CORPORATE GOVERNANCE INDEX AND ITS IMPACT ON FIRM RISK: EMPIRICAL EVIDENCE FROM PAKISTAN

The purpose of this study is to develop a single variable, which would be a combination of internal and external qualitative attributes influencing the governance of firms listed on the Pakistan Stock Exchange from 2006 to 2019. A single set of Governance Index was developed, which was the combination of board composition, board leadership structure and ownership structure by foreign investors, financial institutions and block holders. Firms have been selected from thirteen different sectors of the Pakistan Stock Exchange excluding the financial sector. The results of the study showed that the governance index which aggregates three sets of governance attributes, is significantly and negatively related to systematic risk. However, governance index significantly and positively related to earning risk. Previously many studies have explored the relationship between different governance attributes and firm performance, and these studies have produced a mixed set of results. A small number of studies have investigated the relationship between governance attributes and firm risk. In addition, most of these studies are limited to the financial sector. The current study uses a broad agency framework to extend work on firm risk and governance attributes in developing markets such as Pakistan.