THE EFFECTS OF CORPORATE GOVERNANCE AND RELATED PARTY TRANSACTIONS ON FIRM PERFORMANCE AMONG PAKISTANI FAMILY-OWNED FIRMS

Abstract

This study empirically examined the impact of corporate governance (CG) variables, namely, independent non-executive directors (INEDs), family directorship (FD), and family ownership (FO) and related party transactions (RPTs) on firm performance that prevail in Pakistani family-owned firms. This study analyzed the panel data of 150 family-owned firms listed on the Karachi Stock Exchange (KSE) from 2004 to 2014. Different Panel least squares Models i.e. Model 1, Model 2 and Model 3 are employed to examine the effect of related party transactions and corporate governance variables on firm performance. It has developed index of independent non-executive director (IDI) of family-owned firms comprising three dimensions for measurement of independency of Independent director i.e. composition, financial expertise and tenure. Results of IDI showed that more than 90% of family-owned firms fall in lowest category of IDI. This study found empirically that corporate governance variables, particularly independent director index (IDI) have positive relationship with firm performance. This shows that Pakistani family owned firms have low ratio of independent director on board. This weaker corporate governance in family-owned firms create opportunity for Major shareholders who expropriate resources through RPTs. Similarly, this study also found empirically that RPTs in Model 1, Model 2 and Model 3 has significant relationship with Firm Performance. This is consistent with agency theory and conflict of interest transaction which is potentially harmful to interest of minority shareholder. While, it has also found that RPTs has positive significant relationship with firm performance. It has also provided empirical evidence to show that both family directors and family ownership are negatively related to firm performance.