Corporate governance reforms and investment efficiency: evidence from an emerging economy

This study examines the effect of reforms in corporate governance code on investment efficiency in the emerging economy. The study uses quarterly financial data of non-financial firms listed on the Pakistan Stock Exchange. This study finds that reforms in corporate governance code improve investment efficiency by mitigating agency problems. In addition, corporate governance reforms are more helpful in curbing overinvestment than underinvestment. The study further divides the sample into politically connected and non-political connected firms for additional analysis and finds that corporate governance reforms have no role in improving the investment efficiency for politically connected firms. The study also finds that corporate governance reforms effectively mitigate overinvestment for non-political connected firms than politically connected firms. Overall, these findings imply that increasing the monitoring role by corporate governance mechanisms can reduce agency conflicts and improve corporate investment decisions. Further, Legal restrictions are required on political connections as overinvestment is not good for the economy.