The document discusses the impact of various corporate governance dimensions on bank risks in Pakistan. The empirical results found that board independence, gender diversity on the board, and audit committee independence have a significant effect on reducing bank risks, while board size and CEO turnover have an insignificant effect. It is recommended that corporate governance should be viewed as a facilitator for creating long-term value for stakeholders rather than an end in itself. Enhancing the influence of corporate governance mechanisms could help increase their impact on managing risks in the Pakistani banking industry. In particular, increasing audit committee independence could make management more accountable to protecting the interests of all stakeholders.

1. Umer Gulzar
18I-1118
Supervisor Name: Muhammad Bilal Saeed
1

2. The empirical results found that different CG dimensions impact differently on bank risks. In
context of Pakistan, the results reveal that board independence, gender diversity on board and
audit committee have significant effect on bank risks, while board size and CEO turnover have
insignificant effect. It is recommended that since the fundamental purpose of any company is
the creation and delivery of long-term sustainable value in a manner consistent with their
obligations as a responsible corporate citizen, then the Bank should therefore view corporate
governance not as an end in itself but a vital facilitator to the creation of long- term value for all
stakeholders. And to enhance the level of influence of corporate governance on bank risks to
higher level in the Pakistan Banking Industry. Audit Committee Independence should be
increased as this will make the management to protect not only their interest but the interest of
all stakeholders.
2
Executive Summary/Abstract

3. 
1.1. Background of study
 This research is about the impact of corporate governance (CG) on risk management
(RM) in case of listed banks in Pakistan stock exchange (PSX). According to research
for World Bank, (Kirkpatrick, 2009) found that failures in the CG structures is main
reason behind the latest global financial crisis. He further said that CG didn’t help in
extreme risk taking and it concluded large number of bad debts hence effecting banks’
risk.
 The banking industry has been providing facilities to users and companies for years.
Ongoing improvement and struggle in the financial sector and the new players has
permitted for a much broader range of banking products and facilities for wholesale
and retail banking clients.
3
1. Introduction

4. 4
 Banks verify their customers before giving them loan through the procedure of
RM. They make sure are their customers having capacity and intention to pay
the loan in the future or not? The State Bank of Pakistan (SBP) tries hard to
minimize the risk and they done this through RM. Some managers responded to
this in by dragging back from hazards in such a way that they avoid accepting
the transactions in which they see that the risk is mandatory they also avoid
excessive risk by compromising on financial institute’s value.
 This study follows agency theory perspective. CG means how the firms are
being run and controlled. These characteristics can impact various strategic
decisions of the firms according to many existing studies. Hence there is a
requirement to study the role of CG on RM. This research examines the role of
CG and financial risks of listed banks in PSX from 2009 to 2018.

5. 
1.1.1. Research Gap
The motivation of this study is to identify the impact of CG on RM of
listed banks in Pakistan. Several CG mechanisms can affect the bank risks.
In this study, we are going to find out the current CG mechanisms that
will help to reduce the specific bank risks.
5

6. 
 CG involves the guidelines and regulations which are necessary to run the firm
on shareholders’ goals. Also identify the rights of directors and managers and
helps understand the actions taken by owners to influence the firm’s decisions.
(Kurawa & Ishaku, 2014).
 CG is a group of association between all stakeholders; management, board of
director, shareholders, employees, customers and investors” (Goodhart, 2011).
Effective CG exists to offer check and balance between stockholders and
administration and thus to alleviate agency difficulties. Hereafter, companies
with good governance quality should bear fewer agency problems (Jiraporn,
Kim, & Kim, 2011).
6
1.2. Corporate Governance

7. 7
 CG incorporates a set of connections with in a firm’s management, executive
body, owners and other partners. CG gives us the mechanism by which the
goals of the firm are formed, resources for achieving these goals and evaluating
performance. It should provide proper compensation plan for the
administration that will help to keep them on the long-term goal of
shareholders. Effective corporate mechanism helps in the appropriate operative
of a market economy (OECD, 2004).
 (Gompers, Ishii, & Metrick, 2003), they stated that CG means to establish the
structure that run and controlled the organization to make sure responsibility
on the managers towards executives.
 Past literature shows that performance can be improved by CG (Macey &
O'hara, 2003) explains that the important ole is played by CG and claim that
banks face unpredictable CG problems for managers as well as for regulators.

8.  RM is “a process of identifying, assessing, and prioritizing risks of different
kinds”. When the risks identified, risk manager then generate a strategy to
lessen or abolish the influence of adverse events (Elbahar, 2016).
 The RM is aligns with the credit administration department that’s why banks
don’t have any RM unit (Haneef et al., 2012). For the stability of long lasting
investment environment the risk management practices and mitigation policies
plays key role. Nobody wants to loss their money or any investment that’s why
every investor remains conscious.
 The RM practices of a firms and businesses will depend on the strategies of the
management having, so the trust of the investor stays on the remedy measures
being accompanied there (Bessis, 2011).
8
1.3. Risk Management

9. 9
 Bank risks collapse into four classifications: “financial, operational, business, and
event risks”.
 Financial risks comprise of two risk types, “Pure risks - including liquidity, credit,
and solvency risks - can result in loss for a bank if they are not properly managed.
Speculative risks, based on financial arbitrage, can result in a profit if the arbitrage is
correct or a loss if it is incorrect. The main categories of speculative risk are interest
rate, currency, and market price risks,” (Van Greuning & Brajovic Bratanovic, 2003).
 Operational risks are associated to, “bank's overall organization and functioning of
internal systems, including computer-related and other technologies); compliance
with bank policies and procedures; and measures against mismanagement and
fraud” (Van Greuning & Brajovic Bratanovic, 2003).
 Business risks are related with, “bank's business environment, including
macroeconomics and policy concerns legal and regulatory factors, and the overall
financial sector infrastructure and payment system” (Van Greuning & Brajovic
Bratanovic, 2003).
 Event risks include all external risks which, “if they were to materialize, could
jeopardize a bank's operations or undermine its financial condition and capital
adequacy” (Van Greuning & Brajovic Bratanovic, 2003).

10. 
 This study aligns with agency theory. Managers are bound to run the
firm according to the shareholders missions and visions. If they don’t
follow the shareholders directions or goals agency conflict raises. If the
managers will not follow their true job tasks they will ultimately
increases the bank risks.
 That’s why, agency theory provides ground for linking corporate
governance with bank risk to see relationship exist or not.
10
1.4. Theoretical Justification

11.  In 1970, Agency theory formulated first time in literature of economics (Ross, 1973)
had spread into business institutes, the management literature, specific academia
and applied researcher papers, business media, even company proxy statements.
 (Zeckhauser & Pound, 1990) and (Shleifer & Vishny, 1997) suggest that owners
supervise the manager's behavior very deeply for the reduction in agency cost.
Agency theory is all about the resolving the problems that occur in agency
relationships and there is two type of problems in this relationship. First agency
problem arises when there are conflicts between shareholders and agents in the
desires and goals of the investors. It is very difficult for the principal to verify the
behavior of managers that they are behaving appropriately or not and second
problem is of risk sharing when there is a conflict in the attitudes of the principal
and agent causes risk. The principal and agents act different toward the different
risk (Eisenhardt, 1989).
11
1.4.1. Agency theory

12. 12
 Agency conflict arises when managers keep their personal interest on priority
by pushing back the company’s long term goal of increasing FP of the firm. A
decent exercise of CG helps in managing the agency conflicts between the
manger’s and employees, administration (Adjaoud & Ben‐Amar, 2010).
 Agency theory argues all the difficulties which are occur in the companies just
because of the difference in preferences of stakeholders and managers for
reducing the problems. This theory also implemented in different CG
mechanisms to control or regulate the actions of the agents in the firms to lessen
agency problems (Panda & Leepsa, 2017).

13.  In 1990’s after 1997-1998 crises, CG issue becomes a focused issue in Asian
countries (Tze, 2003). Agency theory and many other corporate theories
recommend that publishing the firm’s information is the best sign of good CG
system. Effective CG of banks plays a vital role in stability of economy and
sustainability of financial sector.
 Poor CG affects the confidence of banks in the market which will impact the
ability of banks in managing assets and liabilities, including securities, that can
cause the liquidity crisis and it may be affect the economy of country and can
occur large risk to banks or society (Cebenoyan & Strahan, 2001). That why, it is
very essential to study the CG instruments in banking sectors.
 Although, risk is in every business but it can be prevented in different business
activities. The major issue in the field of banks is the nature of business because
it causes more risks than other businesses.
13
1.5. Corporate Governance & Bank
Risk Management

14. 14
 According to (Santomero, 2007), banks are improving their RM and internal
supervision since RM is essential for banks. He said that RM systems can be
implemented by emphasizing the risk reporting from financial statements to
the managers and owners. BOD’s are the main observers of banks; they are
completely answerable for the disclosure of RM information.
 RM didn’t mean that continuous risk reduction but it is about how the business
selects the risk type and risk affect that is suitable to them (Crouhy, Galai, &
Mark, 2006). In addition, (Crouhy et al., 2006) states that risk taking behavior
and risk management are “two sides of the same coin”. Many successful firms
take risks for higher rewards and to manage their risk.
 (Raghavan, 2003) mention that risk identification and risk measurement are two
main procedures that involved by RM, that’s why it is necessary for banks.
Then, bank will select the risk type and action taken to lessen the hazard and
formed such plans to monitor these risks.
 RM is necessary for banking sector to reduce the risks and the risk information
helps the investors to forecast the risks and to identify how it managed by CG
of banks (Utama, 2003).

15. 
 Various elements are found to effect bank’s risk. These
elements are related to various aspects of banks. However there
is still a gap with respect to role of corporate governance
mechanisms in Pakistani listed banks on the risks faced by
banks. This study aims to examine the role of corporate
governance on “capital risk”, “credit risk” and “liquidity risk”.
15
1.6. Problem Statement

16. 
 To examine the effect of Corporate Governance on Capital Risk, Credit Risk and
Liquidity Risk.
1.7.1. Research questions
 To examine the role of board size on “Capital Risk, Credit Risk and Liquidity
Risk”.
 To inspect the role of board independence on “Capital Risk, Credit Risk and
Liquidity Risk”.
 To examine the role of gender diversity on board on “Capital Risk, Credit Risk
and Liquidity Risk”.
 To examine the role of CEO duality on “Capital Risk, Credit Risk and Liquidity
Risk”.
 To inspect the impact of audit committee independence on “Capital Risk,
Credit Risk and Liquidity Risk”.
16
1.7. Objectives

17. 
 This study adds an addition to academic literature which helps students
and further researchers in getting understanding the role of corporate
governance on different risks faced by banks.
 If the investors know that the relationship exists between corporate
governance and bank risks. He would probably invest in those banks
whose corporate governance is better.
 Managers would come to know which mechanism should focus to reduce
the bank risks.
 The regulatory bodies like Government, Central bank, etc. would come to
know which mechanism of corporate governance should focus to manage
the bank risk.
17
Significance

18. 2.1. Corporate Governance and Risk Management
Good CG recognized by the disclosing information of the firms in annual reports. According to
(GOVERNANCE, 1998), “disclosure is an important and efficient means of protecting
shareholders and is at the heart of CG. They further state that adequate and timely information
about corporate performance enables investors to make informed buy-and-sell decisions and
thereby helps the market reflect the value of a corporation under present management”. (Van
Greuning & Brajovic Bratanovic, 2003) suggests the management of risk is impacted by the
owners and investors in the CG of banks while (Simpson & Gleason, 1999) and (Prowse, 1997)
discuss they don’t have worthy impact on the RM of banks. CG suggests that BOD’s formed
compensation and recommendation committees. The formation of RM and CG committees are
also suggested but less formed by listed firms (Yatim, 2009). The suggestions emphasize that the
BOD’s should:
 Keep a good system inside the firm to safe the investor’s investment and company’s assets.
 Manage the principle risks by implementing the suitable procedures.
18
2. Literature

19.  According to (Kogan & Wallach, 1964) risk-taking negatively affected by the
decision-making group’s size. (Sah & Stiglitz, 1986) states that in large panel,
the contracts of riskier projects are less accepted because of more judgments of
board members. Managers get freedom to fulfill their own goals due to trouble
in communication of ideas in larger boards while smaller boards performed
significant controller function (Chaganti, Mahajan, & Sharma, 1985).
 The effect of BS on the CG mechanism is not clear, but the solid opinions
recommend that smaller board is closely align with owners’ interests, this will
rise the risk. (Jensen, 1993) suggested more efficiency of control mechanism
will be produced by smaller board size.
 (Raheja, 2005) finds that best board size is a “function of the directors’ and the
firm’s characteristics”.
19
2.2. Board Size and Risk Management

20.  Some studies have demonstrated that no association exists between firm risk
and NEDs. (Cheng, 2008) found in his study on US firms, there is no worthy
relationship among independent NEDs and firm risk.
 (Pathan, 2009) describes that owners wants more profits due to their investment
they like NEDs are more risk-takers. He further said independent NEDs on
panel act on the vision of investors and take decisions for the success of firm.
His study found that strong boards that consist of larger number of
independent NEDs affected bank risk positively.
 (McNulty & Pettigrew, 1999) discuss that more NEDs on board helps inn
effective decision making and enhance the monitoring power of administration.
(Core, Holthausen, & Larcker, 1999) defined that board strength is inversely
linked with internal directors on panel. Board independence means more
number of external directors.
20
2.3. Board independence and Risk Management

21.  (Powell & Ansic, 1997) in study on gender in risk preferences, found that men
are more risk-seeker than women. Although some studies showed that females
on panel of directors are risk-seeking and have positive relationship with FR.
 (Adams & Funk, 2012) showed in study of Swedish females that females take
more risks than males, which are grown from the bottom level of the firm and
now in the panel of directors. However, females that are bound to follow the
guidelines of the firm which lessen the firm risk level. They recommend that
there need not lead of taking risk-averse decisions having females on the board.
 (Berger, Kick, & Schaeck, 2014) conclude from the study of German banks, the
quantity of women on board and FR is positively associated. They further
clarify that females have an important impact on the CG of banks and not
demoted by men dominated board culture.
21
2.4. Gender diversity and Risk Management

22. 
 CEO turnover means a CEO is fired or he resigns
from the firm.
22
2.5. CEO turnover and Risk Management

23.  The value of audit committees’ mistake of RM emphasized when the financial
crisis of 2008 arises. In 2009, the Klynveld Peat Marwick Goerdeler (KPMG)
directed a review of audit committee members’ response to the financial
disaster. According to the study, many audit committee members answered
that improved their ‘‘hands-on involvement’’ with management because of the
financial disaster, telling that they proposed to modify the nature and scope of
their inaccuracy to enhance the firm’s RM systems (Sun & Liu, 2014).
 Grounded on the option theory, bank management is motivated by investors to
finance in high-risk projects. This may outcome in management taking chances
to seek profits from inefficient investment projects that could not produce high
return projected for the high level of risk.
23
2.6. Audit committee independence and Risk
Management

24. 24
 Audit committee independence is expected to affect management’s decisions
through the inaccuracy of risk valuation and RM.
 RM actions of companies are also deeply supervised by its ACI. The main duty
of the committee is to manage the organization’s financial performance and
guarantee the trustworthiness of its financial reporting. Timely assessment of
the company’s RM and the administrative activities used to manage its risk is
crucial towards fulfilling this duty (Yatim, 2009).
 An independent audit committee delivers effective monitoring and aids
supportive internal controls. Reliable with a risk-based approach, an
independent audit committee is expected to support the formation of a risk
management committees because it is helpful and valuable to audit committee
(Yatim, 2009). Independent audit committees offer greater observing of
supervisory choices including risk-taking activities or risk management
activities by managers (Gilson, 1990).

25.  (Cheng, 2008) discovered in a US sample, board size is negatively associated to firm
risk.
 Board size is inversely linked with variability of company’s performance or bank risk
(Platt & Platt, 2012).
 For Pakistani firms, it is estimated that positive relationship existed between FR and
BS as shared information of the associates of the boar. Board size is positively related
to firm risk (Alam & Ali Shah, 2013).
 According to (Nakano & Nguyen, 2012), larger boards are related with lower risk
and with minor board size risk is high. The past literature supports there is negative
relation between FR and BS.
 (Mathew, Ibrahim, & Archbold, 2016) founded that FR and BS are related significant.
 H1: Board size is inversely related to firm risk.
25
2.7. Hypothesis

26. 26
 The study by (Koerniadi, Krishnamurti, & Tourani-Rad, 2014) viewed that BI is
positively linked with risk-taking.
 (Minton, Taillard, & Williamson, 2011) examine how U.S. financial institutes’ RM is
associated to the BI and financial expertise of the BODs; they certified that board
independence is negatively associated with total risk.
 (Brick & Chidambaran, 2008) studied BI founded that it is inversely linked to FR.
 Firm risk is negatively associated with board independence (Alam & Ali Shah, 2013).
 Most recently, (Christy, Matolcsy, Wright, & Wyatt, 2013) found that in large
companies, a board with more number of NEDs creates positive net benefits in the
form of lower capital risk. Another study founded a positive relation between
number of NEDs on the board FR.
 (Pathan, 2009) in a study of US bank founded that CEO’s powers is inversely linked
to bank risk taking and stronger board positively associated with bank risk raking.
 H2: Board independence is negatively related to firm risk.

27. 27
 Gender diversity in board is also related with lower FR (Perryman, Fernando, &
Tripathy, 2016).
 (Berger et al., 2014) found that rise in the number of female bank directors,
results in increased risk.
 (Gulamhussen & Santa, 2015) noted that there existed negative relation between
risk and female in the board.
 (Muller‐Kahle & Lewellyn, 2011) founded that a higher number of female board
members are connected with an increase in risk-taking.
 (Wilson & Altanlar, 2011) found insolvency risk to be inversely associated to the
number of female directors.
 (Adams & Ferreira, 2009) show the sample of US firms the more diverted
boards allocate more human resources to observing; however on average the
influence of gender diversity on firm performance is negative.
 H3: Gender diversity on board is positively related to firm risk.

28. 28
 Gender diversity in board is also related with lower FR (Perryman, Fernando, &
Tripathy, 2016).
 (Berger et al., 2014) found that rise in the number of female bank directors,
results in increased risk.
 (Gulamhussen & Santa, 2015) noted that there existed negative relation between
risk and female in the board.
 (Muller‐Kahle & Lewellyn, 2011) founded that a higher number of female board
members are connected with an increase in risk-taking.
 (Wilson & Altanlar, 2011) found insolvency risk to be inversely associated to the
number of female directors.
 (Adams & Ferreira, 2009) show the sample of US firms the more diverted
boards allocate more human resources to observing; however on average the
influence of gender diversity on firm performance is negative.
 H3: Gender diversity on board is positively related to firm risk.

29. 29
 H4: There exist a relationship between CEO turnover and firm risk.
 (Dar, Naseem, Niazi, & Rehman, 2011) have found a inverse relationship between ACI and
firm performance.
 Firm risk negatively linked with audit committee independence. RM team is positively
connected with the number of NED on audit committees (Yatim, 2009).
 For a sample of Canadian organizations, (Erickson, Park, Reising, & Shin, 2005) found a
positive connection between ACI and firm performance.
 (Abbott, Parker, & Peters, 2002) showed that audit committees that have no knowledge in
finance and RM is significantly linked with high chance of financial faults and errors.
 The audit committee size recommendation is also dependable with the need to increase the
administrative status of the audit committee (Braiotta Jr, Gazzaway, Colson, &
Ramamoorti, 2010). Hence, it is predictable that larger audit committees are possible to
support the formation of RM team as this will boost their oversight duties.
 H5: Audit committees’ independent is negatively associated with
the RM.

30. 
3. Methodology
3.1. Research Resign
 This research is relay on the
secondary data and the population
includes all the banks which are listed
on the Pakistan stock exchange..
 The criterion for sampling is the bank
should be listed on or before 2009 and
the availability of data. The time
period of this study is from 2009 to
2018.
 A panel data methodology (Random-
effect GLS regression technique) was
employed for the analysis of data.
3.2. Population and Sample
Size
 The population of this
study is the total no of
banks listed in Pakistan
and the sample size of
twenty banks selected
on the basis of
availability of data.
30

31. 31
3.3. Variables
3.3.1. Dependent variables
 Capital risk (CaR)
It is defined as, “the risk that investors may face when they be exposed to risk of losing all or part of
the total amount invested. Capital Risk is used as a proxy variable for RM,” (Elbahar, 2016).
CaR= the ratio of equity capital to total assets.
 Credit risk (CrR)
It is defined as, “the risk arises when a borrower defaults on the loan repayment agreement. Banks
whose borrowers default on their repayments may face cash flow problems, which directly affect their
liquidity,” (Elbahar, 2016).
CrR= the ratio of loan loss provision to total loans.
 Liquidity risk (LiR)
It is defined as, “the bank ability to have enough liquid assets that can be easily liquid in order to make
new invest or pay any kind of financial or contractual obligation. Banks will be exposed to liquidity
risk when they do not have enough liquid assets that can be used to compensate any expected and
unexpected obligation,” (Elbahar, 2016).
LiR= the ratio of total loans to total deposits.

32. 32
3.3.2. Independent variables
 Board Size
“Board composition refers to the size of the board and the mix of board members. Board
structure refers to board organization and division of labor among committees” (Mathew,
Ibrahim, & Archbold, 2018).
According to (Asamoah, 2011) boards of directors’ act as essential role in the CG of present
corporations. Due to that it is essential to advance the information about board size to get
complete knowledge about CG.
BS= Natural log of total board members
 Board Independence
Scholars define four roles for BOD’s of a public limited companies (Johnson, Daily, & Ellstrand,
1996). First, the board observers top administration according to the owners in order to lessen
managerial rent-seeking behavior (Jensen, 1986). Second, the board helps the design of strategy
via a consultative role.
Third, board has to arrange means to top supervision and the CEO. Last, the board appoints the
manager on the behalf of owners. The conditions of the agreement includes the manager’s
struggle, funds financing choices and reward (Kumar & Sivaramakrishnan, 2008). Board
efficiency is considered by its capability to observing, guide, agreement and provides means to
the top administration.
BI= NEDs on board/Total board members

33. 33
 Gender diversity
(Mathew et al., 2016) discovers that women seem to be more positive on some
significant governance problems such as valuing the board’s effectiveness and assist
better management on boards. Gender diversity focused by many studies and
discovers that the high ratio of women in panel affect the board efficiency and
company’s performance. The literature on gender-based differences affirms that
males and females are dissimilar in their management behavior and these
dissimilarities may affect board working (Nielsen & Huse, 2010) argue that the
influence of female board directors depend on the nature of the duties performed.
(Adams & Ferreira, 2009) and (Brennan & McCafferty, 1997) explain that female
executives may have a well acknowledge with the consumer preferences and the
opportunities for firms to fulfill their needs. (Izraeli, 2000) and (Huse & Grethe
Solberg, 2006) illuminate that women take their NED’s tasks extra seriousness and
get ready for meetings thoroughly.
GDB= Females directors on board/Total board members

34. 34
 CEO turnover
CEO turnover means a CEO is fired or he resigns from the firm.
CEOT= CEO is changed or not if changed, then put 1 otherwise put 0.
 Audit Committee Independence
The ACI is a team belongs to BOD, this group has significant role in supervising and
observing the zones of inside controls and hazards. The main task of the ACI is to
supervise the fiscal performance and ensures the loyalty to instructions, guidelines,
processes and regulations to the consistency of the financial reporting instrument.
ACI should synchronize the all works associated to audit (Elbahar, 2016). The head of
the audit committee shall be an independent, didn’t work as the chairperson of the
board.
An ACI may strength the decision makers to ignore the risky contracts as failure of a
unstable one will increase uncertainty between the owners (Alam & Ali Shah, 2013).
CG is effective ACI’s monitoring should be independent. The declaration that audit
committees should comprise of NEDs presumes that independent external members
are good observers of management (Sarbanes, 2002).
ACI= Number of NEDs on audit committee/Total audit committee members

35. 35
3.3.3. Control Variables
 Firm Size
(Yegon, Mouni, & Wanjau, 2014) said the net asset value of a company is the
amount through which total assets exceed overall liabilities. In commercial
enterprise net asset cost is used to assess the profitability, credit score repute and
solvency position of a company. The net asset is decided via net worth of assets
and contemporary asset and subtracting cutting-edge liabilities.
The net assets also can be used to degree the net worth of the commercial enterprise, even
though there are other elements which can contribute to price of a firm. (Yazid, Razali, &
Hussin, 2012) added that assets signify the economic funds for businesses. (Pandey, 2004)
whose work is relatively current in the area uses logarithm of total assets as a measure of firm
size.
FS= Natural log of total assets
 Firm Leverage
Leverage is a funding strategy of using borrowed money. Specifically, the usages
of various economic contraptions or borrowed capital to increase the potential go back of
an investment. Leverage can also refer to the quantity of debt a company uses to
finance belongings.
LEV= Total Loans/Total assets

36. 36
 CaR= β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µ
 CrR= β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µ
 LiR= β0+β1BSi,t+β2BIi,t+β3GDBi,t+β4CEOTi,t+β5ACIi,t+β6Controli,t+µ
 CaR= β0+β1CGi,t+β2Controli,t+µ
 CrR= β0+β1CGi,t+β2Controli,t+µ
 LiR= β0+β1CGi,t+β2Controli,t+µ
 Where,
 CaR= Capital risk
 CrR= Credit risk
 LiR= Liquidity risk
 CG= Average of all the CG dimensions.
 BS= Board size
 BI= Board independence
 GDB= Gender diversity on Board
 CEOT= CEO turnover
 ACI= Audit Committee Independence
 Control= Control variables are Firm Size and Firm Leverage
 i= Bank
 t= Year
3.4. Model Specification

37. 
4.1. Descriptive Statistics
The table 4.1 is showing that the mean of CaR is 0.088534. The mean for CrR is
0.074912; LiR is 0.181462. The mean of average of CG dimensions is 0.829428.
ACI-audit committee independence mean is 0.97375; board independence is
0.82919; board size is 2.126181; CEOT is 0.19; GDB is 0.02802. The control
variables result shows the FS average is 19.65414; LEV is 1.681492. The median
statistics shows that ACI is 1; BI is 0.857143; BS is 2.079442; CEOT is 0; GDB is
0; CaR is 0.078882; CrR is 0.030855 and LiR is 1.531071; FS is 19.78197 and LEV
is 0.151211. The skew-ness is positively skewed for all except for ACI, BI, BS
and FS.
37
4. Results and discussion

38. 
38

39. 
The table 4.2 provides the correlation of variables Pakistan’s listed banks. CaR
has a negative correlation with ACI, BI, BS, FS and LEV; while positive
correlation with CEOT and GDB. Control variable LEV has positive correlation
with BS and CEOT and with the remaining variables i.e. ACI, BI, FS and GDB
the correlation is negative. CrR has a negative correlation with all except with
GDB, FS and positive relationship with ACI, BI, CEOT and GDB. FS as a
control variable has negative correlation with BS and LEV, while positively
correlation with ACI, BI, CEOT and GDB. LiR has a negative correlation with
all except with BS, CEOT and LEV.
39
4.2. Correlation Matrix

40. 
40

41. As according to the hypothesis there exist a negative relation between BI and capital risk.
Hence H2 is accepted, same results are also concluded by (Alam & Ali Shah, 2013),
(Christy et al., 2013), (Minton et al., 2011) and (Brick & Chidambaran, 2008). These are the
results of fixed effect model as stated by the likelihood test ratio. H3 is also accepted, same
results concluded by (Berger et al., 2014) and (Muller‐Kahle & Lewellyn, 2011).
41

42. CG is negatively insignificant to the capital risk.
42

43. H5 is accepted, same results are also concluded by (Braiotta Jr et al., 2010), (Yatim,
2009), and (Abbott et al., 2002). H1 is rejected because in Pakistan board size
affected positively on bank risk, positive results concluded by (Alam & Ali Shah,
2013).
43

44. CG is negatively insignificant to the credit risk.
44

45. H5 is accepted, same results are also concluded by (Braiotta Jr et al., 2010), (Yatim,
2009), and (Abbott et al., 2002).
45

46. The average of CG dimensions is negatively insignificant to the liquidity risk.
46

47. 
 We demonstrated in this study that in our modern era, firms might no longer
confined to its basic objective and responsibility, that is, to maximize the wealth
of its shareholders. This study shows that beyond those responsibilities, firms
have to engage discretely in risk management responsibilities as well.
 Otherwise, banks might have to face less reputation, low profits, and fewer
resources. This study also provides the business, philosophical and ethical
arguments against the thought that by involving in bank risks can devastate the
profitability of a firm, which however, might be still a gear to capture long-term
benefits and competitiveness for a firm.
47
5. Conclusions

48. 48
 The main purpose of this study was to investigate the relationship between
corporate governance and risk management of banks in Pakistan. For the
purpose, we used the composite index to measure the CG measures and
estimate the bank risks with ratios. For the estimation we analyzed 20 banks
listed in Pakistan Stock Exchange (PSX) for the period of 10 years from 2009-
2018. The empirical results found that different CG dimensions impact
differently on bank risks.
 In context of Pakistan, we observed that board size affects positively on capital
risk and liquidity risk while it negatively impacted the credit risk.
 We also observed that board independence have positively impacted on credit
risk and liquidity risk. Board independence is also negatively significant to the
capital risk in Pakistan.

49. 49
 Regarding the gender diversity on board in listed banks of Pakistan, we
observed that there is positive relationship of GDB with capital risk, credit risk,
and also positively significant to liquidity risk. This might be due to the reason
that government might have some polices to enhance female culture in banks
and other firms.
 Similar observation was found for audit committee independence in Pakistan.
ACI inversely impact on the bank risks with different characteristics. It is
negatively effect on capital risk, credit risk and liquidity risk, and significant to
credit risk and liquidity risk.
 Finally, we observed that CEO turnover have also positive impact capital risk
and negatively affected on credit risk and liquidity risk. This is because of
separation of ownership and management by geographical diversity and due to
having more exposure of market and different knowledge and values to
owners.

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58. 
58