Final Year Project - MBA Finance

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2. Student Name:
UMER GULZAR
Supervisor Name:
Muhammad Bilal Saeed
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3. Corporate Governance and
Risk Management Evidence
from banking sector of
Pakistan
Topic
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4. Corporate Governance involves the
guidelines and regulations which are
necessary to run the firm. It also identifies
the rights of directors and managers and
helps them understand the actions taken by
owners to influence the firm’s decisions
(Kurawa & Ishaku, 2014).
Corporate
Governance
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5. Risk Management is a process of identifying,
assessing and listing different kinds of risks.
When the risks are identified, the risk
manager can generate a strategy to lessen or
minimize the influence of those adverse
events that can affect the firm (Elbahar,
2016).
Risk
Management
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6. Lack of empirical evidence in
literature regarding the impact of
Corporate Governance on Bank’s
Risks in case of banks listed in
Pakistan.
Research
Gaps
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7. Theoretical
Justification
Agency Theory
Managers being the agents, are bound
to run the firms keeping in check the
stakeholders. Failing to do so might add
various forms of risks to a firm hence
corporate governance can impact firm
risks.
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8. Problem
Statement
Various factors are identified in
literature that effect bank’s risk.
However there is still a gap with respect
to role of corporate governance
mechanisms on the risks faced by banks
in case of Pakistani listed banks.
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9. Objectives
& Research
Questions
 To examine the impact of Corporate Governance on Capital Risk,
Credit Risk and Liquidity Risk.
 To examine the impact of board size on Capital Risk, Credit Risk
and Liquidity Risk.
 To inspect the influence of board independence on Capital Risk,
Credit Risk and Liquidity Risk.
 To examine the impact of gender diversity on board on Capital
Risk, Credit Risk and Liquidity Risk.
 To examine the impact of CEO turnover on Capital Risk, Credit
Risk and Liquidity Risk.
 To inspect the impact of audit committee independence on
Capital Risk, Credit Risk and Liquidity Risk.
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10. Significance
 Adds to academic literature with respect to understanding the
impact of corporate governance on different forms of risks
faced by banks listed in emerging economies like Pakistan.
 Helps investors understand the relationship between
corporate governance and bank risks so that they can invest in
those banks whose corporate governance is relatively strong in
mitigating these risks.
 The managers and regulatory bodies like Government, Central
bank, etc. can know which mechanisms of corporate
governance should be focused to manage bank risks.
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11. Literature
Review
Van Greuning and Brajovic Bratanovic
(2003), Simpson and Gleason (1999),
Prowse (1997), Yatim (2009), Raheja (2005),
Pathan (2009), Cheng (2008), Adams and
Funk (2012), (Alam & Ali Shah, 2013),
Berger, Kick and Schaeck (2014), Sun and
Liu (2014).
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12. Hypothesis
H1: Board size is inversely related with firm risk.
H2: Board independence is negatively related with
firm risk.
H3: Gender diversity on board is positively related
with firm risk.
H4: There exist a relationship between CEO turnover
and firm risk.
H5: Audit committee independent is negatively
associated with the firm risk.
H6: Corporate governance index is negatively associated
with the firm risk.
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13. Methodology
Equation
CaR = β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µi,t
CrR = β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µi,t
LiR = β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µi,t
CaR = β0+β1CGi,t+β2Controli,t+µi,t
CrR = β0+β1CGi,t+β2Controli,t+µi,t
LiR = β0+β1CGi,t+β2Controli,t+µi,t
Where,
CaR= Capital risk
CrR= Credit risk
LiR= Liquidity risk
CG= CG Index.
BS= Board size
BI= Board independence
GDB= Gender diversity on Board
CEOT= CEO turnover
ACI= Audit Committee Independence
Control= Firm Size and Leverage
i= Bank and t= Year
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14. Methodology
Data and
Method
Total banks working in Pakistan = 34
Population : Listed Banks = 24 Sample Size
: 20
Secondary data from annual reports and
firm’s websites
2009-2018
Panel Regression
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15. Variables
CaR = the ratio of equity capital to total assets (Asamoah, 2011)
CrR = the ratio of loan loss provision to total loans (Asamoah, 2011)
LiR = the ratio of total loans to total deposits (Asamoah, 2011)
BS = Natural log of total board members (Mathew, Ibrahim, & Archbold, 2018)
BI = NEDs on board/Total board members (Kumar & Sivaramakrishnan, 2008)
GDB = Females directors on board/Total board members (Nielsen & House, 2010)
CEOT = Dummy = 1 if CEO is changed and 0 otherwise (Saeed and Saeed 2017)
ACI = Number of NEDs on audit committee/Total audit committee members (Alam
2013)
FS = Natural log of total assets (Yazid, Razali, & Hussin, 2012)
LEV = Total Loans/Total assets (Pandey, 2004)
CG = Index is developed by taking the weighted average of all considered
governance variables and weights are assigned on the basis of Principal
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16. Results
Descriptive
Statistics
Variables Mean Maximum Minimum Std. Dev.
ACI 0.974 1.000 0.667 0.089
BI 0.829 1.000 0.429 0.097
BS 8.748 13.000 6.000 1.549
CaR 0.089 0.298 0.016 0.044
CEOT 0.190 1.000 0.000 0.393
CG 0.829 1.098 0.608 0.093
CrR 0.075 1.154 0.001 0.128
FS 19.654 21.830 16.982 1.073
GDB 0.028 0.500 0.000 0.085
LEV 1.681 5.411 0.071 1.108
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17. Results
Correlation
Matrix
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18. Results
Panel
Regression
Capital Risk
as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C 0.538 0.067 7.974 0.000
BS 0.017 0.018 0.972 0.333
BI -0.051 0.020 -2.557 0.011
GDB 0.014 0.034 0.416 0.678
CEOT 0.001 0.004 0.223 0.824
ACI -0.023 0.020 -1.117 0.265
FS -0.021 0.003 -5.993 0.000
LEV -0.010 0.002 -5.027 0.000
R-squared 0.845 F-statistic 36.354
Adjusted R-
squared 0.822 Prob(F-statistic) 0.000
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19. Results
Panel
Regression
Capital Risk
as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C 0.582 0.062 9.376 0.000
CG -0.017 0.017 -1.008 0.315
FS -0.024 0.003 -7.089 0.000
LEV -0.009 0.002 -4.673 0.000
R-squared 0.832 F-statistic 39.846
Adjusted R-
squared 0.811 Prob(F-statistic) 0.000
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20. Results
Panel
Regression
Credit Risk
as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C 1.107 0.409 2.705 0.008
BS 0.123 0.109 1.130 0.260
BI 0.130 0.121 1.077 0.283
GDB 0.239 0.203 1.176 0.241
CEOT -0.020 0.022 -0.932 0.353
ACI -0.332 0.124 -2.676 0.008
FS -0.052 0.021 -2.506 0.013
LEV -0.030 0.012 -2.566 0.011
R-squared 0.318 F-statistic 3.101
Adjusted R-
squared 0.215 Prob(F-statistic) 0.000
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21. Results
Panel
Regression
Credit Risk
as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C 1.168 0.371 3.150 0.002
CG -0.089 0.099 -0.896 0.371
FS -0.049 0.020 -2.478 0.014
LEV -0.030 0.012 -2.555 0.011
R-squared 0.283 F-statistic 3.174
Adjusted R-
squared 0.194 Prob(F-statistic) 0.000
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22. Results
Panel
Regression
Liquidity
Risk as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C -0.051 0.201 -0.253 0.800
BS 0.022 0.054 0.418 0.677
BI 0.052 0.059 0.877 0.382
GDB 0.052 0.100 0.515 0.607
CEOT -0.006 0.011 -0.591 0.555
ACI -0.131 0.061 -2.136 0.034
FS 0.005 0.010 0.461 0.645
LEV 0.104 0.006 18.376 0.000
R-squared 0.846 F-statistic 36.623
Adjusted R-
squared 0.823 Prob(F-statistic) 0.000
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23. Results
Panel
Regression
Liquidity
Risk as
Dependent
Variable Coefficient Std. Error t-Statistic Prob.
C -0.057 0.180 -0.314 0.754
CG -0.034 0.048 -0.704 0.483
FS 0.005 0.010 0.478 0.633
LEV 0.104 0.006 18.416 0.000
R-squared 0.842 F-statistic 42.919
Adjusted R-
squared 0.823 Prob(F-statistic) 0.000
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24. Conclusions and
Recommendations
Board Independence has a negative relationship
with Capital Risk
Audit Committee Independence is negatively
related with Credit Risk
Audit Committee Independence is negatively
related with Liquidity Risk
The firms should have adequate number of
independent members on the board to keep
various forms of risks in check
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25. Thank you
‫شکریہ‬
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