Corporate Governance Changes in Pakistan’s Banking Sector: Is There a Performance Effect?

In this paper we explore the role of the static, selection and dynamic corporate governance changes on performance of commercial banks. We use stochastic cost frontier and panel data methods for an unbalanced panel data of Pakistani banks from 1991 to 2005. We find overall bank cost inefficiency of 36%, which has decreased at the rate of 5.7% per annum. Our results indicate that the static and dynamic corporate governance changes lead to different short-term and long-term efficiency trends, which assure that the short-term efficiency gains (losses) do not preclude the possibility of a reversal in the long-term trends. Our results show that privatization and government restructuring of state-owned banks lead to substantial short-term efficiency losses, but their performance generally improves over time when these banks adjust and adapt to the new competitive environment. Similarly, efficiency gains associated with M&As overwhelm the increasing pre-governance change X-inefficiency levels. Our results also predict that the banks selected forcorporate governance changes are expected to hold on to the X-inefficiency gains even in the near future. The paper thus enriches the line of studies in the corporate governance literature that could help policy makers engage in an informed decisionmaking to improve the efficiency of financial institutions.