The impact of corporate governance indicators on firm value: evidence of shariah compliant and shariah non-compliant firms in Pakistan

The existing literature highlights the several issues related to the implementation of corporate governance codes and problems of firm valuation in developing countries like Pakistan. Although codes of corporate governance and regulations have been formulated in Pakistan, there are several violations of laws and codes observed in the corporate sectors of Pakistan such as Crescent Bank, Mehran Bank, and Taj Company. Firms listed in the Pakistan Stock Exchange (PSX) have failed to effectively implement the codes of corporate governance particularly due to ownership structure, pyramidal structure, and board structure which significantly influence the firm value. Moreover, most of the listed companies are not able to fulfil the Shariah compliant screening criteria of KMI Islamic Index. Past literature affirms the issues related to Principal-
Principal (PP) conflict as most of the firms are owned by the family businesses. The underpinning objective of the current study is to investigate the impact of corporate governance indicators on firm value of PSX and KMI listed companies. The theoretical framework of the current study is based on Principal-Principal agency theory and the concept of “Maqasid al-Shariah”. A total of 312 firms (164 Shariah Compliant and 148 Shariah Non-Compliant) were taken as samples from the KMI screening list for the period of 2009 to 2018. The results of the present study reveal that ownership, pyramidal, and board structures have a significant association with PP conflict and firm value except board independence. Moreover, PP conflict mediates the relationship between ownership, pyramidal structure, and board structure of listed firms. Based on the findings, the current study suggests that implementation of Shariah laws and
regulations can facilitate firms in minimizing the PP conflict and effective implementation of codes of corporate governance.