This study examines business groups and their impact on corporate governance in Pakistan. We use non-financial firms listed on the Karachi Stock Exchange of Pakistan for 1998-2002 periods in order to select group and non-group samples. Our analysis find that group firms have higher liquidity/short-term debt paying ability, and lower financial leverage than those of the non-group firms in each of the five years and when averaged over five-years. More importantly, we find that for the group firms, the five-year mean values of revenues and the five-year mean values of total assets grew faster than those of the non-group firms. Based on mean values of ROA, we find that group firms are more profitable than non-group firms in each year and over all five-years combined. In contrast, Tobins Q results (a market valuation measure) show that the mean values for each year and for all five-years combined are lower than those of the non-group firms. Our industry-level results are roughly consistent with those of the full samples. The divergence between ROA and Tobins Q suggests that external shareholders perceive firms affiliated with business groups to have relatively lower transparency and weaker corporate governance mechanisms than firms not affiliated with business groups. As a consequence, the market participants appear to discount the value of group firms even though these firms are more profitable than non-group firms. We interpret this evidence to indicate that investors view the business-group as a mechanism to expropriate minority shareholders. On the other hand, the comparative financial performance results suggest that business groups in Pakistan are efficient economic arrangements that substitute for missing or inefficient outside institutions and markets. We feel that our preliminary work substantially contributes to our understanding of business groups and their relationship to corporate governance and economic development in Pakistan.
Corporate Governance, Business Group Affiliation, and Firm Performance: Descriptive Evidence from Pakistan
Working Paper No. 05-35