Impact of Corporate Governance on Firm Performance: A Case of Insurance Industry of Pakistan

Abstract

The study is aimed to investigate the outcome of the influence of corporate governance on financial performance of two-tiered insurance industry of Pakistan i.e. Non-life insurance companies and life insurance companies for the period 2005-2012. The study has used four dimensions of corporate governance mechanisms including board composition, board compensation, ownership structure, and audit quality. The study uses twelve corporate governance variables which are categorized under three categories making corporate governance indices which are; corporate governance index of board structure, corporate governance index of ownership structure, and corporate governance index of audit quality. Each category includes variables (i) corporate governance board index, (a) board size, (b) board independence, (c) chief executive officer duality, (d) board diversity, and (e) executive remuneration, (ii) corporate governance ownership index, (a) institutional ownership, (b) ownership concentration, and (c) family ownership, (iii) corporate governance audit index, (a) audit committee size, (b) audit fees, (c) audit committee independence, and (d) independence of audit committee chairman and a set of control variables including premiums growth, liquidity, firm size for both life and non-life insurance companies and firm age for non-life and leverage for life insurance companies. Both accounting and marketing measures are used as financial performance variables viz. return on assets, return on equity as accounting measures, and Tobin’s Q as marketing measure of financial performance. The study separately gives the results of the non-life and life insurance companies while making a comparison between the both. Findings of the study insinuate that index of board structure and index of audit has positive and significant relationship with the both type of financial performance variables of non-life and life insurance companies, governance index of ownership structure has negative effect with all performance measures. While in control variables, size, age and liquidity has positive and premiums growth has negative effect on financial performance variables of non-life insurance companies. And leverage and liquidity of life insurance firms have negative effect with all three performance variables; firm size has positive with return on assets and return on equity but negative with Tobin’s Q and premiums growth has negative association with return on assets and return on equity but positive with Tobin’s Q. The study concludes that return on assets and return on equity are the most suitable variables of measuring financial performance.