Nexus of Corporate Governance Practices and Financial Performance: Evidence from Listed Corporates of Pakistan and China

Abstract

Abstract

The objective of this study is to perform a comparative analysis of the ways in which corporate governance systems and practices influence the financial performance of companies based in Pakistan and China. This study employs the multidimensional Corporate Governance Index (CGI) as a metric to evaluate the effectiveness and caliber of governance practices. The CGI, which includes stakeholders such as shareholders, the board of directors, audit procedures, financial disclosure, employee involvement, and societal factors, functions as a comprehensive indicator of the efficacy of an organization's governance. An assortment of financial performance metrics—including Return on Assets (ROA), Return on Equity (ROE), Market-to-Book Value Ratio (P/B), and Price-Earnings Ratio—are examined for their impact by the empirical model utilized in this study. Fifty firms hailing from Pakistan and China were included in the sample developed using this model. A nuanced relationship appears to exist between CGI scores and financial performance metrics, according to the findings. The CGI scores demonstrate a moderate correlation with ROA, ROE, and P/B ratios for Pakistani firms. However, a significant correlation is observed with P/E ratios. On the contrary, the CGI ratings exhibit a robust and statistically significant correlation with every evaluated financial performance indicator in the case of Chinese firms. The distinction can be ascribed to China's implementation of governance models that are more resilient and adaptable. The significance of effective governance mechanisms in improving financial outcomes is highlighted by these results. These insights provide significant value to organizations aiming to improve their governance frameworks and procedures, potentially resulting in heightened profitability and enhanced shareholder wealth.

       Keywords: governance metrics, governance index (GI), market capitalization, return on firm equity (ROE), return on firm assets (ROA), price to book ratio (P/B)