Role of Corporate Governance to Mitigate the Idiosyncratic Risk in Non-Financial Sector of Pakistan

Abstract

The primary focus of this study is on the relationship between idiosyncratic risk and corporate governance. A secondary focus of the study is on the relationship between firm performance and corporate governance. Then, a potential corporate governance-to-idiosyncratic volatility-to-firm performance link is considered. In this study, corporate governance is approached in the context of internal governance control, based on board structure, composition, ownership, ownership structure, audit committee structure and quality. These are the essential elements of corporate governance, and relevant for studies pertaining to a market with internal-governance characteristics, such as the Pakistan market. The market of Pakistan provides a unique study that is based on market with its distinct characteristics. It is the market with internal-governance-control characteristics that operates in an internal-governance-control system. Therefore, this study has applied data draw form firms listed under the aforementioned of the Pakistan Securities Exchange (PSE). The data used in this study are taken from the PSE, the 104 listed firms for the year’s 2004-2016. The primary conclusion of the study is that there is a clear relationship between idiosyncratic risk and corporate governance. Specifically, this study finds consistent and significant relationship between idiosyncratic volatility and a number of firm-level corporate governance variables. The variables include among others, CEO duality, firm size and leverage. Thus, based on these conclusions, a link between corporate governance, idiosyncratic volatility, and firm performance is implied. The results show that the firms with batter corporate governance mechanisms tend to have a lower idiosyncratic risk. The current studies differ from previous studies on idiosyncratic risk, and also previous corporate governance studies, in its focus on a relationship between idiosyncratic and corporate governance in the context of internal governance controls, and the significant finding and conclusion. Hence, this study adds a valuable contribution to the knowledge and literature on the relationship between idiosyncratic risk and corporate governance, and also to the streams of literature on both idiosyncratic risk, and corporate governance.