This document summarizes a study that investigated the relationship between corporate governance and investor reaction on the Karachi Stock Exchange from 2004-2013. The study used data from 114 manufacturing companies and measured corporate governance using factors like board independence, board size, ownership structure, and audit committee independence. It found a negative but insignificant relationship between corporate governance and investor reaction based on univariate and multivariate regression analyses. The results contradict previous studies that found a significant positive relationship, suggesting that in the Pakistani market, investors may not have full information about corporate governance practices.

1. European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.7, No.17, 2015
157
A Spill Over Relationship - Corporate Governance and Investor
Reaction: A Case of Karachi Stock Exchange
Sajid Iqbal a
, Naveed Ahmad b
, Najeeb Haider c
, Malik Zia-ud-Din d
,
Nadeem Iqbal e
, Naqash Ahmad f
a
Lecturer Indus International Institute D. G. Khan.
b
Head of Management & Social Sciences, Indus International Institute, D. G. Khan, Pakistan
c
Department of Statistics, Ghazi University, D. G. Khan, Pakistan
d
Head of Business Administration, Ghazi University, D. G. Khan, Pakistan
e
Principal, Indus International Institute, D. G. Khan, Pakistan
f
Department of Management Sciences, Mohammad Ali Jinnah University, Islamabad, Pakistan
Corresponding Author
naveedahmad@indusdgk.edu.pk
naveed_8989@yahoo.com
Abstract
The current study aims to investigate the relation of corporate governance with reaction of investor towards
investment. The sample of the study contains on 114 companies of manufacturing sectors specifically and
sample is acquired from (2004-2013). Thus, single and composite correlation is applied to check relationship of
variables. Moreover, univariate and multivariate both regression methods are applied and study concluded
negative insignificant relationship of variables of study.
Key Words: Corporate Governance, Investor Reaction, Univariate, Multivariate, Composite
1. INTRODUCTION
A corporate firm works out on the bases of pre-defined financial objectives i-e profit maximization and
shareholders wealth maximization. It is the corporate governance that helps to achieve targeted goals through
efficient allocation of funds, proper management, and allocation of capital by deciding on cost of capital and also
pooling of resources in investment pursuits. Thus, all these activities are taken to increase the stakeholder
benefits and their sentiment of trust on corporation. Hence, such all activities represent corporate governance
mechanism and it allows international investor’s to invest in local market (Okpara, 2010).
Schwert, (1981) & Binder, (1985) investigated investor reaction response with respect to corporate
governance and have found the firms who are more prone to use corporate governance mechanism have greater
response by investors and vice versa. Moreover, Foerster & Huen, (2004) has supported the study and have
argued that companies working with corporate governance have higher stock returns in stock market because of
their governance efficient management. Chavez & Silva, (2006) argued that governance system has spillover
effect and relationship on firm’s profitability and share prices movements. Though, it helps to execute batter
investment decision that boosts investors trust on corporation. However, past studied have clarified a significant
relationship among corporate governance and investors reaction in financial perspective.
So objective of the study is to investigate the relationship among corporate governance and investor’s
behavior and to analyses the significance of such relationship among cross culture economies.
According to Aycan et al., (2000) Pakistan is underdeveloped country in research or scientific
investigations. Corporate governance is rich field in recent time regarding scientific investigations but such
mechanism of governance with respect to reaction of investor is less investigated in Pakistani context. Hence,
hypothesis of the study is as follows,
H1: There is significant relationship of corporate governance with investor’s reaction
The scheme of the study contains on four parts i-e first part elaborates introduction and literature of the
study, second part edicts methodology, third part explains the results of the study and findings and fourth part
concludes entire study and elaborated the recommendations.
2. RESEARCH METHODOLOGY
The objective of the study is to investigate the relationship among corporate governance structure and
responsiveness of investor’s under umbrella of Karachi stock exchange. The population of the study is listed
companies under Karachi stock exchange. The sample of the study contains on 114 listed companies of
manufacturing sector of Pakistan for the period of 2004 – 2013. Entire data is acquired from financial statements
of the companies by taking annual reports.
Therefore, www.sbp.com , www.brecorder.com & www.opendoors.com database are followed to
extract data for current study. Moreover, univariate regression analyses and correlation techniques are applied

2. European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.7, No.17, 2015
158
for test after analyzing the data reliability and its normal distribution. Hence, following model is developed for
test,
IR = C + β1 CG + e ……………………………………………………………………. Eq. (01)
By combining equation (01) in to equation (02),
IR = C + β1 BI + β2 BS + β3 OS+ β4 ACI + e ……………………………………….. Eq. (02)
Where, C is constant, CG – corporate governance, BI – board independence, BS – board size, OS – ownership
structure and ACI is pronounced as audit committee independence. Thus such study by following
instrumentation and first four proxies measure corporate governance and investor reaction is measured by
incorporating stock returns,
1) Board Independence = (Number of Nonexecutive directors/ Total Directors)
2) Board Size = Natural Log (Total Directors)
3) Ownership Structure = (Shares Held by directors/ Total Shares)
4) Audit Committee Independence = (Number of Nonexecutive directors/ Total Number of Directors)
5) Investor Reaction = Natural Log (Pn/Po)
3. RESULTS & ANAYLISES
Table 01 Representation of Sector
Sector Name Percentage Representation
Chemical Sector 33.7%
Cement Sector 32.0%
Food Sector 15.3%
Automobiles Sector 06.0%
Pharmacy Sector 13.0%
Table 02 Reliability Statistics
Variables Cronbach’s Alpha
BI 0.79
BS 0.71
OS 0.69
ACI 0.84
IR 0.77
As mentioned in prior studies reliability analyses shows percentage of error’s associated with
variables. Thus, in current study data has shown standard percentages of reliability. Thus, Board independence
has 0.79, board size 0.71, ownership structure, 0.69, audit committee independence 0.84 and investor reaction
has 0.77 percentage reliability.
Table 03 Individual Correlation Analysis
1 2 3 4 5
BI 1
BS -0.079 1
OS 0.084 0.743 1
ACI -0.231 -0.324 -0.127 1
IR -0.00071 -0.0267 -0.01077 -0.038 1
Table 04 Combined Correlation Analysis
1 2
CG 1
IR -0.04105 1
In table 03 correlation analyses explain negative relationship between board independence and board
size, board size has positive correlation with ownership structure, ownership structure is negatively correlated
with audit committee independence and audit committee independence is also negatively correlated with
investor’s reaction respectively. And in table 04 there is negative relationship among corporate governance and
investor’s reaction. Hence, corporate governance is negatively correlated with investor’s reaction.

3. European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.7, No.17, 2015
159
Table 05 Multivariate Regression Analysis
Variable Beta t. Statistics Probability
C 0.355 1.29 0.3423
BI -0.3783 -1.18974 0.3462
BS -0.05371 -0.6491 0.6927
OS -0.3217 -1.8439 0.2401
ACI 0.01874 0.07099 0.7934
R- Square 0.0056 Mean Dependent Variation -0.09753
Adj. R Square -0.00249 S.D Dependent Variation 0.90187
S.S.R 621.6280 F - Stat 0.9297
Durbin Watson 2.059 Probability (F – Stat) 0.47562
Table 06 Univariate Regression Analysis
Variable Beta t. Statistics Probability
C -0.18372 -1.123968 0.34728
CG 0.13574 1.08142 0.2629
R – Square 0.0018117 Mean Dependent Variance -0.005419
Adjusted R - Square 0.002475 S.D Dependent Variation 0.785693
Sum Suq. Residual 786.4591 F - Statistics 1.2739
Durbin Watson 2.05789 Probability (F – Statistics) 2.568739
Under OLS when individual regression analyses shown no relationship and correlation among corporate
governance and investor’s reaction. The value of R – Square is 56% that represents that model explain few
phenomena are that represents investor’s reaction and much more are still unexplored. Thus, F – stat is 92%
shown in table 05 and is in significant. And in table 06 when investor reaction is regressed with corporate
governance shown 18% r – square value and 1.27% f – statistics that has proved negative spillover of investor’s
reaction and corporate governance.
4. CONCLUSION
Past studies contributed vitally and have concluded that corporations with corporate mechanism provide more
safety to an investor in financial perspective. But in current study it proved vice versa and study found
insignificant negative relationship of investor reaction with corporate governance. Thus, hypothesis of the study
are rejected and because of inefficient market investors not have full information regarding corporations and
their governance mechanism. However, past justification are not justified in current study and as implications
managers should focus on other factors like information, investor trust, efficiency of markets and investor’s life
time value.
5. REFFRANCES
Aycan, et al. (2000). Impact of Culture on Human Resource Management Practice: A Countries Comparison.
Applied Psychology: An International Review, 49(01), 192-221.
Ahmad, N., Abbas, A., Iqbal, N., & Ullah, H. (2014). Effect of dividend announcement on stock
prices in banking industry of Pakistan. International Letters of Social and Humanistic Sciences, (24), 15-25.
Ahmad, N., Iqbal, N., Kanwal, R., Javed, H., & Javed, K. (2014). The mediating role of employee engagement in
relationship of internal branding and brand experience: Case of service organizations of Dera Ghazi
Khan. Business and Management, 6(4).
Ahmed, N., Khattak, A. K., Iqbal, N., Farooq, O., & Iqbal, J. (2014). Role of celebrity endorsement upon
consumer vanity with mediating role of materialism: Evidence from business students of Pakistan.
Haider, N., Ahmad, N., Farooq, O., Rasheed, I., & Parveen, S. (2014). The role of organizational resources and
environment in Organizational performance and customer loyalty; service climate as mediator: A
Study of Telecommunication Sector of Pakistan.
J. O. Okpara, “Perspectives on Corporate Governance Challenges in a Sub-Saharan African Economy,” Journal
of Business & Policy Research, Vol. 5, No. 1, 2010, pp. 110-122.
W. G. Schwert, “Using Financial Data to Measure Effects of Regulation,” Journal of Law and Economics, Vol.
24, No. 1, 1981, pp. 121-158.
J. J. Binder, “Measuring the Effects of Regulation with Stock Price Data,” The RAND Journal of Economics,
Vol. 16, 1985, pp. 167-183.
S. R. Foerster and B. C. Huen, “Does Corporate Gover- nance Matter to Canadian Investors?” Canadian Invest-
ment Review (Fall), 2004, pp. 19-25.
G. A. Chavez and A. C. Silva, “Improved Corporate Go- vernance: Market Reaction and Liquidity Implication,”
Instituto de Empresa Business School Working Paper, 2006, pp. 1-24.

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