP and solvency risk protection. In addition, studies have

67

provided evidenced that capital structure mediates the association between CG and FP

and risk. However, previous studies have evaluated the CG, capital structure, FP and

risk with limited facets individually, whereas in this research the author is trying to

analyze the impact of CG (predictor variable) on capital structure, FP, and solvency risk

protection (outcome variables) jointly with rich measures based on code of code of CG

of Pakistan (2014) as well as capital structure is used as an intervening variable between

predictor variable and outcome variables of cement sector firms listed on KSE, Pakistan

Hence, this lead to the sixth and seventh hypotheses of the research:

H6: Capital structure mediates the association between CG and FP.

H7: Capital structure mediates the association between CG and solvency risk

protection.

Figure 8. The Sixth and Seventh Hypotheses of the Study


* Insider Directors



* Board Size

*Audit Committee

Capital

Structure

Financial

Performanc

e

Solvency

Risk

Protection

68

Control Variables

This research controls a number of potential confounding variables that could

also impact FP and risk. Previous studies (Alam & Shah, 2013; Aljifri & Moustafa,

2007; Banchuenvijit, 2012; Saliha & Abdessatar, 2011) have used firms’ reputation,

collateral, firm size, firm growth, leverage, industry and firm age as control variables

and proved their influence on FP and solvency risk protection. In order to analyze the

influence of CG on FP and solvency risk protection, this research has used firm size,

firm age and firm growth as control variables based on the variables employed in this

research. In addition, these control variables have been used in this research due to the

assumption of impact on FP and solvency risk protection.

Firms Size

Firm size is employed as a control variable in the current research because

studies have proved its significant impact on FP and solvency risk protection.

Researchers across the globe have been attempted to analyze the influence of firm size

on FP and risk. Studies have proved that firm size have a significant impact on FP and

solvency risk protection in developed and underdeveloped economies (Jonsson, 2007).

Big size firms grasp competitive edge as compared to small size firm due to large

market share and earn high returns. Furthermore, big size firms have more advanced

resources and thus enjoy economies of scale and enhance performance and maximize

solvency risk protection (Bayyurt, 2007). However, studies have proved that small size

firm yield low return and bear more risk (Banchuenvijit, 2012; Saliha & Abdessatar,

2011). Lehn, Patro, and Zhao (2009) documented that firm size has positive association

with financial performance whereas, (Aljifri & Moustafa, 2007; Haniffa & Hudaiba,

69

2006) proved a negative association between firm size and solvency risk protection.

Large size firm concentrate on less leveraging due to sound financial position and

solvency is protected.

Firm size is measured by researchers through total sales, total number of

employees, total assets, and market capitalization. This research has calculated firm size

through market capitalization as measured by (Shubita & Alsawalhah, 2012; Quang &

Xin, 2014). Market capitalization refers to the total market monetary worth of the

corporate outstanding shares and measured by multiplying the outstanding shares with

current price of each share in the market. This study has measured firm size by taking

natural logarithm of the market capitalization.

Firm Age

Firm age emerge as a prolific area of today’s research and got good momentum.

The rising interest of researchers in the domain of firm age and its impact on

performance and solvency risk protection also echoes a persistent change over time.

Studies have been proved different associations between firm age, FP, and solvency risk

protection. Banchuenvijit (2012) documented a positive association between firm age

and performance. Pastor and Veronesi (2013) have proved a positive association of firm

age with solvency risk protection. The corporate uncertainties decline as the firm grows

older. The corporate performance is enhanced due to specialization and experience of

companies exercising since long (Adams, Almeida, & Ferreira, 2005). Older firms own

more assets, advanced technologies, experience, and utilize resources to generate more

profit for shareholders. Older firms have strong market share and goodwill in the market

and can enter into a new market and can generate more profit and minimize risk due to

70

strong financial condition (Ahmed & Hamdan, 2015). According to Aries, 2016;

Banchuenvijit, 2012) firm age positively affect financial performance and solvency of

firm. Hence financial performance increases and risk decreases with firm age. Gaaniyu

and Abiodun (2012) proved that firm age negatively correlates capital structure. They

described further that as older firms prefer equity sources instead of debt financing. As

the level of debt decreases, solvency risk protection increases.

In sum, the firm age significantly influence FP and solvency risk protection due

to firm maturity, and firm can enter into new market in order to maximize financial

performance, minimize risk. Reddy et al (2015) measured firm age as the number of

years since listing and that event is a defining moment in corporate life. Researchers

(Shumway, 2014); Fama & French, 2004) has measured firm age in the same way. In

this research, firm age is measured by taking the natural logarithm of the total number

of years between firm’s year of incorporation and observation year.

Firm Growth

In the groundbreaking definition of firm growth, Penrose (1995) referred to it as

increase in a particular amount (growth of specific parameters like production, sales and

export), and increase in particular development process same as biological process due

to an increase in size and quality improvement. Hutzschenreuter and Hungenberg,

(2006) also classified firm growth into the quantitative and qualitative approach. They

described further that quantitative approach refers to rise in measurable parameters

whereas the qualitative approach refers to the quality of products and the quality of

customer relationships.

71

The growth of firms plays a significant role in economic development,

particularly for developing economies. The prior studies have proved that firm growth

effect financial performance and risk in developed and underdeveloped countries. Firm

growth is measured by researchers through growth in sales (Cooper, Gulen, & Schill,

2008; Shoaib & Yasushi, 2017) growth in total assets value (Goddard, Tavakoli, &

Wilson, 2009; Jang, & Park, 2011), and employment growth (Glen, Lee, & Singh,

2003).

The outcomes of Jang and Park (2011) indicated a positive and significant

impact of firm growth on financial performance. Cooper, Gulen, & Schill (2008)

documented that firm growth has positive and significant influence on financial

performance and solvency risk protection of manufacturing firms listed on Nigeria

Stock Exchange. They argued further that as the firm grows, the financial performance

of such companies increases and firms do not require using heavy external sources of

finance and hence mitigate risk due to strong solvency ratio.

According to Goddard, Tavakoli, and Wilson (2009), firm growth has a positive

and significant effect on financial performance. They described further that financial

performance increases due to growth in firm sales. In this research firm growth is

measured in line with (Cooper, Gulen, & Schill, 2008; Quang, & Xin, 2014) by taking

the difference between the current year sales minus previous year sales divided by

previous year sales. High growth firms provide greater investment avenues and hence

grow speedy and thus produce high performance and mitigate risk.

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Agency Theory, Corporate Governance, and Cement Industry in Pakistan

Agency theory documents the principles of board independence, institutional

shareholdings, the board size, and audit committees which are the significant facets of

the code of CG of Pakistan. Agency theory describes that in order to accomplish goal of

firm, agency problem must be controlled. Code of CG of Pakistan describes that in

order to attain the corporate goal by mitigating agency problem, there must be a

maximum of one-third of insider directors in the corporate board, at least one

independent director in the board, as well as audit committee, must contain three

members headed by an independent director as well as board size must nine. Adhering

the golden principles of CG of Pakistan (2014) by cement sector firms listed on KSE,

Pakistan can easily accomplish their goal. Agency theory emphasizes upon shareholder

approach / unitary system of corporate governance, which is also prevailing in Pakistan.

In Pakistan, cement firms are privately owned and more than fifty percent of shares are

held by them.

Rationale of the Study

Researchers across the globe have conducted several studies to predict that how

to enhance FP and minimize risk in business organizations. Studies have been done to

analyze this problem in various sectors of Pakistan. In the light of significant

contribution of cement industry in economic development, it is indispensable to identify

the impact of CG on capital structure, FP and risk of cement industry of Pakistan. The

literature has proved that CG (audit committee insider directors, institutional

shareholdings, board independence, and board size) significantly impact FP and

73

solvency of firm. The recent literature reveals the association between CG, FP, capital

structure, and solvency risk protection. Shahid et al. (2017) carried research to check the

effect of CG on the FP of cement industry of Pakistan. The results show that CG

positively influences the FP of the cement industry of Pakistan.

Selvam and Vanitha (2016) checked the relation between CG and FP of cement

industry of Calcutta Stock Exchange, India. The results revealed a positive association

between CG and FP of cement manufacturing companies listed on Calcutta Stock

Exchange, India. Todorovic (2013) evaluated the impact of CG on FP of Banja Luka

Stock Exchange, Srpska and Vienna Stock Exchange, Austria. The results indicated that

FP of listed firms on the Vienna Stock Exchange, Austria was much stronger than firms

listed on Banja Luka Stock Exchange, Srpska due to CG mechanism. Sound practices of

CG enhance FP of corporation (Ahmed & Hamdan, 2015; Brown & Caylor, 2004;

Enobakhare, 2010; Gill, Vijay & Jha, 2009; Khan & Awan, 2012). Good practices of

CG reduce risk and enhance solvency risk protection (Vo & Nguyen, 2014).

Masnoon and Rauf (2013) analyzed the effect of CG on the capital structure of

nonfinancial corporations listed on KSE, Pakistan. They concluded that CG negatively

correlates the capital structure. Agyei and Owusu, 2014; Driffield et al. 2007; Gaaniyu

and Abiodun, 2012; Liao, (2012) identified a negative association between CG and

capital structure. They proved that good governed corporations prefer optimal capital

structure to minimize risk, enhance FP and build corporate image. Alam and Shah

(2013) checked the influence of CG on the solvency risk protection (interest coverage

ratio) of companies listed on KSE, Pakistan. The results indicate a positive relation

between CG and interest coverage ratio. Ararat and Ugur (2018) carried research to

74

evaluate the association between CG and risk (times interest earned) of companies

enlisted on Istanbul Stock Exchange, Turkey. The outcome revealed that CG positively

associate times interest earned. According to Brick and Chidambaram (2008); Brigham

and Daves (2005); Eling and Marek (2011); Reddy et al. (2015); Wahla et al. (2012),

there is a positive association between CG and solvency risk protection. Morck et al.

(2009) conducted a research to evaluate the behavior of companies enlisted on Nagoya

Stock Exchange, Japan in hedging risk. They proved that Japanese firms adopt Pecking

Order Theorem, offered by Myers and Majluf (1984) by preferring internal financing

(equity financing and retained earnings) than external financing (debt financing) in

order to maximize FP and protect solvency.

The optimal capital structure decision is made in accordance with good practices

of CG which in turn affects FP and solvency risk protection of corporations. Mwangi et

al. (2014), identified the influence of high leveraging on FP of corporations listed on

Nairobi Stock Exchange, Kenya. The results indicate that high leveraged firms have

positive association with FP. As the level of debts increases, the FP also increases.

Saeedi and Mahmoodi (2011) also documented positive association between capital

structure and FP of corporations enlisted on Tehran Stock Exchange. Adekunle and

Sunday (2010) described that FP improves as the debts increases due to tax

deductibility as described in Trade-off theory. Firms trade off cost and benefit through

optimal capital structure decision to enhance corporate value (Ganiyu & Abiodun,

2012). The optimal capital structure maximizes FP but if the debt level goes high then it

indulge firm into risk due to low solvency risk protection. The capital structure decision

affects corporate risk as high risk is associated with more debt financing. Prasetyo

75

(2011) proved a negative association between capital structure and solvency risk

protection of corporations listed on Indonesian Stock Exchange. The findings revealed

that as the debt level is increased in capital structure, the solvency risk protection

decreases. Roggi et al., (2012) also proved a negative relation between capital structure

and solvency risk protection.

In light of recent literature (Ahmed & Hamdan, 2015; Alam & Shah, 2013;

Aries,2016; Bhagat & Bolton, 2018; Eling & Marek, 2011; Gaaniyu & Abiodun,

2012; Khan & Awan, 2012; Mwangi et al. 2014; Quang, & Xin, 2014; Shahid et al.,

2017; Shoaib & Yasushi, 2017; Todorovic, 2013; Vo & Nguyen, 2014; Wanyoike &

Nasieku, 2015; Zeitun & Tian,2017) the author conclude that studies have been

conducted on CG, capital structure, FP and risk separately or in little combination but

CG, capital structure, FP and risk got very limited literature collectively, specifically in

cement sector and in particular to Pakistan.

This research will contribute to the growing literature on CG, capital structure,

FP and solvency risk protection in the context of a growing economy like Pakistan.

Therefore, for the very first time this research will analyze the impact of CG on capital

structure, FP and solvency risk protection as well as capital structure will also be tested

as mediator between CG, FP and solvency risk protection with rich dimensions in

cement sector firms listed on KSE, Pakistan from 2005 to 2014.

76

Conceptual Framework

The conceptual model is designed in line with the earlier studies, conducted by

researchers on CG (independent variable) and its influence on capital structure

(mediating variable), FP, and solvency risk protection (dependent variables). Firm size,

firm age and firm growth are used as control variables. The conceptual framework is

designed from the preceding studies: CG and its impact on FP (Ahmed & Hamdan,

2015; Barbosa & Louri, 2015; Cheema & Din, 2014; Otman, 2014; Shahid et al., 2017),

impact of CG on solvency risk protection (Alam & Shah, 2013; Aries, 2016), impact of

CG on capital structure (Gaaniyu & Abiodun, 2012; Okiro, Aduda & Omoro, 2015),

impact of capital structure on FP (Quang & Xin, 2014; Shoaib & Yasushi, 2017), and

impact of capital structure on solvency risk protection (Ullah, Akhtar, & Zaefarian,

2018; Ullah et al, 2017).

Figure 9 Conceptual Framework


* Insider Directors



* Board Size

*Audit Committee

Capital

Structure

Financial

Performance

Solvency

Risk

Protection

* Firm Size

* Firm Age

* Firm Growth

Ind

epen

den

t Variab

le

Mediating Variable

Control Variables

Dependent Variable

Dependent Variable

77

CHAPTER 3

RESEARCH METHODOLOGY

This research was conducted to check the impact of CG (board size, insider

directors, institutional shareholdings, board independence, and audit committee) on

capital structure, FP, and solvency risk protection of corporations listed on KSE,

Pakistan. This chapter will depict research philosophy, research approach, research

strategy, and research design. Furthermore, population, data collection methods, and

instruments used in data collection of firms listed on KSE, Pakistan is also described.

Research Philosophy

Philosophical orientations influence research methodology. In order to build

philosophical perspective, researcher formulates many core assumptions, pertaining two

research dimensions: sociological and scientific. According to Saunders, Lewis, and

Thornhill (2007), philosophical approaches: Positivism (objective) approach and

phenomenology (subjective/interpretive) approach exist as these form the ground of

knowledge on which assumptions and pre-dispositions of study base. Positivism

(objective) approach and phenomenology (subjective / interpretive) approach are

defined as assumptions relating to epistemology (knowledge), ontology (reality), human

nature and methodology (tool kit of researchers). These are the two approaches which

navigate research in social sciences. Moreover, the positivist approach follows the

quantitative paradigm to explore phenomena. This approach presumes that the reality

of an object exist which is independent of the behavior of human. This approach seeks

78

facts of social phenomena with slight concern for the subjective state of individuals.

This approach considers the propositions accurate only after the verification of

empirical tests. The researchers concentrate upon facts, seek causality and basic laws,

minimize phenomena to simplest part, and originate hypotheses, and test them.

The phenomenological approach focuses on experience and narration of things

as they are, not as a researcher perceives they are. This paradigm includes the collection

of a large quantity of rich information which is based on the belief of understanding the

experience and situation (Veal, 2005). This study inclines towards the positivist

(objective) philosophical approach as literature is reviewed from the prior relevant

studies, the conceptual framework is designed and the scientific procedure is adopted in

hypothesizing the basic laws. The author presumes that CG positively affects FP and

solvency risk protection whereas, it negatively affects capital structure. Furthermore,

capital structure mediates the association between CG, FP and solvency risk protection.

Research Approach

Research approach is classified into a deductive approach and inductive

approach (Saunders, Lewis, & Thornhill, 2009). Inductive approach is employed in

research when literature is available for developing a new theory, whereas, deductive

approach is applied when the literature and theory both are available. In deductive

approach, quantitative techniques are deployed for testing the theory. In this research,

the deductive research approach is used.

79

Research Strategy

The research strategy is used to select a methodology for answering research

questions (Saunders et al., 2009). Research strategies are categorized into quantitative

research strategy and qualitative research strategy. Usually, researchers use qualitative

research strategy when interviews are conducted from respondents, whereas,

quantitative research strategy provides result in numeric and conducted through

statistics and questionnaires etc. (Afridi, 2017; Saunders, Lewis & Thornhill, 2009).

The current research inclines towards a quantitative research strategy.

Research Design

Research design navigates the research study to ensure that it highlights the

research problem. Research designs are classified under three major headings:

exploratory, descriptive and explanatory. Descriptive research design includes an

explanation of phenomena or traits connected with subject population (what, when,

who, how and where). It permits approximation of the amount of population having

these traits. Descriptive study is done once it presents a snapshot at specific time

(Cooper & Schindler, 2008).

The descriptive research design involves the collection of data to evaluate the

hypothesized relationship among these variables. Descriptive design helps in answering

questions relating to the present study (Mugenda & Mugenda, 2003). This research

analyzes the effect of CG on FP and solvency risk protection with mediating role of the

capital structure of cement sector firms listed on KSE, Pakistan from the year 2005 to

2014. The author has used descriptive and explanatory research as descriptive research

design encompasses data gathering to analyze the hypothesized association between the

80

variables. This design has made the researcher able in finding out the relationship

between CG, capital structure, FP, and solvency risk protection of cement sector firms

listed on Karachi Stock Exchange, Pakistan. Aduda & Musyoka, 2011; Okiro, 2014;

Otman, (2014) have also used the same research design to examine the relationship

between CG and capital structure, and CG and FP.

Population

The KSE (at present known as Pakistan Stock Exchange after integration of

KSE, LSE, and ISE on January 11, 2016) is the 3rd

sound performer across the globe

since 2009. Since that time Pakistani equities delivered 26% per annum for investors in

US dollars, which made KSE one of the top performing stock markets in the world

(KSE, 2015). There are 576 listed corporations of 35 different sectors (See appendix I).

Among these 35 sectors, there are 11 services based sectors.

The author has used reliable data of cement sector among these 24 different

sectors listed on KSE, Pakistan for a period of ten years (from 2005 to 2014). There are

total twenty cement manufacturing corporation listed on KSE, Pakistan (KSE, 2014).

The author used entire cement sector corporations listed on KSE for the reported period

because studies has been conducted to examine the impact of CG mechanisms in other

manufacturing and non-manufacturing sectors in the developed and developing

economy like Pakistan. Furthermore, cement sector is one of the good manufacturing

sectors with the same manufacturing process and mechanism in the developing

economies across the globe and has been found on high boom and earning more profit

in Pakistan. Previous researchers have also recommended to examine the role of CG in

81

the cement sector in developing economy as very limited work have been done in

under-developed economies specially in Pakistan. In addition, based on sound financial

condition and good contribution of cement sector to the national economy of Pakistan,

it is indispensible to analyze the role of board of directors in the cement sector of

Pakistan as history revealed that firms with poor accountability have indulged firms into

fraudulent affairs from the board of directors.







and foreign demand for cement and sound profit margin.

The list of cement manufacturing firms is obtained from KSE, Pakistan (see

Table 1). This study has deployed the entire 20 cement manufacturing firms listed on

KSE, Pakistan. The cement sector was selected due to defined structure and is likely to

show elaborated association between research variables. Besides this, the work done on

the cement industry of Pakistan is not that much as it has been contributing to economic

growth, employment creation for thousands of people, foreign remittances and huge

income for the government. According to author knowledge, the studies done across the

globe in the cement sector on CG, capital structure, FP and solvency risk protection are

not measured collectively as well as not with such rich variables as used in this

research.

82

Table 1

Cement Firms Listed on Karachi Stock Exchange

Sr. No. Symbol Company

1 ACPL Attock Cement Pakistan Limited

2 BWCL Bestway Cement Limited

3 CHCC Cherat Cement Company Limited

4 DBCI DadaBhoy Cement Industries Limited

5 DCL Dewan Cement Limited

6 DGKC D.G. Khan Cement Company Limited

7 DNCC Dandot Cement Company Limited

8 FCCL Fauji Cement Company Limited

9 FECTC Fecto Cement Limited

10 FLYNG Flying Cement Company Limited

11 GWLC Gharibwal Cement Limited

12 JVDC Javedan Corporation Limited

13 KOHC Kohat Cement Company Limited

14 LPCL Lafarge Pak Cement Limited

15 LUCK Lucky Cement Limited

16 MLCF Maple Leaf Cement Limited

18 POWER Power Cement Limited

19 THCCL Thatta Cement Company Limited

20 ZELP Zeal Pak Cement Factory Limited

Source: www.kse.com.pk (2014)

http://www.kse.com.pk/

83

Data Collection

The annual reports, research articles, books, newspapers, online data,

governmental organizations, catalogs are the means which are widely used as sources

for secondary data (Sekaran, 2003; Veal, 2005). Therefore, authentic secondary source

is used for data collection from audited annual reports of entire cement sector

corporations listed on KSE, Pakistan for ten years (2005 to 2014) due to its reliability as

checked and verified by the chartered accountants at the end of the financial year.

Type of Data and Statistical Analysis

In this research, balanced panel data from the entire cement sector (20 cement

corporations) listed on KSE, Pakistan for a period of 10 years (2005 to 2014). Stata 14

was used to analyze the data.

Measurement of variables

Based on literature review, CG (predictor variable) was measured with insider

directors, institutional shareholding, board independence, board size and audit

committee, whereas the outcome variables include FP (ROA, ROE, operating income

margin, net income margin, and total assets turnover) and solvency risk protection

(times interest earned), however capital structure (debt to equity and debt to total assets)

is employed as mediating variable, and Firm size, Firm age, and Firm growth are used

as control variables. The given below Table 2 shows the measurement of all the

variables (independent, dependent, mediating and control variable) used in this

research.

84

Table 2

Measurement of Variables

Sr. No Variables Abbreviation Measurement Reference

1 Insider Directors ID Total number of executive directors in the

company board (Ahmed & Hamdan,

2015)

2 Institutional shareholding IS Shares held by other institutions divided by

outstanding shares (Otman, 2014

3 Board Independence BI Total Number of Independent Directors

in the board Yasser et al., 2011)

4 Board Size BS Total number of directors in the company Board Cheng, Evans, &

Nagarajan, 2008)

5 Audit Committee AC Total number of audit committee members (Okiro, et al., 2015)

85

Table 2 (Continued)


6 Return on Assets ROA Net Income divided by Total Assets (Bokpin & Arko, 2009;

Enobakhare, 2010)

7 Return on Equity ROE Net Income divided by Total Stockholders’ Equity (Otman, 2014;

Mackay, 2012)

8 Operating Income Margin OIM Earnings Before Interest & Taxes divided by (Gill et al., 2009)

Net Sales

9 Net Income Margin NIM Net Sales divided by Total Assets (Mackay, 2012)

10 Total Assets Turnover TAT Net Sales divided by Total Assets (Ullah et al., 2017)

11 Debt to Equity DTE Total Debt divided by Shareholders’ Equity (Mwangi et al.,

2014)

12 Debt to Total Assets DTA Total Debt divided by Total Assets (Otman, 2014)

13 Times Interest Earned TIE Earnings Before Interest and Taxes divided by

Interest charge (Lang & Jagtiani, 2010)

86

Table 2 (Continued)


14 Firm Size FSZ Natural logarithm of the market capitalization (Muthoni, Nasieku,

Olweny 2018)

15 Firm Age FAG Natural logarithm of the number of years between

the observation year and the incorporation year

of the firm (Shoaib & Yasushi, 2017)

16 Firm Growth FGR Difference between the current year sale and the

previous year sale to the previous year sale (Shahid et al., 2017)

___________________________________________________________________________________________________

87

CHAPTER 4

DATA ANALYSIS

This chapter is designed as descriptive statistics, correlation analysis and

regression diagnosis: CG and FP, CG and solvency risk protection, CG and capital

structure, capital structure and FP, capital structure and solvency risk protection,

mediation analysis and summary of the hypotheses estimates.

Descriptive Statistics

The descriptive statistics of CG (insider directors, institutional shareholdings,

board independence, board size and audit committee), FP (ROA, ROE, operating

income margin, net income margin and total assets turnover) capital structure (debt to

equity and debt to assets) and solvency risk protection (times interest earned) are

documented in Table 3. Descriptive measures comprised of minimum, maximum, mean

and standard deviation. Mean values range from 0.15 to 15.74, whereas, standard

deviation range from 0.16 to 0.54 shows that all instruments were governed to use.

88

Table 3

Descriptive Statistics of Variables (N=200)

Variables Minimum Maximum Mean Std. Deviation


ID 1.00 4.00 2.94 0.54

IS 1.00 23.23 6.75 0.52

BI 0.00 4.00 0.63 0.47

BS 7.00 11.00 8.00 0.43

AC 3.00 4.00 3.19 0.39


ROA -0.41 3.52 1.09 0.16

ROE -1.84 4.87 2.14 0.32

NIM -3.31 7.95 4.13 0.54

OIM -2.30 12.93 7.01 0.51

TAT 0.36 15.97 4.22 0.26

Solvency risk protection -1.24 8.91 7.06 0.26

Capital Structure

DTE -0.04 2.43 0.15 0.35

DTA 0.01 7.18 0.55 0.54

Control Variables

FSZ 2.48 8.74 5.53 0.50

FAG 1.32 1.77 1.53 0.15

FGR -46.85 93.80 15.74 0.32

Note: ID= Insider Directors, IS= Institutional Shareholdings, BI= Board Independence,

BS= Board Size, AC= Audit Committee, ROA= Return on Assets, ROE= Return on

Equity, OIM= Operating Income Margin, NIM= Net Income Margin, TAT= Total

Assets Turnover, DTE= Debt to Equity, DTA= Debt to Assets, FSZ = Firm Size, FAG

= Firm Age, and FGR = Firm Growth.

89

Pearson Correlation Analysis

Pearson product moment correlation analysis was used to form the association

between CG (board size, insider directors, institutional shareholdings, board

independence and audit committee), FP (ROA, ROE, operating income margin, net

income margin, total assets turnover) solvency risk protection, and capital structure

(debt to equity and debt to assets). The Pearson correlation matrix (Table 4) documents

that there is a positive and significant correlation between facets of CG, dimensions of

FP, and solvency risk protection. Whereas, there is a negative correlation between

facets of CG and measures of capital structure as well as capital structure measures’ and

solvency risk protection. The outcomes indicate that change in one variable impact

another variable. The entire values are significant at 0.05.

Corporate Governance, Financial Performance, Solvency Risk Protection,

and Capital Structure. The Table 4 documents that the CG (board size, insider

directors, institutional shareholdings, board independence and audit committee)

positively associates FP (ROA, ROE, operating income margin, net income margin,

total assets turnover), and solvency risk protection (times interest earned) whereas,

negatively correlates capital structure (debt to equity and debt to total assets). The

results indicated that there is no value above 0.90 and hence there is no issue of

multicollinearity in the variables.

The results show that insider directors positively correlates with dimensions of

FP (ROA ROE, net income margin, operating income margin, total assets turnover),

solvency risk protection, firm size, firm age, firm growth, however negatively correlates

with capital structure measures (debt to equity and debt to assets) (r = 0.351, 0.263,

90

0.277, 0.225, 0.099, 0.404, 0.042, 0.144, 0.049, -0.058, & -0.042). There are evidences

that insider directors have positive correlation with FP (Cheema & Din, 2014; Shahid,

et. al, 2017; Vo & Nguyen, 2014). Reddy et al. (2015) identified that insider directors

positively correlates solvency risk protection. Masnoon and Rauf (2013) identified that

insider directors negatively correlates capital structure.

The results document that institutional shareholdings positively correlates with

FP (ROA ROE, net income margin, operating income margin, total assets turnover),

solvency risk protection, and firm growth, however negatively correlates with firm size,

firm age, firm growth, and capital structure measures (debt to equity and debt to assets)

(r = 0.175, 0.173, 0.168, 0.211, 0.176, 0.151, 0.136, -0.488, -0.174, -0.211, & -0.250).

The results of Ahmed and Hamdan (2015) proved that there is an affirmative

association between institutional shareholdings and FP. Reddy et al. (2015) identified

that institutional shareholdings positively correlates solvency risk protection, whereas,

Driffield, Mahambare, and Pal (2007) proved that there is a negative relationship

between institutional shareholdings and capital structure.

The results prove that board independence positively correlates with FP (ROA,

ROE, net income margin, operating income margin, total assets turnover), solvency risk

protection, and firm growth, however negatively correlates with firm size, firm age,

firm growth, and capital structure measures (debt to equity and debt to assets) (r =

0.272, 0.306, 0.315, 0.366, 0.422, 0.364, 0.163, -0.217, -0.161, -0.339, & -0.424).

Chugh et al., 2009; Gaaniyu & Abiodun, 2012; Javed & Iqbal (2008) proved a positive

association between board independence and FP. Eling and Marek (2011) proved a

positive association between board independence and solvency risk protection. Bokpin

91

and Arko, 2009; Ganiyu and Abiodun, 2012; Shangguan, 2007; Sheikh and Wang,

(2011) proved that board independence negatively associates with capital structure.

The results proved that board size positively correlates with FP (ROA, ROE, net

income margin, operating income margin, total assets turnover), solvency risk

protection, and firm growth, however negatively correlates with firm size, firm age,

firm growth, and capital structure measures (debt to equity and debt to assets) (r =

0.083, 0.081, 0.105, 0.079, 0.193, 0.089, 0.119, -0.041, -0.318, -0.090, & -0.071).

Masnoon & Rauf, 2013; Velnampy, 2013; Vo and Nguyen, (2014) proved that board

size and FP has positive association. Agyei and Owusu (2014) proved a negative

relation between capital structure and board size. The results prove that audit committee

positively correlates with FP (ROA, ROE, net income margin, operating income

margin, total assets turnover), solvency risk protection, and firm size however

negatively correlates with firm age, firm growth, and capital structure measures (debt to

equity and debt to assets) (r = 0.087, 0.111, 0.127, 0.083, 0.016, 0.192, 0.259, -0.060, -

0.064, -0.062, & -0.037). Ahmed and Hamdan, 2015; Cheema and Din, (2014) proved

that audit committee and FP positively correlates each other. Bernanke (2008) proved

that audit committee positively associates solvency risk protection. Agyei and Owusu,

2014; Gaaniyu and Abiodun, (2012) proved that audit committee negatively correlates

capital structure.

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Table 4

Correlation Analysis: CG, FP, Solvency Risk Protection, Capital Structure and Control Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

ROA 1

ROE .739**

1

NIM .741**

.751**

1

OIM .854**

.645**

.819**

1

TAT .635**

.688**

.674**

.736**

1

DTE .478**

.472**

.466**

.417**

.353**

1

DTA .506**

.517**

.509**

.475**

.439**

.753**

1

TIE .512**

.510**

.515**

.524**

.624**

-.309**

-.371**

1

FSZ -0.035 -0.019 -0.001 -0.051 -0.014 0.051 0.107 -0.079 1

FAG -.304**

-.271**

-.275**

-.261**

.033 .280**

.277**

-.145* 0.074 1

FGR .228**

.248**

.234**

.219**

.239**

-.318**

-.319**

.238**

-.175* -.194

** 1

ID .351**

.263**

.277**

.225**

.099 -0.058 -0.042 .404**

0.042 .144* 0.049 1

IS .175* .173

* .168

* .211

** .176

* -.205

** -.250

** .151

* -.488

** -.174

* 0.136 -0.107 1

BI .272**

.306**

.315**

.366**

.422**

-.339**

-.424**

.364**

-.217**

-.161* .163

* 0.119 .429

** 1

BS .083 .081 .105 .079 .193**

-0.090 -0.071 0.089 -0.041 -.318**

0.119 -.193**

.146* 0.057 1

AC .087 .111 .127 .083 -0.016 -0.062 -0.037 .192**

.259**

-0.060 -0.013 -0.064 -0.083 -.190**

.359**

1

**. Correlation is significant at the 0.01 level (2-tailed), *. Correlation is significant at the 0.05 level (2-tailed), ROA= Return on Assets, ROE=

Return on Equity, NIM= Net Income Margin, OIM= Operating Income Margin, TAT= Total Assets Turnover, DTE= Debt to Total Equity, DTA=

Debt to Total Assets, TIE= Times Interest Earned, FSZ= Firm Size, FAG= Firm Age, FGR= Firm Growth, ID = Insider Directors, IS = Institutional

Shareholdings, BI = Board Independence, BS = Board Size, and AC = Audit Committee.

NOTE: ROA, ROE, NIM, OIM, and TAT are the dimensions of FP (Dependent Variable), DTE and DTA are measures of Capital Structure

(Intervening Variable), TIE is used to calculate Solvency Risk Protection (Dependent Variable). FSZ, FAG, and FGR are Control Variables

whereas, ID, IS, BI, BS and AC are the facets of CG (Independent Variable).

93

Regression Analysis

The research hypotheses were tested by applying panel data Generalized Method

of Moments (GMM) model to spell out the effect of CG on capital structure, FP, and

solvency risk protection of cement listed firms on KSE, Pakistan. CG is independent

variable, capital structure is a mediating variable, FP and solvency risk protection is

dependent variables, whereas firm size, firm age and firm growth are control variables.

Diagnostic Tests

The following tests have been conducted to check the Normality,

Multicollinearity, Autocorrelation, Heteroscedasticity and endogeneity biases in order

to satisfy the data for viability of analysis. After evaluating the study found that there is

a problem of heteroscedasticity and endogeneity.

Shapiro-Wilk Test. Data normality was assessed through Shapiro-Wilk test.

The results were significant at p<0.05, indicated that data is normally distributed.

Variance Inflation Factors. To test the Multicollinearity in predictor variable,

Variance Inflation Factors (VIF) was employed. The outcome indicated that there is no

Multicollinearity in the data.

Wooldrige Test. To test the autocorrelation in independent variable,

Wooldridge test has been employed at a significant level of p<0.05, which indicated

that there is no autocorrelation in predictor variables of this study.

Breusch-Pagan/Cook-Weiserg Test. To predict the heteroscedasticity in the

data, Breusch-Pagan/Cook-Weiserg test has been deployed. The result indicated 0.210

94

which is insignificant at p<0.05, which prove that there was heteroscedasticity in the

data.

Dynamic Modeling and Panel Data Analysis. In order to resolve these

problems, the study performs the dynamic generalized method of moments model

(GMM). GMM has the ability to resolve the above problems in corporate governance,

financial performance, and solvency risk protection data as recommended by many

researchers (Ullah, Akhtar, & Zaefarian, 2018).

Principal Component Analysis. Principal component factor analysis (PCA)

was performed to reduce the number of variables within a dataset as recommended by

the previous authors (Tracey, 2014). The PCA were performed to reduce the number of

items and convert number of dependent variables into one. The PCA was utilized for FP

and capital structure variables respectively.

Model Equations

Equation 1: In this model, FP is regressed on CG (See Table 5).

FP it= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+

β8{FGRit}+β9{YDit}+µtit

Equation 2: In this model, solvency risk protection is regressed on CG (See Table 6).

SRPit= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+

β8{FGRit}+ β9{YDit}+µtit

Equation 3: In this model, capital structure is regressed on CG (See Table 7).

CSit= π+β1{IDit}+β2{ISit}+β3{BIit}+β4{BSit}+β5{ACit}+β6{FSZit}+β7{FAGit}+

β8{FGRit}+β9{YDit}+µtit

https://en.wikipedia.org/wiki/Pi



95

Equation 4: In this model, FP is regressed on capital structure (Table 8).

FPit=π+β1{DTE it}+β2 {DTA it}+β3{FSZit}+β4{FAGit}+β5{FGRit}+β6{YDit}+µtit

Equation 5: In this model, solvency risk protection is regressed on capital structure

(Table 9).

SRPit=π+β1{TIE it}+β2{FSZit}+β3{FAGit}+β4{FGRit}+β6{YDit}+µtit

In above equations, FP denotes financial performance, ID denotes insider

directors, IS denotes institutional shareholdings, BI denotes board independence, BS

denotes board size, AC audit committee, FSZ denotes firm size, FAG denotes firm age,

FGR denotes firm growth, YD denotes years dummy, CS denotes capital structure, SRP

denotes solvency risk protection, DTE denotes debt to equity, DTA denotes debt to

assets, π denotes constant, it indicates individual company and time, β denotes beta, µt

denotes the error term.

Corporate Governance and Financial Performance. The author estimated

equation 1 and the estimation outcomes are documented in Table 5, which shows the

effect of CG on FP. The results show that there is a positive impact of CG variables on

FP. The results show beta value of 0.17 for insider directors, 0.22 for institutional

shareholdings, 0.14 for board independence, 0.29 for board size and 0.16 for audit

committee and t-value 2.39 for insider directors, 3.29 for institutional shareholdings,

1.92 for board independence, 4.14 for board size and 2.25 for audit committee with p-

value 0.023 for insider directors, 0.000 for institutional shareholdings, 0.000 for board

independence, 0.057 for board size and 0.026 for audit committee.

The results indicate that CG: insider directors, institutional shareholdings, board

independence, board size, and audit committee positively affects FP. This is evidence of




96

hypothesis 1 that investigates the direct positive influence of CG: insider directors,

institutional shareholdings, board independence, board size and audit committee on FP.

There are evidences that insider director have positive impact on FP of (Shahid et al.,

2017; Vo & Nguyen, 2014). Wahla et al., (2012) proved a positive association between

board independence and FP. Cheema and Din (2014) identified that insider directors

positively influence corporate FP. Velnampy (2013) documented a positive association

between board size and FP of firm. Ahmed and Hamdan (2015) proved that audit

committee improves FP.

Table 5

Generalized Method of Moments Model (GMM): CG and FP

FP Coef. St.Err t-value p-value Sig.

Lag of Dependent

Variable

0.690 0.076 9.08 0.000 ***

Insider Directors 0.171 0.069 2.39 0.023 *

Institutional

Shareholdings

0.221 0.067 3.29 0.000 ***

Board Independence 0.146 0.076 1.92 0.057 *

Board Size 0.293 0.071 4.14 0.026 *

Audit Committee 0.164 0.073 2.25 0.026 **

Firm Size 0.015 0.062 0.24 0.813

Firm Age -0.091 0.057 -1.59 0.115

Firm Growth 0.065 0.056 1.17 0.244

Years Dummy YES - - - - Mean dependent variable 0.051 SD dependent variable

variable

0.991

Number of observation 200 F-test 13.250

*** p<0.01, ** p<0.05, * p<0.1

97

Corporate Governance and Solvency Risk Protection. The author estimated

equation 2 and the estimation outcomes are shown in Table 6, which shows the

influence of CG on solvency risk protection. The results in below table show that all the

dimensions of CG have positive impact on solvency risk protection. The results indicate

beta value of 0.17 for insider directors, 0.36 for institutional shareholdings, 0.14 for

board independence, 0.12 for board size and 0.10 for audit committee and t-value 3.01

for insider directors, 2.51 for institutional shareholdings, 2.57 for board independence,

2.47 for board size and 1.93 for audit committee with p-value 0.003 for insider directors

and 0.000 for institutional shareholdings and 0.011 for board independence, 0.015 for

board size, and 0.055 for audit committee.

The outcomes indicate that insider directors, institutional shareholdings, board

independence, board size, and audit committee positively impact solvency risk

protection. This is evidence of hypothesis 2 that investigates the direct positive

influence of CG on solvency risk protection. Reddy et al. (2015) identified that insider

directors, institutional shareholdings and larger board positively affects solvency risk

protection. Ahmed & Hamdan, 2015; proved that audit committee and board

independence have positive impact on solvency risk protection.

98

Table 6

Generalized Method of Moments Model (GMM): CG and Solvency Risk Protection

Solvency Risk Protection Coef. St.Err t-value p-value Sig.

Lag of Dependent Variable 0.760 0.058 13.00 0.000 ***

Insider Directors 0.173 0.058 3.01 0.003 ***

Institutional Shareholdings 0.360 0.043 2.51 0.000 ***

Board Independence 0.148 0.058 2.57 0.011 **

Board Size 0.125 0.051 2.47 0.015 **

Audit Committee 0.107 0.055 1.93 0.055 *

Firm Size -0.015 0.040 -0.37 0.713

Firm Age -0.027 0.035 -0.78 0.438

Firm Growth 0.081 0.037 2.21 0.029 **

Years Dummy

Mean dependent variable -0.005 SD dependent variable 0.979


*** p<0.01, ** p<0.05, * p<0.1

Corporate Governance and Capital Structure. The author estimated equation

3 and the estimation results are exhibited in Table 7, which shows the effect of CG on

capital structure. The results indicate beta value of -0.31 for insider directors, -0.20 for

institutional shareholdings, -0.15 for board independence, -0.17 for board size and -0.21

for audit committee and t-value -04.21 for insider directors, -3.27 for institutional

shareholdings, -2.24 for board independence, -2.07 for board size and -2.01 for audit

committee with p-value 0.000 for insider directors, 0.000 for institutional shareholdings,

0.027 for board independence, 0.041 for board size, and 0.031 for audit committee.

99

The outcomes reveal that insider directors, institutional shareholdings, board

independence, board size, and audit committee negatively affects capital structure. This

is evidence of hypothesis 3 that investigates the direct negative influence of CG: insider

directors, institutional shareholdings, board independence, board size, and audit

committee on capital structure. Masnoon and Rauf (2013) identified that CG: board

independence, managerial shareholdings and board size has negative effect on capital

structure: debt to equity. Driffield et al. (2017) proved that insider directors, audit

committee and board independence negatively affects capital structure.

Table 7

Generalized Method of Moments Model (GMM): CG and Capital Structure

Capital Structure Coef. St.Err t-value p-value Sig.


Insider Directors -0.312 0.060 -4.21 0.000 ***

Institutional Shareholdings -0.200 0.061 -3.27 0.000 ***

Board Independence -0.155 0.069 -2.24 0.027 **

Board Size -0.177 0.055 -2.07 0.041 *

Audit Committee -0.216 0.066 -2.01 0.031 *

Firm Size 0.058 0.056 1.04 0.299

Firm Age 0.075 0.052 1.44 0.152

Firm Growth -0.054 0.051 -1.05 0.295

Years Dummy



*** p<0.01, ** p<0.05, * p<0.1

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Capital Structure and Financial Performance. The author estimated equation

4 and the estimation outcomes are presented in Table 8, which shows the influence of

capital structure on FP. The results indicate beta value of 0.123, t-value 7.68, and with

p-value 0.000 for capital structure.

The results indicate that debt to equity and debt to assets have positive effect on

FP. This is evidence of hypothesis 4 that investigates the direct positive effect of capital

structure on FP. Ganiyu and Abiodun (2012) documented that capital structure

positively affect FP. Researchers (Quang & Xin, 2014; Shoaib & Yasushi, 2017) also

proved affirmative association between capital structure and FP.

Table 8

Generalized Method of Moments Model (GMM): Capital Structure and FP

FP Coef. St.Err t-value p-value Sig.


Capital Structure 0.123 0.016 7.68 0.000 ***

Firm Size 0.040 0.057 0.70 0.486

Firm Age -0.055 0.059 -0.94 0.347

Firm Growth 0.027 0.060 0.45 0.655

Years Dummy

Mean dependent variable 0.051 SD dependent variable 0.991

Number of observations 200 F-test 12.285

*** p<0.01, ** p<0.05, * p<0.1

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Capital Structure and Solvency Risk Protection. The author estimated

equation 5 and the estimation outcomes are documented in Table 9, which shows

negative influence of capital structure on solvency risk protection. The results indicated

beta value of -0.40, t-value -2.82 and with p-value 0.000 for solvency risk protection.

The results describe that debt to equity and debt to assets negatively affects

solvency risk protection. This is evidence of hypothesis 5 that investigates the direct

negative influence of capital structure on solvency risk protection. Researchers (Ullah,

Akhtar, & Zaefarian, 2018; Ullah et.,al, 2017) proved that capital structure negatively

affects solvency risk protection.

Table 9

Generalized Method of Moments Model (GMM): Capital Structure and Solvency Risk

Protection

Solvency Risk Protection Coef. St.Err t-value p-value Sig.


Capital Structure -0.408 0.145 -2.82 0.005 ***

Firm Size 0.018 0.038 0.46 0.644

Firm Age -0.012 0.037 -0.33 0.741

Firm Growth 0.051 0.041 1.24 0.216

Years Dummy Yes - - -



*** p<0.01, ** p<0.05, * p<0.1

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Mediation Analysis

The hypotheses of mediation predict that capital structure mediates between CG

and FP and solvency risk protection. For testing the mediation hypotheses, Stata 14.0

SGMEDIATION command was applied. This command gives an outcome of 4 steps

mediation approach recommended by renowned authors (Baron & Kenny, 1986;

Preacher & Hayes, 2004; Preacher, Rucker, & Hayes, 2007; Sobel, 1982). Furthermore,

the SGMEDIATION outcomes gives indirect effect test, Sobel test and Goodman tests

for more testing and authentication of the mediation effect between the variables used in

the model (Hicks & Tingley, 2011).

Figure 10. Mediation Model -1

Figure 11. Mediation Model based -2

Corporate

Governan

ce

Capital

Structure

Financial

Performanc

e

Path A Path B

Path C

IV DV MV

Corporate

Governan

ce

Capital

Structure

Solvency

Risk

Protection

Path A Path B

Path C

IV DV MV

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The authors (Baron & Kenny, 1986; Preacher & Hayes, 2004; Preacher et al.,

2007) recommended the given four steps to test mediation between predictor, mediating

and outcome variables:

1. The predictor variable significantly effects the mediating variable, named as path A

2. The mediating variable significantly effects outcome variable, named as path B

3. The predictor variable significantly effects the outcome variable, named as path C

4. The effect of predictor variable on outcome variable may change after the effect of

mediating variable is controlled, named as path C. In step four, if the relationship of the

predictor variable and outcome variable becomes insignificant it is considered as full

mediation, otherwise partial mediation. In addition, if a single condition from the

aforesaid is not satisfied, then there is no mediation (Baron and Kenny, 1986).

Preacher and Hayes, 2004; Preacher et al., 2007) recommended further that

indirect effect must be significant in order to support the mediation effect in the model.

Assenting to the direction of mediation testing steps, CG (ID, IS, BI, BS, & AC) is

deployed as predictor variable, FP and solvency risk protection as outcome variables,

and capital structure as mediating variable.

Financial performance as Dependent Variable, Capital Structure as

Mediating Variable and CG as Independent Variable. The results indicate

significant values for the direct effect and indirect effect. The indirect tests also show

significant values suggesting that capital structure (intervening variable) partially

mediates the relationship between CG: insider directors, institutional shareholdings,

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board independence, board size, and audit committee (predictor variables) and FP

(outcome variable) by getting the significant direct beta values of 0.24, 0.12, 0.24,

0.043, and 0.023 respectively (see Table 10 section 1).

Solvency Risk Protection as Dependent Variables, Capital Structure as

Mediating Variable and Corporate Governance as Independent Variable. The

results indicate significant values for the direct effect and indirect effect. The indirect

effect tests also show significant values suggesting that capital structure (intervening

variable) partially mediates the relationship between CG: insider directors, institutional

shareholdings, board independence, board size, and audit committee (predictor

variables) and solvency risk protection (outcome variable) by getting the significant

indirect beta values of 0.018, 0.089, 0.133, 0.030 and 0.117 respectively (see Table 10

section2).

Table 10

Mediation Analysis: FP and SRP as Dependent Variables, Capital Structure as

Mediating Variable and CG as Independent Variable

Relationship Beta Indirect Effect

(Z value)

Sig

Mediation: CG>CS >FP (Section 1)

ID >CS > FP .024 2.74** 0.006

IS >CS > FP .124 3.29** 0.000

BI >CS > FP .241 4.81** 0.000

BS >CS > FP .043 3.23** 0.001

AC >CS > FP .023 3.28** 0.000

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Table 10 (Continued)

Relationship Beta Indirect Effect

(Z value)

Sig

Mediation: CG>CS >SRP (Section 2)

ID >CS > SRP .018 2.73** 0.006

IS >CS > SRP .089 2.98** 0.002

BI >CS > SRP .133 3.23** 0.001

BS >CS > SRP .030 3.56** 0.000

AC >CS > SRP .117 2.14* 0.032

Note. FP= Financial Performance, CS= Capital Structure, SRP=Solvency Risk

Protection, ID= Insider Director, IS=Institutional Shareholdings, BI= Board

Independence, BS= Board Size, and AC= Audit Committee.

Note: **= p<0.01, *= p<0.05

Table 11

Summary of Hypotheses Testing

Hypotheses Results

H1: CG (insider directors, institutional shareholdings, board

independence, audit committee, and board size) positively

affect FP (ROA, ROE, operating income margin, net income margin,

total assets turnover). Supported

H2: CG positively effects corporate solvency risk protection

(times interest earned). Supported

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Table 11 (Continued)

Hypotheses Results

H3: CG negatively affects capital structure (debt to equity and debt

to total assets). Supported

H4: Capital structure positively influences FP. Supported

H5: Capital structure negatively affects solvency risk protection. Supported

H6: Capital structure mediates the association between CG and FP. Supported

H7: Capital structure mediates the association between CG and

solvency risk protection. Supported

107

CHAPTER 5

DISCUSSIONS AND RECOMMENDATIONS

The fundamental constituents of this chapter are result based discussion,

limitations of the study, contribution to the knowledge, future research

recommendations and research conclusion.

The fundamental aim of this research was to check the influence of CG on

capital structure, FP and solvency risk protection of cement firms listed on KSE,

Pakistan from 2005 to 2014. Furthermore, capital structure was tested as a mediator

between CG, FP, and solvency risk protection. In this research CG is used as

independent variable, FP and solvency risk protection as dependent variables, and

capital structure as mediating variable. In addition firm size, firm age, and firm growth

are used as control variables due to its significant impact on dependent variables. The

current research was conducted to answer the following questions: 1) What is the

association between CG (insider directors, institutional shareholdings, board size, board

independence, and audit committee) and FP (ROA, ROE, operating income margin, net

income margin, and total assets turnover)? Does CG effects firms’ solvency risk

protection (times interest earned)? 3) Is there any association between CG and capital

structure (debt to equity and debt to total assets)? 4) What is the relationship between

capital structure, FP and solvency risk protection? 5) Does capital structure mediate

between CG, solvency risk protection and FP?

The outcomes of current research documented an important addition to the field

of CG and address the work of CG, capital structure, FP, and solvency risk protection of

cement manufacturing firms listed on KSE, Pakistan. The total of twenty cement firms

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listed on KSE, Pakistan were deployed to analyze the association between CG, capital

structure, FP, and solvency risk protection from year 2005 to 2014. The cement sector

was selected due to its defined structure and likely to indicate an association between

the variables of this research. Besides this, studies are not found on cement industry

across the globe regarding CG, capital structure, FP and solvency risk protection jointly

and in particular to developing economies like Pakistan. The data regarding research

variables are gathered from the audited annual reports due to data reliability as verified

by the chartered accountants.

The current research is based on Agency Theory and inclined towards the

positivist philosophical approach. The deductive approach is applied due to the

availability of literature and theory, and the quantitative technique is employed for

testing the theory. Descriptive and explanatory research design is employed keeping in

view the data type and analytical mechanism. Pearson correlation analysis and dynamic

generalized method of moments (GMM) model were applied for panel data regression

analysis to measure the relation between the variables used in the current research.

GMM model is used for regression analysis due to its ability to resolve the problems in

CG, FP, capital structure and solvency risk protection data as recommended by many

researchers (Ullah, Akhtar, & Zaefarian, 2018). The tests were done at 5% significance

level (α = 0.05). All of the hypotheses of the current research and the results are

documented in the succeeding paragraphs.

The first hypothesis of current research aims to analyze the positive impact of

CG (insider directors, institutional shareholdings, board independence, audit committee,

and board size) on FP. The empirical analysis provides findings in support of the first

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hypothesis. It demonstrates that there is positive association between CG (board size,

institutional shareholdings, board independence, and audit committee) and FP of cement

manufacturing firms listed on KSE, Pakistan.

The Agency theory describes that FP can be improved by controlling the agency

problem. The agency problem is controlled effectively if independent directors

are entrusted by shareholders to represent them on company boards. As the number of

independent directors’ increase in cement manufacturing firms, the FP also increases.

Furthermore, the agency problem is minimized and FP is maximized in the presence of

institutional shareholdings in cement firms. The institutional shareholdings deploy their

financial and analytical skills to fully utilize corporate resources and maximize FP. The

adequate percentage of institutional shareholdings in the company board of cement

manufacturing firms improves FP due to strong financial insight.

The Agency theory suggests that large board size positively affects FP. The

outcomes support the theory in the cement firms listed at KSE, Pakistan. Board size

properly advice and monitor management and hence improve corporate FP. However, it

is worth mentioning that board size is not similar across companies. Large companies

need large board size and small companies need small, however cement companies are

large in size, therefore, there may be a high level of agency problem which requires

large board size to control agency conflict. Thus the outcomes support the Agency

theory that a large size of board improves monitoring and enhances corporate FP.

Proper functioning audit committee ensures controlling managerial functions

like financial reporting, risk management, and internal auditing. As the numbers of the

audit committee and particularly the independent members with sound financial

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background increases, the control on agency problem also increases. The proper

functioning of the audit committee will improve financial performance. Agency theory

describes that in order to mitigate the agency problem and control the activities of

agents, there must be proper functioning audit committee who frequently check the

financial records of the corporation to protect the interest of entire stakeholders and

enhance corporate worth. There is empirical evidence on the effect of CG (insider

directors, institutional shareholdings, board independence, the board size, and audit

committee) on FP. The outcomes of this research support the previous studies (Ahmed

& Hamdan, 2015; Barbosa & Louri, 2015; Cheema & Din, 2014; Otman, 2014; Shahid

et al., 2017).

The second hypothesis of this research was to examine that CG (insider

directors, institutional shareholdings, board independence, the board size, and audit

committee) positively affects solvency risk protection. The outcomes of this study were

in the support of the hypothesis after evaluating the data. The outcomes documented

that CG positively influence solvency risk protection. The Agency Theory states that

good practices of CG maximize corporate fairness and transparency in a firm affair and

enhance solvency risk protection.

The Agency theory elaborates that in order to minimize corporate risk, agency

problem must be controlled properly. Agency problems can be controlled in cement

companies if independent directors are entrusted by shareholders to represent them on

the company board to make unbiased corporate judgments and decisions in the best

interest of corporation. As the number of independent director increases in cement

manufacturing firms, the unbiased decision and fair and transparent judgment of the

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corporation also evolves and managers do not work against corporate interest which in

turn minimizes risk.

In addition, the agency problem is controlled and risk is minimized in presence

of institutional shareholdings. The institutional shareholdings deploy financial and

analytical skills to fully utilize corporate resources and minimize risk. The adequate

ratio of institutional shareholdings in the firm board of cement manufacturing firm do

not allow managers to expand own power by buying other companies or spend money

on wasteful projects, and utilize organizational resources for personal use that

negatively affects solvency risk protection.

The Agency theory suggests that large board size properly advice and monitor

management and do not allow managers to expand own power, invest in risky projects,

borrow more funds for operating and fixed assets needs, due to which the risk is

controlled. Cement firms are large in size, therefore the agency problem is also more in

such firms. Agency theory also documents that in order to control the agency problem

and control the corporate activities, there must be properly functioning audit committee

who frequently check and share the financial records of a corporation and ensure

fairness in the record. Empirical work on CG (insider directors, institutional

shareholdings, board independence, the board size, and audit committee) and risk is not

abundant, but still the findings of this research support the earlier work (Alam & Shah,

2013; Aries, 2016; Ullah et al., 2017).

The third hypothesis of the current research was to analyze that dimensions of

CG (insider directors, institutional shareholdings, board independence, board size, and

audit committee) negatively affect capital structure. The outcomes indicate that CG

112

negatively affects the capital structure of cement manufacturing corporations listed on

KSE, Pakistan. This documents that CG align the interest of corporate managers with

entire stakeholders and minimize the level of debt in the capital structure to control the

agency problem. The Agency theory suggests that in order to properly control the

agency problem, board size is also needed to be large for effective monitoring that

ensures low debt level in capital structure.

Agency theory documents that agency problem is controlled by bringing down

the level of debt in capital structure. Board independence controls the work of managers

and ensures low debts in capital structure in order to boost corporate goodwill by

ensuring unbiased corporate judgments and decisions in the best interest of corporation.

As the number of independent directors increases in cement manufacturing firms, the

unbiased decision and fair and transparent judgments of a corporation also increases,

and managers may not able to borrow more funds for risky ventures.

The negative association between institutional shareholdings and capital

structure shows that corporations with high percentage of institutional shareholdings

deploy less debt as a mechanism to control the agency problem and prefer internal

sources like retained earning first but after exhausting the internal funds, they negotiate

debts at a lower cost. It can be stated that institutional shareholdings ensure good CG

structure as they have good recognition from the debt market. Companies with high

ratio of institutional shareholdings are considered less risky.

Myers and Majluf (1984) described that in order to minimize cost and maximize

benefit, firms prefer to utilize internal sources of funds to meet the operating, financial

and assets need of corporations and external sources in last. The Agency theory

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documents that good CG will decrease agency costs and encourage investors’ trust

which in turn maximizes the capability of a corporation to get access to equity finance

and reduce reliance on debt finance. The findings of current research are in line with the

prior studies which have proved that CG (insider directors, institutional shareholdings,

board independence, the board size, and audit committee) negatively affect capital

structure (Gaaniyu & Abiodun, 2012; Okiro et al., 2015).

The fourth hypothesis of this research was to check that capital structure has

positive effect on FP. After empirical investigation regarding association of capital

structure and FP, the outcomes revealed that capital structure positively influences FP.

The cement manufacturing companies which are highly financed through debt offers a

higher return to investors. Risk taker investors invest in such riskier ventures in order to

gain more return. The Agency Theory demonstrates that highly levered firms offer more

return to investors due to tax shield (as the level of debts increases the company pay less

amount of taxes which goes to investors).

Kraus and Litzenberger (1973) documented in the trade-off theory that a

company must trade-off cost and benefit while choosing debt and equity in order to

enhance its total worth. Company balance bankruptcy cost and tax shield benefit while

selecting the debt to equity ratio. Companies have advantages of debt financing, tax

benefits of debt. Findings of the present research support the previous studies (Quang &

Xin, 2014; Shoaib & Yasushi, 2017) that have proved that capital structure have

positive association with FP.

The fifth hypothesis of the current research was to check that capital structure

negatively influence solvency risk protection. The results revealed that capital structure

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negatively associates with solvency risk protection. As the level of debt in capital

structure of cement sector firm increases, the firm solvency risk protection decreases. If

firms reduce the level of debt in capital structure, the solvency risk protection will be

augmented and the firms will not face risk. The Agency theory documents that highly

leveraged firms bear more costs like bankruptcy, supplier demanding high payment

terms, bondholder/stockholder infighting which puts a company into more risk.

According to Trade-off theory, firms’ trade-off cost with benefit while choosing

capital structure ratio in order to reduce cost and enhance solvency. Firms’ trade-off

cost of debt and benefit of tax. Firms have tax benefit but bear financial and non-

financial costs of distress. The financial cost of distress is bankruptcy cost, whereas

non-financial cost of distress is staff leaving, supplier of funds demand for high

payment terms. Therefore, such firms are required to have optimal capital structure in

order to maximize solvency risk protection. The outcomes support earlier studies

(Ullah, Akhtar, & Zaefarian, 2018; Ullah et.,al, 2017) that have proved negative

association between capital structure and solvency risk protection.

The sixth and seventh significant hypotheses were that capital structure mediates

the association between CG, solvency risk protection, and FP. The fundamental

objective of CG (exogenous variable) is the projection of specific outcomes. CG,

directly and indirectly, influences FP, capital structure, and solvency risk protection.

Shareholders and other corporate stakeholders believe that sound CG (institutional

shareholdings, board independence, the board size, and audit committee) significantly

impact FP, capital structure, and solvency risk protection of cement manufacturing

firms. The outcomes of this research are in line with Agency theory that predicts that

115

good practices of CG maximize FP, solvency risk protection, and minimize debt level in

capital structure.

The outcomes revealed that capital structure partially mediates between CG, FP,

and solvency risk protection. It demonstrates that CG significantly affects capital

structure which further significantly affects FP and solvency risk protection. Empirical

work on CG, capital structure as mediating and FP and solvency risk protection are

support the work of authors (Muthoni, Nasieku, Olweny 2018; Ullah, Malik, Zeb, &

Rehman, 2019).

Policy Implications

The fundamental objective of this research was to examine the impact of CG

practices on capital structure, FP and solvency risk protection of cement firms listed on

KSE, Pakistan from 2005 to 2014 in the context of code of CG of Pakistan (2014).

Hence, the outcomes of research predicted some significant policy implication.

Application of code of CG in cement industry of Pakistan is a best way to

maximize FP, solvency risk protection, and minimize debt level in capital structure. For

this purpose, board size is required to be nine, insider directors to be 1/3 of the board

(lesser is better) whereas, independent directors must be 1/3 of the board of directors

(greater is better), and there must be proper functioning audit committee with at least 3

members. This research is very useful for managers and policy makers of cement

manufacturing firms in developing economies and particularly in Pakistan to identify

the significance of code of CG.

116

This research has integrated a new model by enriching the existing academic

framework (how the association between CG (predictor) and FP and solvency risk

protection (outcome variables) is intervened by capital structure). In addition, the

current research has enriched the agency theory by documenting that how to minimize

conflict of interest in cement sector firms in the context of code of CG of Pakistan

(2014) by predicting the optimum number of independent directors, insider directors,

audit committee members, institutional shareholding, and optimal board size required

for maximization of FP and solvency risk protection and minimization of debt level in

capital structure.

Limitations and Delimitations

Although the current study has contributed significantly in the area of CG,

capital structure, FP, and solvency risk protection however, this study has few

limitations and delimitations.

Limitations. The current research was based on the cement manufacturing firms

listed on KSE, Pakistan which rim the generalization of outcomes to other services

sectors. Due to non-availability of research data for entire cement sector firms listed on

KSE, Pakistan, this study has used data for ten years only.

Delimitations. This research lacks analyzing more industries as only cement

industry is discussed. The current research integrated only five significant facets of CG:

insider directors, institutional shareholdings, board independence, the board size, and

audit committee, whereas there are other CG measures which have significant effect on

capital structure, FP and solvency risk protection.

117

Capital structure was measured through debt to equity and debt to total assets,

however it could be calculated with long term debt to capitalization, total debt to

capitalization. FP was measured through ROA, ROE, operating income margin, net

income margin and total assets turnover. However, FP could be measured through

Tobin’s Q and earning per share. This research has measured only solvency risk

protection, however, the impact of CG and capital structure on systematic risk could

also be analyzed. Last but not the least, this research has analyzed only the correlation

between CG, FP, and solvency risk protection, whereas the causal relationship could

also be checked.

Contribution to Knowledge

This research has imperatively contributed to the existing knowledge,

specifically in the field of CG, capital structure, FP, and solvency risk protection in the

context of cement manufacturing companies listed on KSE, Pakistan. The empirical

evidence shows that this is the first research that evaluates the impact of CG on capital

structure, FP and solvency risk protection as well as testing the meditating role of

capital structure between CG, FP, and the solvency risk protection of cement

manufacturing corporations listed on KSE, Pakistan for a period of ten years (2005 to

2014). Furthermore, the previous researchers have used few dimensions to measure CG,

FP, and capital structure and solvency risk protection however, the current research

used rich facets to measure CG (insider directors, institutional shareholdings, board

size, board independence, and audit committee), FP (ROA, ROE, operating income

margin, net income margin, and total assets turnover), capital structure (debt to equity

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and debt to total assets), and solvency risk protection (times interest earned) based on

code of CG of Pakistan (2014) and keeping in view the causes of collapse of the giant

corporations in Pakistan and other countries.

This research presents an integrated approach to enhance CG effectiveness and

proposes a broad understanding of CG system as previous research has overlooked the

mediating variable that also contribute a significant role between CG, FP and solvency

risk protection. This study provides a framework that associate CG with FP and

solvency risk protection with mediating role of capital structure.

The current study also enriched the agency theory in the context of Pakistan.

Agency theory documents the principles of board independence, institutional

shareholdings, board size, and board committees whereas, this research specifically

indicates the number/ratio of insider directors, institutional shareholdings, board

independence, the board size, and audit committee based on code of CG (2014) in the

context of Pakistan in order to enhance FP and solvency risk protection, and minimize

debt level in capital structure.

The findings of this research show the impact of CG on FP, capital structure and

risk collectively and individually in the context of developing economy like Pakistan.

The majority of prior studies in CG provide evidence from developed economies,

therefore the outcomes of such studies might not be applied on firms in developing

economies due to contextual variations. This research is highly significant for future

researchers while conducting researches in the same area as most of the variables and its

relationship in the context of literature is described well, which will fully help them to

accomplish their research objectives.

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Future Research Recommendations

The current research has been analyzed the cement sector firms listed on KSE,

Pakistan however, future researchers could consider doing the same study by adding

more sectors. Future researchers could employ the same data by comparing the cement

sector with other manufacturing sectors(s) of Pakistan or other developed and

developing economies in order to evaluate changes in response.

Further studies could be conducted by deploying the same variables by adding

more facets in main variables like CEO duality, board diversity, board meeting,

disclosures and reporting mechanism in CG. In addition, the capital structure could be

calculated with total capitalization and fixed assets to equity, and FP with Tobin’s Q

and earnings per share.

Future researchers could add more variables with CG in addition of FP, capital

structure, and solvency risk protection to check its association like adding non-FP and

systematic risk. Future research could be conducted by adding moderating variables

along with mediating variable to examine the impact of CG on FP and solvency risk

protection. Besides this future researchers could deploy other than capital structure as

an intervening variable to evaluate its mediating effect with CG, FP, and solvency risk

protection.

Research Conclusion

The fundamental aim of conducting this research was to examine the influence

of CG on capital structure, FP and solvency risk protection, and test capital structure as

a mediator between CG, FP, and solvency risk protection in cement manufacturing

120

firms listed in KSE, Pakistan. The current research has proved that good structure of CG

enhance FP and solvency risk protection which is supported by the existing literature.

The outcomes of this research prove that CG (insider directors, institutional

shareholdings, the board size, board independence, and audit committee) positively

influence FP (ROA, ROE, operating income margin, net income margin and total assets

turnover) and solvency risk protection (times interest earned), whereas negatively affect

capital structure (debt to equity and debt to total assets). The indirect impact by adding

capital structure as mediator shows that capital structure partially mediates the

association between CG, FP, and solvency risk protection.

The significance of CG cannot be ignored as it improves corporate environment,

FP, and solvency risk protection. The adherence of code of CG is essential in order to

protect against mismanagement, fraud, and corruption. Good practices of CG stimulate

transparency in business, instill the confidence of national and foreign investors in the

capital market, and protect the interest of entire stakeholders.

121

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143

APPENDIX I: Sectors and Companies at KSE, Pakistan

Sr. No. Sector Name Number of Companies

1 Automobile Assembler 12

2 Automobile Parts & Accessories 10

3 Cable & Electrical Goods 08

4 Cement 20

5 Chemical 29

6 Close - End Mutual Fund 08

7 Commercial Banks 20

8 Engineering 19

9 Fertilizer 07

10 Food & Personal Care Products 22

11 Glass & Ceramics 10

12 Insurance 31

13 Inv. Banks / Inv. Cos. / Securities Cos. 30

14 Jute 02

15 Leasing Companies 10

16 Leather & Tanneries 05

17 Miscellaneous 22

18 Modarabas 31

19 Oil & Gas Exploration Companies 04

20 Oil & Gas Marketing Companies 08

21 Paper & Board 10

http://www.ksestocks.com/ListedCompanies/SortByName#AUTOMOBILE%20ASSEMBLER

http://www.ksestocks.com/ListedCompanies/SortByName#AUTOMOBILE%20PARTS%20&%20ACCESSORIES

http://www.ksestocks.com/ListedCompanies/SortByName#CABLE%20&%20ELECTRICAL%20GOODS

http://www.ksestocks.com/ListedCompanies/SortByName#CEMENT

http://www.ksestocks.com/ListedCompanies/SortByName#CHEMICAL

http://www.ksestocks.com/ListedCompanies/SortByName#CLOSE%20-%20END%20MUTUAL%20FUND

http://www.ksestocks.com/ListedCompanies/SortByName#COMMERCIAL%20BANKS

http://www.ksestocks.com/ListedCompanies/SortByName#ENGINEERING

http://www.ksestocks.com/ListedCompanies/SortByName#FERTILIZER

http://www.ksestocks.com/ListedCompanies/SortByName#FOOD%20&%20PERSONAL%20CARE%20PRODUCTS

http://www.ksestocks.com/ListedCompanies/SortByName#GLASS%20&%20CERAMICS

http://www.ksestocks.com/ListedCompanies/SortByName#INSURANCE

http://www.ksestocks.com/ListedCompanies/SortByName#INV.%20BANKS%20/%20INV.%20COS.%20/%20SECURITIES%20COS.

http://www.ksestocks.com/ListedCompanies/SortByName#JUTE

http://www.ksestocks.com/ListedCompanies/SortByName#LEASING%20COMPANIES

http://www.ksestocks.com/ListedCompanies/SortByName#LEATHER%20&%20TANNERIES

http://www.ksestocks.com/ListedCompanies/SortByName#MISCELLANEOUS

http://www.ksestocks.com/ListedCompanies/SortByName#MODARABAS

http://www.ksestocks.com/ListedCompanies/SortByName#OIL%20&%20GAS%20EXPLORATION%20COMPANIES

http://www.ksestocks.com/ListedCompanies/SortByName#OIL%20&%20GAS%20MARKETING%20COMPANIES

http://www.ksestocks.com/ListedCompanies/SortByName#PAPER%20&%20BOARD

144

22 Pharmaceuticals 11

23 Power Generation & Distribution 19

24 Real Estate Investment Trust 01

25 Refinery 04

26 Sugar & Allied Industries 34

27 Synthetic & Rayon 11

28 Technology & Communication 10

29 Textile Composite 56

30 Textile Spinning 82

31 Textile Weaving 13

32 Tobacco 03

33 Transport 05

34 Vanaspati & Allied Industries 06

35 Woolen 02

35 TOTAL FIRMS 576

Source: www.kse.com.pk (2014)

http://www.ksestocks.com/ListedCompanies/SortByName#PHARMACEUTICALS

http://www.ksestocks.com/ListedCompanies/SortByName#POWER%20GENERATION%20&%20DISTRIBUTION

http://www.ksestocks.com/ListedCompanies/SortByName#REAL%20ESTATE%20INVESTMENT%20TRUST

http://www.ksestocks.com/ListedCompanies/SortByName#REFINERY

http://www.ksestocks.com/ListedCompanies/SortByName#SUGAR%20&%20ALLIED%20INDUSTRIES

http://www.ksestocks.com/ListedCompanies/SortByName#SYNTHETIC%20&%20RAYON

http://www.ksestocks.com/ListedCompanies/SortByName#TECHNOLOGY%20&%20COMMUNICATION

http://www.ksestocks.com/ListedCompanies/SortByName#TEXTILE%20COMPOSITE

http://www.ksestocks.com/ListedCompanies/SortByName#TEXTILE%20SPINNING

http://www.ksestocks.com/ListedCompanies/SortByName#TEXTILE%20WEAVING

http://www.ksestocks.com/ListedCompanies/SortByName#TOBACCO

http://www.ksestocks.com/ListedCompanies/SortByName#TRANSPORT

http://www.ksestocks.com/ListedCompanies/SortByName#VANASPATI%20&%20ALLIED%20INDUSTRIES

http://www.ksestocks.com/ListedCompanies/SortByName#WOOLLEN

http://www.kse.com.pk/

145

APPENDIX II: Measurement of Variables

Corporate Governance and Capital Structure

Year Cement Firms

Insid

er Directo

rs

Institu

tion

al S

hareh

old

ings

Board

Ind

epen

den

ce

Board

Size

Au

dit C

om

mitte

e

Deb

t to E

qu

ity

Deb

t to A

ssets

2005 Attock Cement 2 0.7 2 7 3 0.41 0.29

2006 2 0.31 2 7 3 0.39 0.27

2007 2 0.19 2 7 3 0.35 0.25

2008 2 0.28 2 7 3 0.41 0.29

2009 2 0.63 2 7 3 0.43 0.31

2010 2 0.78 2 7 3 0.32 0.21

2011 2 0.33 2 7 3 0.35 0.25

2012 2 0.79 3 7 3 0.36 0.26

2013 2 0.89 3 7 3 0.39 0.27

2014 2 0.59 3 7 3 0.38 0.26

2005 Best Way Cement 2 0.45 1 7 3 0.25 0.19

2006 2 0.25 1 7 3 0.31 0.29

2007 2 0.47 1 7 3 0.35 0.26

2008 2 0.49 1 7 3 0.27 0.19

2009 2 0.84 1 7 3 0.41 0.35

2010 2 0.25 1 7 3 0.34 0.28

2011 2 0.19 1 7 3 0.38 0.31

2012 2 0.41 1 7 3 0.41 0.28

2013 2 0.61 1 7 3 0.35 0.24

2014 2 0.33 1 7 3 0.33 0.27

2005 Cherat Cement 1 0.15 3 8 3 0.36 0.26

2006 1 0.89 3 8 3 0.33 0.24

146

2007 1 0.54 3 8 3 0.31 0.21

2008 1 0.57 3 8 3 0.29 0.19

2009 2 0.67 3 8 3 0.41 0.32

2010 2 0.25 3 8 3 0.35 0.26

2011 2 0.3 3 8 4 0.45 0.37

2012 2 0.19 3 8 4 0.32 0.21

2013 2 0.6 1 7 3 0.27 0.12

2014 2 0.65 1 7 3 0.25 0.12

2005 DGK Cement 2 0.6 1 7 3 0.19 0.16

2006 2 0.65 1 7 3 0.21 0.18

2007 2 0.51 1 7 3 0.18 0.16

2008 2 0.58 2 7 3 0.19 0.17

2009 2 0.49 2 7 3 0.26 0.21

2010 2 0.17 2 7 3 0.22 0.15

2011 2 0.61 2 7 3 0.17 0.14

2012 2 0.58 2 7 3 0.36 0.31

2013 2 0.52 2 7 3 0.29 0.24

2014 2 0.7 2 7 3 0.31 0.22

2005 Dada Cement 4 0.21 1 7 3 0.32 0.24

2006 4 0.63 1 7 3 0.31 0.27

2007 4 0.77 1 7 3 0.33 0.28

2008 3 0.58 1 7 3 0.32 0.27

2009 3 0.21 1 7 3 0.29 0.24

2010 3 0.89 1 7 3 0.31 0.27

2011 3 0.57 1 7 3 0.34 0.28

2012 3 0.69 1 7 3 0.31 0.27

2013 3 0.87 1 7 3 0.35 0.29

2014 3 0.54 1 7 3 0.31 0.25

2005 Dandot Cement 4 0.19 1 7 3 0.21 0.17

2006 4 0.19 1 7 3 0.19 0.15

2007 4 0.19 1 7 3 0.17 0.14

147

2008 4 0.19 1 7 3 0.18 0.16

2009 4 0.19 1 7 3 0.19 0.17

2010 4 0.19 1 7 3 0.15 0.13

2011 4 0.16 1 7 3 0.12 0.09

2012 4 0.17 1 7 3 0.14 0.11

2013 4 0.14 1 7 3 0.16 0.12

2014 4 0.13 1 7 3 0.12 0.09

2005 Dewan Cement 2 0.2 1 7 2 0.43 0.35

2006 2 0.2 1 7 2 0.41 0.32

2007 2 0.22 1 7 2 0.39 0.34

2008 2 0.22 1 7 2 0.35 0.29

2009 2 0.21 1 7 2 0.41 0.34

2010 2 0.21 1 7 2 0.41 0.36

2011 2 0.21 1 7 2 0.42 0.35

2012 2 0.08 1 7 2 0.36 0.27

2013 2 0.06 1 7 2 0.45 0.33

2014 2 0.11 1 7 2 0.41 0.36

2005 Fauji Cement 3 0.11 1 10 5 0.32 0.29

2006 3 0.08 1 10 5 0.35 0.31

2007 3 0.12 1 10 5 0.34 0.28

2008 3 0.32 1 10 5 0.39 0.33

2009 3 0.3 1 10 5 0.41 0.38

2010 3 0.28 1 10 5 0.27 0.19

2011 3 0.28 1 10 5 0.38 0.26

2012 3 0.05 1 10 5 0.33 0.25

2013 3 0.15 1 10 5 0.34 0.23

2014 3 0.19 1 10 5 0.35 0.28

2005 Fecto Cement 2 0.19 0 7 3 0.56 0.47

2006 2 0.19 0 7 3 0.61 0.53

2007 2 0.17 0 9 3 0.52 0.42

2008 2 0.17 0 9 3 0.59 0.49

148

2009 2 0.16 0 9 3 0.67 0.61

2010 2 0.16 0 9 3 0.51 0.48

2011 2 0.15 0 9 3 0.48 0.39

2012 2 0.12 2 9 3 0.49 0.41

2013 2 0.12 2 9 4 0.52 0.45

2014 2 0.4 2 9 4 0.53 0.47

2005 Flying Cement 3 0.1 1 7 3 0.32 0.29

2006 3 0.1 1 7 3 0.31 0.28

2007 3 0.1 1 7 3 0.35 0.27

2008 3 0.1 1 7 3 0.39 0.33

2009 3 0.01 1 7 3 0.35 0.29

2010 3 0.01 1 7 3 0.36 0.25

2011 3 0.01 1 7 3 0.33 0.26

2012 3 0.02 1 7 3 0.37 0.31

2013 3 0.03 1 7 3 0.36 0.31

2014 3 0.03 1 7 3 0.31 0.27

2005 Gharibwal Cement 3 0.11 0 7 3 0.52 0.45

2006 3 0.03 0 7 3 0.51 0.47

2007 3 0.01 0 6 3 0.48 0.39

2008 3 0.01 0 7 3 0.47 0.41

2009 3 0.01 0 7 3 0.49 0.38

2010 3 0.01 0 7 3 0.47 0.38

2011 3 0.03 0 7 3 0.45 0.37

2012 3 0.16 0 7 3 0.44 0.33

2013 3 0.16 0 7 3 0.46 0.35

2014 3 0.15 0 7 3 0.45 0.32

2005 Javedan Cement 2 0.18 0 7 3 0.68 0.61

2006 2 0.19 0 7 3 0.71 0.64

2007 2 0.2 0 7 3 0.58 0.53

2008 2 0.23 0 7 3 0.65 0.61

2009 2 0.2 0 7 4 0.59 0.52

149

2010 2 0.18 0 7 4 0.63 0.58

2011 2 0.08 0 7 4 0.51 0.47

2012 2 0.07 0 7 4 0.53 0.48

2013 2 0.3 0 7 4 0.55 0.49

2014 2 0.02 0 7 4 0.57 0.51

2005 Kohat Cement 1 0.1 0 7 3 0.29 0.26

2006 1 0.09 0 7 3 0.31 0.25

2007 1 0.13 0 7 3 0.28 0.22

2008 1 0.18 0 7 3 0.37 0.31

2009 1 0.09 0 7 3 0.35 0.29

2010 1 0.04 0 7 3 0.32 0.24

2011 1 0.03 0 7 3 0.33 0.28

2012 1 0.02 0 7 3 0.34 0.29

2013 1 0.08 1 7 3 0.35 0.29

2014 1 0.11 1 7 3 0.35 0.29

2005 Lafarge Pak Cement 2 0.17 0 6 4 0.29 0.26

2006 2 0.17 0 6 4 0.31 0.25

2007 2 0.17 0 6 4 0.28 0.22

2008 2 0.12 0 6 4 0.37 0.31

2009 2 0.11 0 6 4 0.35 0.29

2010 2 0.08 0 6 4 0.32 0.24

2011 2 0.07 0 6 4 0.33 0.28

2012 2 0.1 0 6 4 0.34 0.29

2013 2 0.1 0 6 4 0.35 0.29

2014 2 0.1 0 6 4 0.35 0.3

2005 Lucky Cement 1 0.46 0 9 4 0.41 0.36

2006 1 0.38 0 9 4 0.39 0.35

2007 1 0.45 0 9 4 0.33 0.29

2008 1 0.55 0 9 4 0.34 0.27

2009 1 0.48 0 9 4 0.29 0.23

2010 1 0.11 0 9 4 0.25 0.19

150

2011 1 0.12 0 9 4 0.27 0.21

2012 1 0.12 0 9 4 0.27 0.22

2013 1 0.08 0 9 4 0.26 0.2

2014 1 0.07 0 9 4 0.21 0.16

2005 Mapple Leaf Cement 2 0.19 0 8 3 0.67 0.61

2006 2 0.19 0 8 3 0.69 0.63

2007 2 0.12 0 8 3 0.53 0.47

2008 2 0.16 0 8 3 0.58 0.49

2009 2 0.16 0 8 3 0.78 0.64

2010 2 0.07 0 8 3 0.81 0.73

2011 2 0.06 0 8 3 0.85 0.79

2012 2 0.14 0 8 4 0.82 0.68

2013 2 0.19 0 8 4 0.71 0.66

2014 2 0.18 0 8 4 0.65 0.58

2005 Poineer Cement 3 0.43 3 7 3 0.41 0.35

2006 3 0.43 3 7 3 0.38 0.32

2007 3 0.4 3 7 3 0.33 0.29

2008 3 0.4 3 7 3 0.37 0.22

2009 3 0.34 0 7 3 0.36 0.29

2010 2 0.43 0 7 3 0.33 0.21

2011 2 0.35 0 7 3 0.41 0.35

2012 2 0.22 0 7 3 0.39 0.32

2013 2 0.35 0 7 3 0.35 0.31

2014 2 0.68 0 7 3 0.33 0.25

2005 Power Cement 3 0.19 0 7 3 0.67 0.61

2006 3 0.2 0 7 3 0.69 0.63

2007 3 0.19 0 7 3 0.53 0.47

2008 3 0.19 0 7 3 0.58 0.49

2009 3 0.13 0 7 3 0.78 0.64

2010 3 0.05 0 7 3 0.81 0.73

2011 3 0.2 0 7 3 0.85 0.79

151

2012 3 0.02 0 7 3 0.82 0.68

2013 3 0.1 0 7 3 0.71 0.66

2014 3 0.14 0 7 3 0.65 0.58

2005 Tatta Cement 2 0.12 1 7 3 0.32 0.29

2006 2 0.12 1 7 3 0.31 0.28

2007 2 0.14 1 7 3 0.35 0.27

2008 2 0.12 1 7 3 0.39 0.33

2009 2 0.14 1 7 3 0.35 0.29

2010 2 0.18 1 7 3 0.36 0.25

2011 2 0.28 1 7 3 0.33 0.26

2012 2 0.28 1 7 3 0.37 0.31

2013 2 0.53 1 7 3 0.36 0.31

2014 2 0.71 1 7 3 0.31 0.27

2005 Zeal Cement 3 0.01 1 6 3 0.33 0.27

2006 3 0.01 1 6 3 0.39 0.28

2007 3 0.11 1 6 3 0.36 0.29

2008 3 0.1 1 6 3 0.33 0.26

2009 3 0.1 1 8 3 0.37 0.31

2010 3 0.1 1 6 3 0.41 0.35

2011 3 0.11 1 6 3 0.46 0.37

2012 3 0.11 1 6 3 0.44 0.36

2013 3 0.1 1 6 3 0.39 0.32

2014 3 0.11 1 6 3 0.37 0.31

152


Year Cement Firms

Retu

rn o

n A

ssets

Retu

rn o

n E

qu

ity

Net In

com

e Marg

in

Op

eratin

g In

com

e Margin

Tota

l Assets T

urn

over

2005 Attock Cement 0.33 0.5 0.41 0.67 1.05

2006

0.39 0.57 0.44 0.72 1.18

2007

0.25 0.47 0.41 0.69 1.12

2008

0.39 0.51 0.49 0.7 1.4

2009

0.33 0.55 0.51 0.71 1.43

2010

0.31 0.59 0.49 0.73 1.51

2011

0.42 0.69 0.52 0.79 1.62

2012

0.43 0.61 0.53 0.82 1.72

2013

0.52 0.68 0.55 0.86 1.83

2014

0.37 0.49 0.42 0.58 0.95

2005 Best Way Cement 0.11 0.28 0.22 0.35 0.65

2006

0.21 0.37 0.27 0.48 0.71

2007

0.19 0.28 0.23 0.39 0.67

2008

0.2 0.32 0.21 0.41 0.76

2009

0.19 0.31 0.25 0.48 0.63

2010

0.31 0.49 0.33 0.52 0.61

2011

0.27 0.38 0.39 0.49 0.59

2012

0.31 0.53 0.41 0.61 0.73

2013

0.36 0.47 0.32 0.66 0.98

2014

0.39 0.52 0.44 0.69 1.02

2005 Cherat Cement 0.31 0.43 0.36 0.51 0.73

2006

0.39 0.65 0.51 0.79 0.85

2007

0.37 0.55 0.48 0.66 0.91

153

2008

0.35 0.41 0.38 0.59 0.76

2009

0.39 0.46 0.41 0.61 0.85

2010

0.36 0.44 0.42 0.63 0.85

2011

0.37 0.48 0.39 0.72 0.97

2012

0.41 0.58 0.53 0.61 1.06

2013

0.44 0.55 0.49 0.69 1.15

2014

0.42 0.64 0.55 0.72 1.21

2005 DGK Cement 0.37 0.57 0.39 0.61 0.96

2006

0.32 0.44 0.35 0.51 0.85

2007

0.33 0.41 0.36 0.53 0.83

2008

0.43 0.49 0.45 0.62 0.97

2009

0.45 0.57 0.51 0.75 1.05

2010

0.31 0.43 0.33 0.52 0.79

2011

0.39 0.48 0.47 0.58 0.62

2012

0.44 0.51 0.48 0.62 0.85

2013

0.47 0.63 0.53 0.76 0.98

2014

0.49 0.52 0.47 0.67 0.75

2005 Dada Cement 0.21 0.33 0.29 0.41 0.63

2006

0.23 0.41 0.31 0.53 0.68

2007

0.31 0.38 0.36 0.49 0.65

2008

0.3 0.41 0.34 0.52 0.62

2009

0.27 0.33 0.29 0.41 0.63

2010

0.21 0.42 0.39 0.53 0.68

2011

0.23 0.37 0.33 0.49 0.66

2012

0.35 0.47 0.41 0.51 0.78

2013

0.1 0.21 0.19 0.38 0.42

2014

0.21 0.38 0.22 0.47 0.53

2005 Dandot Cement 0.1 0.23 0.14 0.32 0.48

2006

0.19 0.33 0.29 0.41 0.53

2007

0.21 0.44 0.27 0.49 0.52

2008

0.23 0.47 0.33 0.51 0.63

154

2009

0.31 0.35 0.41 0.42 0.62

2010

0.22 0.41 0.37 0.51 0.66

2011

0.27 0.48 0.33 0.52 0.71

2012

0.34 0.59 0.41 0.68 0.85

2013

0.21 0.37 0.31 0.43 0.56

2014

0.3 0.41 0.35 0.52 0.62

2005 Dewan Cement 0.35 0.45 0.37 0.53 0.74

2006

0.21 0.29 0.22 0.35 0.52

2007

0.17 0.33 0.21 0.41 0.56

2008

0.23 0.29 0.27 0.41 0.56

2009

0.21 0.41 0.32 0.52 0.74

2010

0.16 0.33 0.29 0.47 0.52

2011

0.02 0.13 0.01 0.21 0.42

2012

0.11 0.27 0.15 0.39 0.58

2013

0.13 0.22 0.17 0.31 0.47

2014

0.19 0.31 0.22 0.42 0.59

2005 Fauji Cement 0.09 0.21 0.13 0.35 0.55

2006

0.12 0.29 0.22 0.48 0.61

2007

0.19 0.33 0.27 0.41 0.57

2008

0.21 0.41 0.39 0.52 0.75

2009

0.27 0.47 0.33 0.59 0.77

2010

0.22 0.43 0.34 0.51 0.74

2011

0.31 0.52 0.41 0.61 0.75

2012

0.43 0.61 0.52 0.73 0.86

2013

0.12 0.35 0.26 0.42 0.62

2014

0.44 0.61 0.58 0.78 0.98

2005 Fecto Cement 0.15 0.31 0.23 0.46 0.75

2006

0.12 0.23 0.19 0.39 0.62

2007

0.22 0.35 0.27 0.45 0.68

2008

0.21 0.31 0.28 0.44 0.69

2009

0.2 0.34 0.31 0.42 0.58

155

2010

0.18 0.29 0.26 0.39 0.51

2011

0.11 0.23 0.17 0.34 0.49

2012

0.17 0.48 0.37 0.57 0.62

2013

0.21 0.29 0.27 0.35 0.49

2014

0.32 0.47 0.41 0.63 0.78

2005 Flying Cement 0.19 0.25 0.21 0.38 0.56

2006

0.22 0.36 0.31 0.47 0.68

2007

0.15 0.32 0.21 0.41 0.61

2008

0.21 0.41 0.38 0.51 0.69

2009

0.22 0.39 0.33 0.51 0.69

2010

0.31 0.45 0.42 0.62 0.75

2011

0.29 0.51 0.48 0.75 0.75

2012

0.41 0.63 0.57 0.76 0.79

2013

0.26 0.48 0.49 0.56 0.62

2014

0.27 0.44 0.32 0.53 0.59

2005 Gharibwal Cement 0.31 0.51 0.39 0.68 1.06

2006

0.27 0.38 0.34 0.42 0.78

2007

0.31 0.46 0.41 0.53 0.86

2008

0.23 0.41 0.31 0.51 0.81

2009

0.29 0.43 0.33 0.62 1.01

2010

0.21 0.39 0.27 0.57 0.99

2011

0.15 0.33 0.17 0.43 0.85

2012

0.23 0.41 0.338 0.47 0.82

2013

0.19 0.39 0.27 0.48 0.88

2014

0.35 0.58 0.42 0.61 0.98

2005 Javedan Cement -0.17 -0.09 -0.3 -0.21 0.03

2006

-0.17 -0.04 -0.01 -0.12 0.03

2007

0.23 0.33 0.26 0.47 0.57

2008

-0.41 -0.21 -0.19 -0.03 0.12

2009

-0.05 -0.01 -0.03 -0.23 0.3

2010

-0.32 -0.17 -0.21 -0.13 0.19

156

2011

-0.18 -0.13 -0.2 0.02 0.48

2012

-0.09 -0.01 -0.47 0.18 0.47

2013

0.23 0.36 0.3 0.45 0.58

2014

0.26 0.43 0.37 0.52 0.68

2005 Kohat Cement 0.41 0.53 0.49 0.61 1.19

2006

0.33 0.42 0.37 0.49 0.81

2007

0.51 0.68 0.53 0.71 0.87

2008

0.53 0.71 0.62 0.85 0.95

2009

0.47 0.53 0.5 0.62 1.25

2010

0.37 0.41 0.31 0.51 0.84

2011

0.33 0.44 0.38 0.3 0.65

2012

0.45 0.56 0.41 0.63 0.78

2013

0.47 0.51 0.48 0.66 0.87

2014

0.51 0.63 0.52 0.72 0.91

2005 Lafarge Pak Cement 0.13 0.23 0.19 0.35 0.68

2006

0.08 0.21 0.15 0.36 0.71

2007

0.11 0.33 0.21 0.39 0.76

2008

0.14 0.29 0.26 0.35 0.68

2009

0.21 0.33 0.23 0.41 0.77

2010

0.17 0.35 0.35 0.43 0.79

2011

0.22 0.39 0.31 0.52 0.82

2012

0.27 0.41 0.33 0.49 0.75

2013

0.33 0.52 0.41 0.62 0.97

2014

0.41 0.55 0.49 0.66 1.16

2005 Lucky Cement 0.46 0.59 0.39 0.71 0.41

2006

0.57 0.68 0.63 0.73 0.51

2007

0.41 0.57 0.44 0.68 0.47

2008

0.44 0.56 0.47 0.62 0.5

2009

0.48 0.62 0.51 0.78 0.53

2010

0.47 0.55 0.53 0.62 0.45

2011

0.55 0.61 0.58 0.71 0.41

157

2012

0.61 0.73 0.68 0.82 0.62

2013

0.58 0.66 0.61 0.71 0.58

2014

0.51 0.68 0.63 0.79 0.61

2005 Mapple Leaf Cement 0.04 0.19 0.11 0.34 0.53

2006

0.02 0.15 0.11 0.39 0.61

2007

0.01 0.14 0.09 0.21 0.34

2008

0.01 0.14 0.05 0.23 0.39

2009

-0.13 -0.01 -0.06 0.01 0.11

2010

-0.07 -0.02 -0.19 -0.04 0.09

2011

-0.03 -0.01 -0.14 0.01 0.11

2012

0.02 0.09 0.03 0.18 0.21

2013

0.1 0.21 0.19 0.28 0.39

2014

0.11 0.25 0.15 0.27 0.42

2005 Poineer Cement 0.11 0.29 0.18 0.31 0.68

2006

0.19 0.33 0.22 0.41 0.73

2007

0.21 0.39 0.27 0.48 0.77

2008

0.27 0.41 0.32 0.63 0.79

2009

0.31 0.44 0.37 0.73 0.86

2010

0.22 0.38 0.31 0.51 0.75

2011

0.18 0.22 0.19 0.42 0.55

2012

0.17 0.26 0.21 0.39 0.63

2013

0.41 0.51 0.39 0.65 0.78

2014

0.43 0.57 0.51 0.68 0.84

2005 Power Cement -0.21 -0.12 -0.19 -0.09 0.05

2006

-0.14 -0.01 -0.12 -0.01 0.01

2007

-0.11 -0.01 -0.69 -0.01 0.01

2008

-0.1 -0.06 -0.03 -0.03 0.27

2009

0.08 0.19 0.13 0.26 0.34

2010

-0.01 -0.01 0 0.01 0.21

2011

-0.16 -0.05 -0.09 -0.1 0.11

2012

0.21 0.31 0.23 0.42 0.47

158

2013

0.21 0.33 0.27 0.44 0.53

2014

0.23 0.46 0.31 0.51 0.44

2005 Tatta Cement 0.19 0.34 0.31 0.49 0.59

2006

0.21 0.41 0.23 0.48 0.56

2007

0.12 0.33 0.19 0.45 0.47

2008

0.19 0.31 0.23 0.38 0.58

2009

0.33 0.41 0.37 0.52 0.78

2010

0.37 0.52 0.42 0.62 0.78

2011

0.33 0.47 0.41 0.66 0.81

2012

0.34 0.51 0.48 0.72 0.83

2013

0.37 0.43 0.34 0.58 0.49

2014

0.41 0.63 0.45 0.71 0.88

2005 Zeal Cement 0.1 0.21 0.14 0.36 0.53

2006

0.19 0.35 0.21 0.42 0.67

2007

0.24 0.47 0.35 0.56 0.71

2008

0.38 0.44 0.39 0.51 0.65

2009

0.33 0.51 0.42 0.63 0.78

2010

0.41 0.62 0.48 0.75 0.86

2011

0.39 0.52 0.44 0.68 0.81

2012

0.33 0.47 0.41 0.57 0.69

2013

0.22 0.33 0.27 0.45 0.72

2014

0.31 0.49 0.39 0.61 0.77

159

Solvency Risk Protection, Firm Size, Firm Age and Firm Growth

Year Cement Firms

Solv

ency

Risk

Pro

tectio

n

Firm

Size

Firm

Age

Firm

Gro

wth

2005 Attock Cement 89.44 3.41 1.51 37.61

2006

85.13 3.54 1.51 34.25

2007

53.31 3.66 1.51 31.30

2008

42.12 3.70 1.51 9.67

2009

56.25 3.88 1.51 50.17

2010

78.36 3.88 1.51 2.10

2011

54.26 3.93 1.51 11.55

2012

45.51 4.03 1.51 24.36

2013

51.26 4.06 1.51 8.81

2014

48.5 4.10 1.51 9.03

2005 Best Way Cement 32.12 3.55 1.32 22.31

2006

33.31 3.66 1.32 28.51

2007

45.25 3.75 1.32 24.32

2008

47.56 3.87 1.32 32.54

2009

51.35 4.06 1.32 54.95

2010

55.63 4.12 1.32 15.20

2011

58.15 4.12 1.32 0.01

2012

35.98 4.26 1.32 18.12

2013

33.87 4.25 1.32 12.89

2014

41.59 4.15 1.32 2.87

2005 Cherat Cement 58.32 3.38 1.51 15.16

2006

33.12 3.39 1.51 1.46

2007

54.21 3.42 1.51 7.55

2008

63.25 3.48 1.51 15.04

2009

56.96 3.66 1.51 51.33

160

2010

57.25 3.54 1.51 -24.40

2011

63.25 3.63 1.51 22.40

2012

41.25 3.84 1.51 28.58

2013

43.24 3.80 1.51 15.34

2014

44.25 3.81 1.51 2.49

2005 DGK Cement 13.89 6.90 1.44 50.69

2006

15.6 6.81 1.44 -19.31

2007

17.12 7.10 1.44 93.87

2008

16.25 7.26 1.44 44.79

2009

22.36 7.21 1.44 -9.68

2010

21.35 7.27 1.44 14.14

2011

27.12 7.36 1.44 23.54

2012

27.78 7.40 1.44 8.57

2013

29.12 7.51 1.44 6.53

2014

21.32 7.42 1.44 -1.65

2005 Dada Cement 7.13 2.88 1.54 36.57

2006

8.23 2.77 1.54 22.65

2007

9.32 2.85 1.54 2.36

2008

7.28 2.58 1.54 15.36

2009

8.23 2.60 1.54 5.74

2010

6.24 2.77 1.54 45.98

2011

8.14 2.85 1.54 23.56

2012

9.56 2.58 1.54 12.00

2013

8.62 2.48 1.54 20.21

2014

8.14 3.70 1.54 20.67

2005 Dandot Cement 4.12 6.04 1.53 5.33

2006

3.12 6.15 1.53 29.98

2007

4.26 5.95 1.53 35.27

2008

5.26 5.75 1.53 39.19

2009

6.25 6.01 1.53 83.60

2010

7.21 6.05 1.53 10.99

161

2011

5.12 5.89 1.53 31.78

2012

3.25 6.04 1.53 42.75

2013

4.25 5.16 1.53 23.58

2014

6.32 5.03 1.53 13.68

2005 Dewan Cement 8.41 3.72 1.5 8.16

2006

7.32 3.75 1.5 6.25

2007

6.25 3.61 1.5 23.10

2008

5.14 3.66 1.5 6.19

2009

7.98 3.75 1.5 23.60

2010

4.65 3.57 1.5 38.50

2011

8.71 3.71 1.5 45.61

2012

11.32 3.85 1.5 38.51

2013

12.25 3.94 1.5 22.86

2014

11.69 4.30 1.5 15.07

2005 Fauji Cement 45.32 6.45 1.34 4.12

2006

47.85 6.63 1.34 50.65

2007

41.25 6.65 1.34 19.02

2008

39.52 6.73 1.34 53.45

2009

42.78 6.55 1.34 33.28

2010

44.63 6.75 1.34 49.85

2011

27.62 6.58 1.34 28.34

2012

29.14 6.68 1.34 24.53

2013

24.63 7.18 1.34 15.25

2014

22.87 7.20 1.34 41.93

2005 Fecto Cement 11.12 6.63 1.77 1.11

2006

10.36 6.39 1.77 6.82

2007

9.62 6.38 1.77 1.92

2008

8.52 6.37 1.77 5.47

2009

11.63 6.87 1.77 48.81

2010

6.32 6.87 1.77 16.10

2011

9.98 6.89 1.77 13.52

162

2012

13.25 6.91 1.77 5.25

2013

12.21 6.95 1.77 3.36

2014

15.57 6.98 1.77 2.68

2005 Flying Cement 8.12 8.74 1.34 0.23

2006

7.52 8.74 1.34 0.25

2007

6.32 8.25 1.34 1.39

2008

9.65 8.20 1.34 1.36

2009

11.25 8.05 1.34 -12.65

2010

13.95 8.52 1.34 -5.75

2011

14.25 7.91 1.34 15.25

2012

13.25 7.82 1.34 10.20

2013

18.32 8.12 1.34 25.33

2014

17.25 7.92 1.34 35.88

2005 Gharibwal Cement 15.12 7.93 1.73 2.55

2006

17.15 6.17 1.73 12.25

2007

14.78 6.20 1.73 7.55

2008

15.85 5.72 1.73 27.52

2009

13.41 5.39 1.73 13.89

2010

7.62 5.33 1.73 17.25

2011

6.62 5.52 1.73 36.98

2012

7.52 5.72 1.73 49.52

2013

8.59 5.79 1.73 25.30

2014

9.14 5.93 1.73 37.19

2005 Javedan Cement 4.36 5.89 1.72 34.52

2006

5.61 6.11 1.72 1.02

2007

6.32 5.17 1.72 1.36

2008

5.21 5.87 1.72 -15.63

2009

6.33 5.99 1.72 -6.56

2010

6.98 5.82 1.72 -2.55

2011

4.32 4.79 1.72 -7.83

2012

3.21 5.21 1.72 -1.25

163

2013

2.22 5.07 1.72 -23.12

2014

3.12 5.38 1.72 1.23

2005 Kohat Cement 45.62 6.23 1.47 22.72

2006

47.41 6.37 1.47 35.67

2007

49.52 6.19 1.47 5.85

2008

52.25 6.17 1.47 11.36

2009

53.69 6.38 1.47 23.69

2010

55.51 6.57 1.47 31.62

2011

54.52 6.78 1.47 17.25

2012

51.35 6.77 1.47 25.69

2013

49.58 7.19 1.47 21.36

2014

52.36 7.23 1.47 13.12

2005 Lafarge Pak Cement 45.62 6.91 1.76 5.32

2006

47.41 6.84 1.76 7.63

2007

49.52 6.89 1.76 12.68

2008

52.25 6.98 1.76 10.25

2009

53.69 6.99 1.76 5.63

2010

55.51 6.99 1.76 9.35

2011

54.52 7.12 1.76 10.58

2012

51.35 7.23 1.76 15.39

2013

49.58 7.25 1.76 23.23

2014

52.36 7.30 1.76 7.85

2005 Lucky Cement 15.32 3.60 1.32 15.69

2006

18.32 3.90 1.32 45.63

2007

31.25 4.10 1.32 25.36

2008

27.62 4.23 1.32 49.14

2009

25.36 4.23 1.32 23.36

2010

23.63 4.39 1.32 5.26

2011

22.41 4.42 1.32 13.91

2012

27.79 4.52 1.32 15.25

2013

32.14 4.58 1.32 13.35

164

2014

33.85 4.63 1.32 13.95

2005 Mapple Leaf Cement 8.12 6.13 1.73 18.13

2006

7.63 6.18 1.73 10.23

2007

8.62 6.16 1.73 5.12

2008

1.43 6.39 1.73 12.66

2009

2.63 6.50 1.73 -10.63

2010

2.45 6.52 1.73 -2.81

2011

1.68 6.55 1.73 -13.53

2012

3.68 6.46 1.73 -14.52

2013

4.25 6.42 1.73 -7.41

2014

4.98 6.42 1.73 1.48

2005 Poineer Cement 12.68 3.3. 1.44 23.55

2006

25.36 3.49 1.44 35.15

2007

27.69 3.51 1.44 3.54

2008

33.41 3.69 1.44 43.63

2009

31.25 3.70 1.44 3.01

2010

25.21 3.59 1.44 15.68

2011

26.52 3.72 1.44 36.51

2012

24.87 3.81 1.44 23.21

2013

26.63 3.88 1.44 15.30

2014

23.25 3.91 1.44 6.30

2005 Power Cement 8.12 5.77 1.44 -15.36

2006

7.63 5.96 1.43 1.36

2007

8.62 5.31 1.43 -23.61

2008

1.43 6.07 1.43 -46.85

2009

2.63 6.47 1.43 15.36

2010

2.45 6.34 1.43 -8.61

2011

1.68 6.35 1.43 1.00

2012

3.68 6.47 1.43 22.97

2013

4.25 6.55 1.43 19.47

2014

4.98 6.59 1.43 12.68

165

2005 Tatta Cement 8.12 6.19 1.43 29.78

2006

7.52 6.05 1.53 5.36

2007

6.32 6.15 1.53 7.51

2008

9.65 6.25 1.53 14.35

2009

11.25 6.19 1.53 12.85

2010

13.95 6.27 1.53 7.23

2011

14.25 6.36 1.53 13.65

2012

13.25 6.39 1.53 2.03

2013

18.32 6.38 1.53 7.58

2014

17.25 6.36 1.53 5.59

2005 Zeal Cement 36.12 6.01 1.75 21.24

2006

33.15 6.06 1.75 3.61

2007

34.58 5.67 1.75 14.53

2008

32.69 5.50 1.75 15.20

2009

31.96 5.76 1.75 5.02

2010

32.69 6.01 1.75 1.03

2011

35.52 6.06 1.75 3.68

2012

33.76 6.87 1.75 4.89

2013

39.41 5.77 1.75 5.87

2014

38.58 5.79 1.75 13.99

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