The relationship between ownership structure as well as CEO power and firm performance and risk taking: evidence from Pakistan

The business sector of Pakistan is under-performing and there is a series of mega financial scams in the corporate sector of Pakistan. The current study argues that firm performance can be affected by many firm specific variables including ownership structure, CEO duality and independent directors. These firm specific variables can affect firm performance and overall firm risk and can also determine the risk preferences -low, medium and high - by different types of shareholders. The main focus of the study was to investigate the impact of ownership structure, CEO duality and independent directors on firm performance, firm risk and return to risk of the firm in the light of the agency theory. Therefore, to serve this purpose, data from the annual reports of 284 out of the 440 companies listed on the Pakistan stock exchange between 2010 and 2014 were collected based on data availability. Panel data analysis technique was used to test the hypotheses of the study. The study showed that family ownership, CEO duality and independent directors have no significant relationship but institutional, foreign and ownership concentration have significant relationships with firm performance. On the other hand it showed that family ownership, CEO duality and independent director do not have any significant relationship with firm risk. However, foreign ownership, institutional ownership and ownership concentration have significant relationships with firm risk. The study also showed that none of the type of ownership is significantly related to low, medium and high firm risk except ownership concentration with medium risk .On the other hand the study found that none of the type of ownership (family, institutional, foreign and ownership concentration) is significantly related to return to risk of the firm. The study also found an insignificant moderating effect of CEO duality between the relationship of ownership structure and firm performance. This study strongly raises questions about the implications of the agency theory in the corporate sector of Pakistan, as only three out of forty, main and sub-hypotheses, were accepted. The study calls for a new theory considering the behavioural and other market specific dynamics in the market settings of developing countries such as Pakistan.