Impact of Board Independence on firm Performance: Evidence from Pakistan

Abstract

The purpose of this study is to find relationship between board independence and firm performance. In order to achieve the purpose of the study, we collected data which is based on 76 non financial firms listed on Karachi Stock Exchange (KSE-100). There are total 100 large firms listed on KSE-100 index from 34 sectors. Out of which 76 firms are non financial while 24 firms are related to financial sectors. For our sampled firms, the study collected data for 5 years ranging from 2012 to 2016. Based on this data, we find that there is a positive relationship between board independence and firm performance. The result of the study indicates that our main variable board independence is significant and positively related with firm performance measures that are ROA and Tobin’s Q. The results of this are in the favor of agency theory predictions which says that outside directors are more associated to firm profitability than firms inside directors. Talking about control variables, firm size and firm leverage are negatively while firm age is positively related to firm performance. The results are applicable to countries having similar economic situations like Pakistan.