Corporate Governance and Corporate Financial Failures: Evidence From Pakistan Stock Exchange (PSX)

Abstract

The purpose of this study is to look into the impact of corporate governance on corporate business failure among Pakistan's publicly traded companies. The study utilized the publicly available corporate governance characteristics data representing explanatory variables along with the three-year negative position in earning per share for the determinant of the business success and failure representing an explained variable. Paired sampling based on 55 successful companies and 55 business failed companies has been used and empirically tested through logistic regression for the period 2010 to 2020. The results reveal that corporate governance mechanisms based on CEO duality and outsider ownership significantly explain the likeliness of business failures of firms. The designed study provides more likeliness of the business failures for the presence of the firms which have the evidence of larger board size and CEO duality. The business failed firms also lack board independence and become a more dispensable activity in the context of agency and stewardship theory. The results of the study support the recent modifications on account of renowned corporate failures to strengthen the adequacy of corporate boards, and their neglected committees. This research lessens the possibility of corporate failures and highlights the proposal of policymakers to enhance board and committee effectiveness. The earlier studies skip the incorporation of a categorical variable to project the corporate failures through logit modelling. This study is the first in its contextual settings to predict financial failures by logit modelling across various industrial sectors that insinuates corporate decision-makers to avoid practices exposing firms to failures.