Corporate Governance & Sensitivity of Investment to Cash Flows (Evidence from Pakistani Listed Non- Financial Firms)

Abstract

Corporate governance has improved the working of the businesses as it provides discipline and certain approaches to the firms to run and conduct their tasks. In corporate governance, there is a team of board of governors hired specifically to look after the approaches that are essential to grow business without taking much risk. In Pakistan, the term corporate governance is relatively new and is slowly adopted by the companies. However, there are large number of firms that follow those guidelines provided by the board of directors to excel their businesses. Cash flow is an important part of any company's investment plans. As the term is new and not many companies know hov,, to develop effective governance, the firms are di villed to weak and strong corporate govemance. The existing studies also showed the illl pOI1 ::t nce of corporate go\'ema.ncc and its impact on cash flow and investments. In this study, the main focus is to find the impact of weak and strong corporate govemance firms on sensitivity of investment to cash flows. For this purpose, a large pool of non-financial fim1s from Pakistan stock exchange are chosen and divided into two groups of firms with weak and strong corporate governance. Different sectors are chosen for the collection of firms which are then divided into two groups. For weak corporate governance, 875 firms are observed and 700 firms are observed for strong corporate governance. To find the results, regression models and pooled regression techniques are applied. The results prove both the hypothesis to be true and accurate. First hypothesis says that firms with strong corporate governance use internal cash flows for investments while second hypothesis says that firms with weak corporate governance use internal cash flows for negative NPV investments. The main significance of this study is towards the stakeholders who will get to know about the companies they are investing in. They' ll also know whether the company cares about their benefits and interests or not. The financial health of the company is also discussed which clears the air about the risk of a company going into default. Banks will also get benefitted by the fact that if corporate governance is strong, they should use internal funds. So the creditors will have to reinforce their policies with low interest loans.