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Corporate Governance, Political Connections, and Bank Performance

Muhammad Haris (), Hongxing Yao (), Gulzara Tariq (), Hafiz Mustansar Javaid () and Qurat Ul Ain ()
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Muhammad Haris: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Hongxing Yao: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Gulzara Tariq: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Hafiz Mustansar Javaid: School of Economics, Sapienza Università di Roma, 00161 Roma, Italy
Qurat Ul Ain: School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China

International Journal of Financial Studies, 2019, vol. 7, issue 4, 1-37

Abstract: This study investigates the impact of corporate governance characteristics and political connections of directors on the profitability of banks in Pakistan. The study uses the data of 26 domestic banks over the latest and large period of 2007–2016. Our findings firstly affirm that bank profitability is negatively affected by the presence of politically connected directors on the board, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin. Secondly, our findings also affirm the negative political influence on the sustainability of the banking industry, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin during the government transition of banks having politically connected directors sitting on their board. Our findings further report an inverted U-shaped relationship between board size and bank profitability, suggesting that a board size beyond 8–9 members decreases the profitability. The study further finds a positive impact of board composition, board independence, and director compensation on bank profitability, while also finding a negative impact of frequent board meetings, presence of foreign directors, and audit committee independence.

Keywords: Pakistan; banks; profitability; corporate governance; political connections (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 F2 F3 F41 F42 (search for similar items in EconPapers)
Date: 2019
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