







































 
 

 

110 
© 2020 by the authors; licensee Asian Online Journal Publishing Group 
 

Economy 
Vol. 7, No. 2, 110-118, 2020 

ISSN(E) 2313-8181/ ISSN(P) 2518-0118 
DOI: 10.20448/journal.502.2020.72.110.118 

© 2020 by the authors; licensee Asian Online Journal Publishing Group 

    
 

 
 
 
Does an External Governance Framework Enhance the Performance of Pakistan's 
Banking Sectors? Foreign Ownership as Moderator 

 
Shoaib Ali1    

Hafiz Muhammad Naveed2    

Abubakar Khaliq3 
 

( Corresponding Author)  
1School of Management, Jiangsu University, Zhenjiang, China. 

 
2School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu Province, China. 

 
3 Hailey College of Commerce, University of the Punjab, Lahore, Pakistan.  

 

 
Abstract 

This study would determine how external governance structure improves the performance of 
listed banks in Pakistan with the return on assets (ROA), return on equity (ROE), earnings per 
share (EPS) and dividend payout ratio (DPR) estimates. The study concerned external corporate 
governance with the presence of foreign ownership as a moderator. The sample design of the 
study is listed banks in Pakistan stock exchange (PSX) from 2009 to 2018 with the availability of 
foreign ownership data. The data are gathered from financial statements, shareholding trends, and 
the credit rating agencies Pakistan (PACRA). The panel data approach (fixed and random effect 
model) was reversed to serve a different research objective and the study goals. The results 
showed that the external mechanism of governance performs an important part in the 
transparency and efficiency of the banking sectors. The banks could also increase foreign 
investment if they get better external governance mechanisms. This work will help commercial 
banks resolve the issues and improve compliance with the corporate governance code, and devise 
strategies for better functioning. This research is inconsistent as none defined the governance of 
the external system with the moderator presence in Pakistan. 

 
Keywords: External governance, Performance, Foreign ownership, Banking system, Pakistan. 

JEL Classification: E58; G21; G32; G34. 
 

Citation | Shoaib Ali; Hafiz Muhammad Naveed; Abubakar Khaliq 
(2020). Does an External Governance Framework Enhance the 
Performance of Pakistan's Banking Sectors? Foreign Ownership as 
Moderator. Economy, 7(2): 110-118. 
History:  
Received: 18 September 2020 
Revised: 12 October 2020 
Accepted: 26 October 2020 
Published: 9 November 2020  
Licensed: This work is licensed under a Creative Commons 

Attribution 3.0 License  
Publisher:  Asian Online Journal Publishing Group 
 

Acknowledgement: All authors contributed to the conception and design of 
the study. 
Funding: This study received no specific financial support. 
Competing Interests: The authors declare that they have no conflict of 
interests. 
Transparency: The authors confirm that the manuscript is an honest, 
accurate, and transparent account of the study was reported; that no vital 
features of the study have been omitted; and that any discrepancies from the 
study as planned have been explained. 
Ethical: This study follows all ethical practices during writing.   

 

 

Contents 
1. Introduction .................................................................................................................................................................................... 111 
2. Literature Review .......................................................................................................................................................................... 112 
3. Methodology Design ..................................................................................................................................................................... 113 
4. Results and Discussions ................................................................................................................................................................ 114 
5. Conclusion ....................................................................................................................................................................................... 116 
References ............................................................................................................................................................................................ 116 
 

 
 

 

 

 

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Contribution of this paper to the literature 
This study contributes to existing literature by determining how external governance structure 
improves the performance of listed banks in Pakistan with the return on assets (ROA), return on equity 
(ROE), earnings per share (EPS) and dividend payout ratio (DPR) estimates. 

 
1. Introduction 

The organization's main goal is to figure out the issues and then seek to minimize the challenges of 
implementing corporate practices and mitigating misunderstandings. The poor corporate governance system and 
globalization of the capital markets have disrupted governance the monetary market both domestically and 
internationally (Sohail, Rasul, & Fatima, 2017). In a company, the investors and consumers may be in the same 
place, and they could partner with multiple countries. The control board should be at the top level determined and 
check the efficiency of how issues can be solved because they can be detrimental to financial institutions. Several 
theories about (i.e. stakeholder, signaling, and resource dependency, etc.) play an important role in the 
establishment of a successful stockholder-management relationship. 

The responsibility of stakeholder concerns that executives and organizations struggle because of personal 
gains and poor governance structure. Wijnberg (2000) defined a community or individual as stakeholders who may 
affect the success of the aims or priorities of the organization. Corporate governance has the function of offering an 
assurance that managers are working to boost the returns of shareholders. The theory of stakeholders is the 
opposite the philosophy of the agency and its manager are seen as a participant rather than an entity. 
Organizational performance and shareholder satisfaction are the main relationships that explain long term 
organizational effectiveness (Donaldson & Davis, 1991). Another use is the resource dependency theory, which 
demonstrates a lack of all the institution's resources and expertise needed to achieve the desired results and achieve 
organizational objectives. Hence, it relies on the resources and hardships of an organization that exceeds the 
central agency's capacity (Reitz, 1979). The theories outlined above suggest an organizational governance 
framework that improves the firms' efficiency. 

The Agency issues insolvency root for different organizations (i.e. WorldCom and Enron) and this purpose 
(such as the Blue-Ribbon Committee; the Federation for Economic Cooperation and Growth or the OECD; the 
Cadbury Group; the King Committee; the European Surveillance Dealers' Federation or the EASD and the 
Banking Supervisory Group of Basel) clarified the criteria and principles for the management of issues. Such groups 
aim to strengthen the corporate governance foundations for a monitoring framework to come up with corporate 
governance. However, deals with business management's privileges and responsibilities, the organization, and the 
interests of the stakeholders. 

Banks are classified as intermediaries, which gather money from depositing investors, lend it, and verify on 
their behalf. Levine (2003) argued that heavy dependence on the banking industry is the driving force of economic 
growth in developing countries although Arun and Turner (2004) described, that in the underdeveloped monetary 
markets, banking sectors are the most-vital basis of financing for the mainstream of the organizations and core 
collection for the economic reserves. Hence, the worth of banking sectors in the economy and the breakdown of the 
banking sectors will straight disturb the monetary flow of the economy (Banerjee, 2005). 

The banking institutions and external governance create an operative situation among the management, 
stakeholders, investors, and creditors for the sake of improving its success. In Pakistan, the system of governance 
code for banks was first introduced in 2003 by the State Bank of Pakistan (SBP), but subsequently, it was updated 
and acquired a new governance framework with improvements from 2009 to 2011. Pakistan is an emerging 
country and its banking industry is faced with problems including high-interest rates, equity inflows or outflow, 
the narrow scope of commodities, indiscriminate consumption and pledge loans, undiversified managerial budges, 
and union intervention in forecasting, poor decision-making, weak human means allocations, and weak external 
operations. The predictors and experts analyzed that the main reason for the poor performances of the firms is the 
lack of a comprehensive corporate governance mechanism. 

The prior research was concentrated on financial or non-financial sectors to evaluate corporate governance's 
relationship to firm performance. This study focuses on the effect that the governance process has on the viewpoint 
of the banking institutions. The banking sector and the corporate governance structure are explained by the banks 
themselves. A wider corporate governance view should be enforced attributable to banking organizations, affecting 
both creditors and stakeholders (Mullineux, 2006). 

The shortcomings of the governance system contribute to financial fraud and powerlessness. According to a 
report banking institutions with poor regulations were exhausted (Peni & Vähämaa, 2012). This has explained that 
insufficient corporate governance will adversely cause problems with the economic list of a country (Sharma & 
Rathi, 2014). Governance mechanisms fragile and wide-open participation in financial represent obstacles to 
financial market regulation at home. Financial organizations are facing many problems recently in a global 
environment without governance. There are still issues with the essence of banking, the regulatory process, 
shareholders, creditors, and forecasters. 

This research intends to examine the impact of governance mechanism on the performance of listed banks in 
Pakistan. There are distinct codes of a governance mechanism for commercial institutions while SBP articulates in 
the shape of prudential regulations. This research contributes some novelty to the current literature. First of all, 
the data establish more expressive, comprehensive, and the target population of the study is private banks 
identified in PSX, the sampling technique is purposive. We have taken steps from the conventional framework of 
the earlier literature and, regardless of how internal governance is determined, we have used external structures to 
protect minority shareholders (PMS), financial transparency, external auditors, and foreign ownership as 
moderators. 
 
1.2. Objectives of the Study 

• To assess the effect of PMS on the performance of banks with the moderator of foreign ownership. 



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• To identify the impact of financial transparency on the performance of banks with the moderator of foreign 
ownership. 

• To analyze the effect of external auditors relating to bank performance with the moderator of foreign 
ownership.  

 

 
Figure-1. Theoretical framework. 

 
The paper is managed as follows. In unit 2 we elaborate theoretical analysis for the encouragement of external 

governance mechanisms and engaged empirically hypotheses to test. Unit 3 consists of a description of the target 
population, as well as the firms’ aspects that are considered in our study. In unit 4 their results regressed 
explanations with a panel data approach (fixed and random effect model). Finally, unit 5 states our conclusive 
remarks. 
 

2. Literature Review 
There are significant facts concerning the value of governance mechanisms in banking institutions. The 

governance mechanism would be capable to decrease seize of bank reserves and encourage bank competency 
(Caprio, Laeven, & Levine, 2007). The banking sectors have been contributed positively to the performance of the 
firms (Eldomiaty & Choi, 2011). Banking institutions in Germany as features universal banking system are 
operating financing institutions in comparison with capital markets. There is a need to involve more part of the 
governance mechanism to maintain positions of lenders, major stakeholders, underwriters, corporate position 
holders, stock exchange position holders, and communicating vote rights by the minority of shares (Lowengrub, 
Luedecke, & Melvin, 2004). Tulepova (2017) argued that in a circumstance of huge credit-ship where organizations 
depend on credit from financial sectors, banking institutions can perform governance roles by analyzing the 
organization's actions, annually audit, and enforce penalty payments. Thus, the comprehensive governance 
mechanism of banking institutions enhances the chances that banks will exceed sound governance mechanisms 
over other organizations. 

This study analysis defines the connotation of corporate governance and the performance of banking 
institutions. The monetary power of an organization is closely associated with good corporate governance. 
Ownership structure, legal underlay with PMS, financial disclosure, and external auditors are constructive 
measures that have a major impact on the operations of banking firms' results. 
 
2.1. Protection of Minority Shareholders 

There has been the practice that conflicts of compensation occur between the shareholder minority and the 
majority of shareholders. This is a legal defense framework for the PMS and its stock trading on the capital 
markets. Corporate governance relating to investigation approvals, economic position, conditions on the capital 
market, independent statutory structures, managing the economy theory aspects, institutional growth, investment 
frameworks, and PMS testimonials (Bai, Liu, Lu, Song, & Zhang, 2006).  

There are also disputes about the relevant PMS standard. Different types of experts have different opinions 
when addressing PMS. Coffee and Schwartz (1981) emphasized several important points about PMS imitation 
procedures, such as mismanagement and harassment prevention. It also reduces the risks involved in the corporate 
administration of service payments. According to Fischel and Bradley (1986) concerns about the validity of 
criminal prosecutions are imitative about PMS. They also encouraged managers to work collectively for PMS and 
other firms, while many instruments for corporate governance initiatives require explicit disclosure statements 
from management for minority shareholder litigation. A minority of stockholder’s usefulness because they do not 
perform the minimal level in determining the indemnity for a useful outcome. The investigators do not present an 
empirically valid approach to measures the weak institutional return flow as it does not yield reliable PMS 
behavioral results (Thompson & Thomas, 2004).  

H1= PMS positively increases the performance of the banks with foreign ownership as a moderator. 
 
2.2. Financial Transparency 

Public confidence is reduced from financial institutions that have a negative effect on social, economic trends 
which actions towards poor results (Cadbury, 2011). Procedural accountability and facts reveal critical and 
essential aspects of the governance process (Damodaran, 2007). Corporate governance is a set of principles for 
promoting transparency, honesty, morals, ethics, equity, duty, and accountability in the policies and practices of the 
board of directors of the company. Granof (2003) also clarified that the corporate structure fulfills the role of 
authority, guiding principles, participation, honesty, respect for shareholders' rights, processes, practices, 
governance policies, financial transparency, accuracy, and performance access results. The financial accountability 



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and confidentiality of current-state data are central to corporate processes. Corporate governance codes exist, 
group trust with knowledge revealing is called an exchange feature to detect the institution's functioning. The 
prior research information presented and considered non-binding which is used to appease creditors and capital 
markets (Healy & Palepu, 2001). 

In addition to this, there is a negative relationship between financial transparency and organizational 
performance (Chen, Chung, Lee, & Liao, 2007). On the other side, The correlation between financial transparency 
and organizational growth is positive (Bai et al., 2006). Organizational performance can possible to increase if it 
achieves a good credit rating, which enhances its fame, and more stockholders engage for investment (Lukas & 
Basuki, 2014). 

H2= Financial transparency positively associated with the performance of the banks with foreign ownership as 
moderators. 
 
2.3. External Auditors 

An addition to the governance mechanism is external auditors which can control administrative unrestricted 
activities. Watts and Zimmerman (1983) explained that on the base of stakeholder theory, an external audit 
decreases instruction inequality between the director and the operator and reduces conflicts of interest. Botez 
(2009) identified the primary function of the International Accounting Standard (IAS) for external auditing is to 
restore the competencies to trust users in the assessment of financial statements to preserve the accountability 
environment and to satisfy stakeholders. IAS will enhance control and timely auditing of financial data during IAS 
through banks and corporate decision-makers, and the use of processes in decision making. Afify (2009) There is 
confirmation that coverage and reporting rates reduce asymmetries between internal and external information and 
increase marketplace performance. Al-Ajmi (2008) also indicated that it is necessary to look at the possibilities and 
risks for negative payments during an argument and elimination of the financial market bad rumors about 
performance. The reducing number of tests carried out by coordinating to internal auditors, especially those 
concerned for external auditing that is the main function (Abbott, Parker, & Peters, 2012). 

A study has a significant effect on the internal investigators working with external auditors. It is also 
considered to have implications that would lead to improvements in the financial statement audit report being 
reviewed, which is prepared by external auditors. Timely operations conducting audit procedures and audit-related 
tasks. The prior research between external audit and earnings management revealed a poor relationship with 
external auditors and a huge risk (Becker, Defond, Jiambalvo, & Subramanyam, 1998).  

H3= External auditors positively increase the performance of the banks with foreign ownership as moderator. 
 
2.4. Foreign Ownership 

The ownership structure has different predictions which include foreign ownership, government ownership, 
ownership concentration, and managerial ownership, etc. But this research focused on foreign ownership as a 
moderator. Earlier studies have examined the multi-measurements ways of connection between ownership 
structure and performance. Institutional ownership has a significant positive association on performance (Badrul & 
Shahid, 2012). The organization without managerial ownership executes less efficiency than those organizations 
that use more managerial ownership. 

On the other side, foreign ownership plays a vital role in financial firms’ performance. Also, foreign stockholder 
looks to choose huge cash organizations with large stocks of their reserves in large organizations (Dahlquist & 
Robertsson, 2001). Bokpin (2013) argued banks that have domestic ownership are low profit-maker but as 
compared those banks who have foreign ownership are making huge profits. Foreign ownership has a positive 
relationship with financial institutions (Dahlquist & Robertsson, 2001). The foreign investors play an efficient role 
in growing countries and create a leading environment (Micco, Panizza, & Yañez, 2007). International corporations 
have a new framework, regulations, and standards that do not exist in the domestic market until the national 
banking system functions better (Bris, Brisley, & Cabolis, 2008). They also clarified that when international 
investors participate, the firm's profitability and credibility improve.  
 

3. Methodology Design 
3.1. Description of Data 

This research entirely focused on quantities sources from the listed banks on the Pakistan Stock Exchange 
(PSX), excluding foreign banks due to data unavailability. The data is collected from the State Bank of Pakistan 
(SBP) website, annual report of banks, the shareholders' patterns, and Pakistan Credit Rating Agency (PACRA) 
from 2009 to 2018. A total of 23 commercial banks was listed in PSX during the study. Thus, banks with 
insufficient data were removed from the study. So, the final sample of data comprised 22 listed banks with 204 firm 
annual observations. This research looks at the external governance structure and econometric model used for the 
target population in the explanatory variables. 
 
3.2. Structure of Variables 

We assess the external governance process with the PMS, financial transparency, and the external auditor to 
check the relationship on organizational performance with ROA, ROE, EPS, and DPR. In addition to this, we also 
measure the effectiveness of the commercial bank’s performance with foreign ownership as a moderator. Two 
control variables as bank size and leverage are included in the regression to control the bank definite elements that 
may change the performance of firms. Operationalization definitions of these variables are listed in Table 1. 

 

3.3. Econometric Assessment 
The data in this research include banks with 204 observations from 2009 to 2018. This research was applied to 

the panel data approach (fixed or random effect model) for the analysis of the results. The MorckHausman (1978) 
test used when the model with the fixed effect is an accurate or random-effect model to an assortment of activity 
(Moussa & Aymen, 2014). 



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Table-1. Variable development interpretations. 

Variables names Kind of variables Short-form Proxies 

Return on Assets Dependent ROA Return after tax proportion to total assets. 
(Al-Saidi & Al-Shammari, 2013). 

Return on Equity Dependent ROE Return after tax proportion to stockholder’s 
equity. (Badrul Muttakin & Shahid Ullah, 
2012)  

Earning Per Shares Dependent EPS Return after tax proportion to numbers of 
common stocks. (Sheikh. & Karim, 2015) 

Dividend Payout Ratio Dependent DPR Total dividends proportion by net return. 
(Mason, Franks, & Broyles, 1980)  

Protection of Minority 
Shareholders 

Explanatory PMS If the stocks are exchanged on the stock 
market then 1, otherwise 0. (Bai et al., 2006)  

Financial Transparency Explanatory FT Reflects score advertised by the 
organizations in the market for its stable 
financial situations. (Bai et al., 2006) 

External Auditors Explanatory EAUD Represented as if the bank is inspected by 
the external auditor 1, otherwise 0. 

Foreign Ownership Moderator  FOWN Evaluated from financial statements of 
banks (stockholder scheme). 

Bank Size Control BS “Natural logarithm of the total assets”.   
Leverages Control LEV “Ratio of total liabilities to total assets” 

(Sheikh. & Karim, 2015)  

 

3.3.1. Unmoderated Estimates 
To analyze the above stated hypothesis, four equations are developed, which are given below: 

First model: 

ROAit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ πit 

Second model: 

ROEit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ πit  
Third model: 

EPSit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ πit  
Fourth model: 

DPRit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ πit  
 

3.3.2. Moderated Estimates 
Four equations are developed with moderator, which are given below: 

First model: 

ROAit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ β7i.PMS*FOROWNit+ 

β8FINTR* FOROWNit+ β9i.EXAUD* FOROWNit+ πit 

Second model: 

ROEit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ β7i.PMS*FOROWNit+ 

β8FINTR* FOROWNit+ β9i.EXAUD* FOROWNit+ πit 

Third model: 

EPSit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ β7i.PMS*FOROWNit+ 

β8FINTR* FOROWNit+ β9i.EXAUD* FOROWNit+ πit 

Fourth model: 

DPRit = α0+ β1i.PMSit+ β2FINTRit+ β3i.EXAUDit+β4FOROWNit+ β5BNKSIZit+ β6LEVGSit+ β7i.PMS*FOROWNit+ 

β8FINTR* FOROWNit+ β9i.EXAUD* FOROWNit+ πit 

 

4. Results and Discussions 
4.1. Hausman Test Information 

The MorckHausman (1978) introduced differentiation both the fixed and the random-effect model. For the data 
analysis, a combination of time series and cross-sectional data was also used, and by applying the time series and 
cross-section observation, panel data identify accurate and reliable results that can add some valuable information 
in research. The panel data approach calculates the impact that is not observable in pure time series knowledge 
(Mason et al., 1980). The panel data were selected for more accurate results from the banking sector and minimizes 
the biases. 

A conclusion that P<0.05 as evidence that there are two models dissimilar enough to reject the null hypothesis 
at the conformist level of significance, there is to reject and simulate of random effects in place of a fixed-effect 
model. As a modal estimation, the Hausman test was employed for each experiment to decide if the fixed effect 
model is the correct one, or if the model is better for the random effect. 
 

Table-2. Hausman test elucidation. 

Models Variables Chi P-value Accept or Reject Fixed or Random model 

First ROA 4.09 0.218 H0: Accept Random 
Second ROE 1.89 0.914 H0: Accept Random 
Third EPS 5.1 0.305 H0: Accept Random 
Fourth DPR 59.14 0.001 H0: Reject Fixed 

 



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According to the test standards Table 2 shows that model first, second, and third accept the null hypothesis 
(H0) and the random model is applying. But on the other side, the fourth model rejects the H0 and fixed effect 
random effect model applies.  

Table 3 showing a combined summary of statistics and correlation matrix. The mean ROA is 9.01% and ROE 
is 43.12%. Similarly, the mean of EPS and DPR are Rs.1.90 and 6.92 respectively. This percentage is a little high in 
commercial banks than other non-financial institutions and other variables are showing low percentage results as 
compared to Sheikh, Wang, and Khan (2013); Sheikh. and Karim (2015); Sohail et al. (2017). Besides that, the 
matrix of correlations showing there is no severe multicollinearity among these variables. 
 
4.2. Correlation Matrix and Statistics  
 

Table-3. Descriptive statistics and correlation matrix. 

Variables Mean SD ROA ROE EPS DPR PMS FT EAUD FOWN BS LEV 

ROA 0.0901 0.4209 1          
ROE 0.4312 0.7038 0.745** 1         
EPS 1.9012 2.0945 0.567** .456** 1        
DPR 6.9231 1.9341 0.614** .546** .767** 1       
PMS 0.0340 0.2304 -0.317* -.322* -.657** -.510** 1      
FT 0.2035 0.5902 -0.108 -0.139 -0.14 -.326** -0.044 1     

EAUD 1.2091 0.2684 -0.003 -0.142 -0.104 -0.024 0.0 -0.182 1    
FOWN 0.6102 0.0236 .465** .234* .276** .297** -.317** .203* .331** 1   

BS 8.5024 2.7649 0.191 .351** .268** .273** 0.061 0.055 -.235* -0.184 1  
LEV 2.0612 1.3876 -.341** -0.063 -0.19 -.305** 0.065 .216* -0.057 -.357** .239* 1 

Note:  **Correlation is significant at the 0.01 level (2-tailed). 
*Correlation is significant at the 0.01 level (2-tailed). 

 
The results of Table 4, the First model designates that the PMS has a negative impact on ROA. It indicates 

that PMS does not participate to increase firm performance. This is useless to PMS because they do not play any 
part in putting organizational performance inducements (Thompson & Thomas, 2004). Further, for the sake of 
motivation to act positively with a minority of stakeholders and other companies that may play a positive role in 
firm performance. The financial transparency indicates negative and insignificant measurements on ROA. Financial 
transparency and company results have a negative relationship (Chen et al., 2007). Financial transparency does not 
play a part to enhance firm performance. The external auditor shows a positive and insignificant relationship on 
ROA. The more external auditors reveal objection about the trustworthiness of financial information which is 
communicated via the financial statements of banks. A prior study between external audit and earning management 
showed a negative relationship and a huge risk with external auditors (Becker et al., 1998). After regressed 
moderation, PMS shows positive and insignificant relationship on ROA, which means the participation of foreign 
ownership can increase the efficiency of banking institutions. 
 

Table-4. Effect of the external governance framework on banking sector performance. 

Variables First model ROA 
Coefficient    
Probability 

Second model ROE 
Coefficient    
Probability 

Third model EPS 
Coefficient    
Probability 

Fourth model DPR 
Coefficient   
Probability 

PMS -0.505* 0.274 -7.252 0.077 -7.654** 0.114 0.000 0.691 
FT -0.013 0.040 -0.951 0.087 0.150 0.086 0.273 0.108 

EAUD 0.145 0.215 -2.326 0.024 0.745 0.063 -15.62* 0.256 
BS 0.142 0.103 3.330** 0.115 1.576*** 0.020 -26.10 0.054 

LEV -0.026 0.037 -0.336 0.045 -0.083 0.003 0.457 0.010 
FOWN -0.017 0.034 -0.306 0.282 0.589*** 0.012 -3.230 0.021 

FOWNPMS 0.002 0.007 -0.021 0.558 -0.033 0.052 2.506 0.023 
FOWNFT 0.001* 0.001 0.017 0.091 -0.019** 0.423 -0.003 0.201 

FOWNEAUD -0.010 0.026 0.081 0.129 -0.176 0.231 3.398* 0.432 
Constant 2.901 - 45.67 - 4.240 - 153.7 - 

Wald chi2 30.41 - 40.74 - 160.2 - 6.41 - 
Note: Standard errors in parentheses. 
*** p<0.01, ** p<0.05, * p<0.1. 

 
Financial transparency indicates positive and significant measurement on ROA, which indicates through 

foreign ownership financial transparency plays an important role in the advancement in banks' performance. 
Financial transparency is measured positively on firm performance (Bai et al., 2006). The external auditor reveals a 
negative and insignificant association on ROA. It shows that the participation of foreign investment and the 
capability of disclosing is essential to restrict banking performance. It is most valuable that an external auditor 
should retain his client sovereignty (Lennox, 1999).  

The results of the second model indicate that PMS effects on ROE negative and insignificant. It explains 
considering PMS does not generate profit for the firm. Wei-qi (2010) highlighted, to produce PMS interest, the 
focus must be pay on disciplining a firm when it issues any material or annual report. The effect of financial 
transparency on ROE is negative and insignificant, that would be banks do not have enough consideration to 
maximize the profit. Besides this, there is one negative measurement of financial transparency on organizational 
efficiency (Chen et al., 2007). The external auditor has a negative insignificant measurement of ROE. Based on this 
result external auditors do not participate in incremental return for banks. On the other hand, external auditor has 
a positive relation with co-audit (Boulila Taktak & Mbarki, 2014). 

Therefore, after regressed moderation, PMS has negative insignificant relation on ROE, which shows even 
participation of foreign investors does not increase banks' performance. In addition to this, it is normally argued 
that foreign investors demand a high quality of information because of their fame (D'Souza, Nash, & Megginson, 
2005). The financial transparency has a positive insignificant impact, which shows that cooperate foreign investors 



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play a significant side. So, External auditors have a positive impact and indicate that they participate in the 
advancement of the firm return. 

The results of the third model, show that PMS has a negative and significant effect on EPS. It highlights that 
focusing on PMS does not improve earnings on shares. The specialists would not suggest the easy way that 
analyses the poor flow value of organizations as it would not offer positive outcomes for the benefit regarding PMS 
(Thompson & Thomas, 2004). Whereas, financial transparency has positive and insignificant relation with EPS, 
which explains the credibility of banks plays a vital role to maximize the return on shares. Transparency of 
functioning and revelation of key information are the basic dimensions of governance mechanism (Bushman, 
Piotroski, & Smith, 2004; Damodaran, 2007). The external auditor on EPS is a positive and significant effect, which 
reveals that it increases profit on shares effectively. So, after running moderation PMS has a negative insignificant 
impact on EPS, which examines that after engaging foreign investors do not enhance return on shares. Financial 
transparency has a negative significant role and indicates that it does not improve return on shares with foreign 
ownership. The external auditors have negative effects and reveals that they with foreign investors do not enhance 
return on shares. Therefore, the external auditors have a negative relationship with organizational efficiency 
(Boulila Taktak & Mbarki, 2014). 

The outcomes of the fourth model show that PMS has a positive and insignificant relation on DPR. It 
interprets that PMS plays an important role in the retained amount in the firm and help to pay its debts. PMS also 
reduces the costs of the agency fees found in the management of companies. Besides, financial transparency affects 
DPR positively and insignificantly, it highlights that transparency must help banks to pay off their outstanding. 
Financial transparency has a positive connection with the success of organizations (Bai et al., 2006). The external 
auditor has negative and significant relation on DPR, it means that it does not help to firm for reserve. Sometimes 
it causes an imbalance between firms and external audit firms (Bennecib, 2004).  

While regressed moderation, PMS has positive and insignificant relation on DPR which examines that foreign 
investors are more vigilant in observing activities than with domestic investors (Ferreira & Matos, 2008). 
Aggarwal, Erel, Ferreira, and Matos (2011) examined that foreign investors also play a valuable role in enhancing 
governance mechanisms, particularly in countries with the protection of weak stakeholders. The financial 
transparency has a negative impact and shows that it does not take part in retained firm debt even with foreign 
investors. The information provided is deemed non-binding and can be used to accommodate the financial system 
and investment firms (Healy & Palepu, 2001). The external auditors have positive significant relation and they paid 
the efficient debt of the firm with the engagement of foreign investors. External auditors are another governance 
mechanism that restrains administrators’ non-compulsory activities. 

In brief, the positive and negative impact of explanatory variables before and after moderation on banking 
performance shows that instead of weak governance mechanism in-country external governance seems to have a 
worthwhile impact on the performance of banks. Aggarwal et al. (2011) explained that foreign stakeholders also 
play an effective role in the activities of upgrading governance structures, especially in countries with weak 
governance practices. 
 

5. Conclusion 
The study analyzed the effect of the external governance structure on the commercial bank’s performance in 

Pakistan. The panel technique has regressed as the sample design includes 23 listed banks in PSX from 2009-2018. 
The study examined four models to inspect the relationship of external mechanisms on banking sectors. This 
research intended to investigate the components of governance mechanism that source to upgrade the efficiency of 
banking institutions. The findings investigated that PMS does not play a considerable part in the performance even 
with foreign ownership (Anderson, Chi, & Liao, 2019; Shan, 2013; Thompson & Thomas, 2004). The foreign 
stakeholders also play an effective role in the advancement of governance mechanism activities, especially in those 
countries that have weak governance practices Aggarwal et al. (2011). The financial transparency direct and 
moderation shows the same results which enhance the improvement of the performance of banks (Bai et al., 2006; 
Chen et al., 2007). Furthermore, the external auditors show mixed results in four models which is to retrieve user 
confidence in the financial statement the transparency ecosystem should be maintained, and stakeholders satisfied 
(Botez, 2009). In sum, it comes up with the motivation to supervise performance practices in banking sectors. 
Although the external auditor's ability to show reservations has obstructive effects on the manager's tact. 

In addition to this, results indicate that instead of weak governance mechanism there is still governance 
measures considerably affect the bank performance in Pakistan. Bank administrators, depositors, prospect 
shareowners, should consider the value of these measures although making forecasting or decisions. 

Furthermore, legislative authorities should follow some important measures to apply regulations for 
productive governance mechanisms in the country. We have explained the impact of some external governance 
analyses regarding the performance of banks listed in the PSX. So, there is still a need to examines the impact of 
some other governance variables like separation of CEO, committee designs, rights, and responsibility of 
shareholders on the profit of banking sectors. The external governance can also check by including international 
banks that are working in Pakistan but not included in this study due to data unavailability. 
 

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