How Corporate Governance and Intellectual Capital Affect Firm Performance: Evidence from Pakistani Non-Financial Firms

Abstract

The aim of this study is to find out if there are any differences in the effect of governance monitoring mechanisms, in terms of market values and accounting profitability, between non-financial companies listed on Pakistan Stock Exchange with respect to intellectual capital efficiency. The statistical analysis is based on the Generalized Method of Moments (GMM) estimates of return on assets (ROA), return on equity (ROE) and price-earnings ratio (P/E) derived from the evidence supplied on the panel comprising the 30 firms and the six sectors that make up its sample, spanning 240 firm-year observations from 2009 to 2016. The results show a significant gap between the measures of performance. Board independence and human capital efficiency is significant for ROA and P/E; board ownership and structural capital efficiency is significant for ROE and P/E; and capital employed efficiency is significant for ROA and ROE. The size of the board is only significant in the ROA model while CEO duality is not significant in any of the three. The adjusted R² values of these three model explanatory powers, ROA, ROE and P/E, are 78.3%, 68.6%, and 57.8% respectively. The results indicate that governance and IP investments cannot be assessed on a single performance measure since the governance mechanisms that are linked to lower short-term accounting profitability could have a positive effect on the market.

Keywords: accounting profitability; board independence; board ownership; governance monitoring; intellectual capital efficiency; market valuation; Pakistan Stock Exchange

https://doi.org/10.5281/zenodo.22664700