Muhammad Zeeshan

Supervised by Sir M Nauman Khan

BS Accounting and Finance 2019-2023

Institute of Management Sciences Peshawar

23 June, 2023
 Certificate of Approval

I confirm that I have read the research “checking inflationary trends on banking
performance” by, and my belief this work meets the criteria for approving a thesis submitted
in partial fulfillment of the requirements for the BS-Accounting and Finance at the Institute
of Management Sciences, Peshawar.

Supervisor Name: Mr. --------------------

Designation: Assistant Professor

Signature: ___________________

Coordinator Research & Development Department

Name: Dr. Saleem Gul

Signature: _________________
 Declaration
I, Muhammad Zeeshan, hereby declare that the research thesis submitted to R&DD by me is
my own original work. I am aware of the fact that in case my work is found to be plagiarized
or not genuine, R&DD has the full authority to cancel my research work and I am liable to
penal action.

Date:
 Dedication
I dedicate my work to my venerable Father, the strength and the support of my life. To my
mother for her ceaseless efforts, prayers and her love, and my beloved sister who always
appreciate what I did and supported me with whatever they could and last but not the least to
my elder uncle because of whom I am who I am.
 Acknowledgement

In the first place, thank you to the All-Powerful Allah, the Most Merciful, the Most
Forgiving, and the Most Helpful, who provided me the confidence, perseverance, and
discipline I needed to complete my research. I appreciate Sir Muhammad Nouman Khan's
help, his time, and all the work he put into helping me finish my research. I sincerely
appreciate my great buddy Muhammad Ali's unwavering encouragement and assistance
during this demanding task, as well as the love and support of my entire family, who made it
possible for me to finish my research.
Contents
Declaration.................................................................................................................................................
Dedication..................................................................................................................................................
Acknowledgement.....................................................................................................................................
Abstract:.....................................................................................................................................................
1. Chapter 1. Introduction.......................................................................................................................
1.1. Introduction................................................................................................................................
1.2. Research Objective......................................................................................................................
1.3. Scope of the research..................................................................................................................
1.4. Significance of the study...........................................................................................................
1.5. Contribution to the body of knowledge...................................................................................
1.6. Research Problem.....................................................................................................................
1.7. Research Questions...................................................................................................................
2. Chapter 2. Literature Review............................................................................................................
2.1 Board Size..............................................................................................................................
2.2 NED........................................................................................................................................
2.3 Board Gender........................................................................................................................
2.4 Control Variables...................................................................................................................
3. Chapter 3. Data and Methodology...................................................................................................
3.1 Research Design........................................................................................................................
3.1.1 Return on assets................................................................................................................
3.1.2 Return on equity...............................................................................................................
3.1.3 Board Size..........................................................................................................................
3.1.4 Board Composition............................................................................................................
3.1.5 Board Gender....................................................................................................................
3.1.6 Board Gender Diversity.....................................................................................................
3.2 Theoretical Framework.............................................................................................................
3.3 Variables....................................................................................................................................
3.4 Data Sources..............................................................................................................................
3.5 Research Model.........................................................................................................................
3.6 Sampling and Population..........................................................................................................
3.7 Data Analysis.............................................................................................................................
3.8 Uniqueness of the study...........................................................................................................
4 Chapter 4. Findings and Data Analysis..............................................................................................
 4.1 Descriptive Statistics.............................................................................................................
4.2 Correlation Matrix.....................................................................................................................
4.3 Regression (Linear and non-linear form of board)...................................................................
5. Conclusion:........................................................................................................................................
5.1 Limitations.................................................................................................................................
References.................................................................................................................................................
 Abstract:
The purpose of this research is to observe how board characteristics impact the performance
of banks in Pakistan. Using information from 20 banks, including local private, public,
Islamic, specialized, and foreign banks, that are operated by the Pakistani state bank between
the years of 2013 and 2022. The performance measures are return on equity and return on
assets because the goal of the research is to determine how firm performance is impacted by
board characteristics. The empirical approach used in this quantitative study employs a fixed
effect regression model to identify and clarify how board characteristics affect the
profitability of the banking sector. The descriptive statistics demonstrate that the profitability
of various banks varies; yet, the banking sector's performance has improved over the past few
years despite Pakistan's rising Inflationary trends. Overall, the findings demonstrated that
board characteristics have a substantial impact on the performance of the banks.

Points to note : Board characteristics, Firm performance, Profitability, Return on equity,

Return on assets, Banking performance.
 1. Chapter 1. Introduction
1.1. Introduction
Corporate governance, firm performance, and other related factors have been the subject of
intense discussion (Haniffa and Hudaib, 2006; Rashid et al., 2010; Ujunwa, 2012). Failures
of large firms (e.g., General Electric Co.) have further escalated the debate. Enron WorldCom
and Adelphia were each affected by poor corporate governance practices, prompting
questions as to whether these companies are managed for the benefit of both shareholders
and other stakeholders (Farinha 2003).

To address agency problems and reduce agency costs, several internal and external controls
have been proposed as possible solutions. This topic has been widely covered under the term
"corporate Governance". Governance mechanisms that have been suggested for consideration
include board structure variables and debt financing solutions. Shareholdings by both insiders
and outsiders and the market for controlling corporations. The board of directors is an
effective internal corporate governance mechanism to help facilitate dialogue between
shareholders and managers and alleviate conflicts among them. Size, composition (in terms
of percentage of nonexecutives), skills and qualifications of board members, and Board
membership all serve as important characteristics (Haniffa & Hudaib 2006; Ehikioya 2009;
Ujunwa 2012). Mak and Li (2001), proposing that in emerging countries like Pakistan, where
external corporate governance practices are less efficient, internal mechanisms like boards of
directors become vital parts of corporate governance.

There have been various empirical studies in Pakistan that examine the relationships among
corporate management variables and firm performance, specifically from an impact
perspective of Corporate Governance on firms of various sizes from different perspectives:
microfinance institutions (Kyereboah-Coleman, 2007; Adusei, 2017; Ofoeda, 2017), listed
companies on stock exchanges (Kyereboah-Coleman & Biekpe, 2006; Bokpin, 2008; Asante
Darko et al., 2018), and commercial banks (Adeabah et al., 2019; Boadi and Osarfo, 2019;
Fiador and Sarpong-Kumankoma, 2021).

This study seeks to fill up this void by exploring how board characteristics, such as board
diversity variables such as gender, have an impact on the performance of listed firms in
Pakistan using multi-theoretical perspectives. This may increase understanding of corporate
governance practices in Pakistan and explore whether board characteristics impact the bank
performance of Pakistani-based banks. Banks could make better decisions regarding board
membership and governance to enhance performance; this may aid regulators in maintaining
investor confidence while protecting investors. This research is crucial due to the growing
recognition worldwide of corporate governance structures as an essential ingredient of
company success; quite a few organizations and countries have distributed guidelines and
recommendations regarding top governance practices.

1.2. Research Objective

The key objective of the research is to determine the effect of board characteristics on the
performance of the banking sector. The secondary objective is to conduct the research within
the scope of the Pakistan banking sector. Islamic banks, local banks, foreign banks, and
private banks are included in the study to have a fair view of the research as a major banking
sector is occupied by these banking sectors.

1.3. Scope of the research

The research conducted in Pakistan up to this point has either been limited to a small area or
a single branch of the banking industry. Whether it's before or after the current economic
downturn, the overall impact hasn't been examined to date in order to take the full or most of
the banking sector into account and have a good understanding of how board features affect
the banking sector, which is the fastest-expanding industry in Pakistan.

1.4. Significance of the study

The main objective of this study is to govern whether there is any association between the
board characteristics of Pakistan's banking sector and how those characteristics affect the
performance of the banks. To gain a deeper grasp of the subject, we would analyze various
banks, including private banks, Islamic banks, local banks, and overseas banks.

1.5. Contribution to the body of knowledge

This study adds a wealth of knowledge and findings about board characteristics and their
effects on the banking industry. Because this study would last for ten years, most banks in
Pakistan, including foreign banks, were chosen to represent the banking system. The results
of this study will help the audience understand how board characteristics affect the banking
industry's performance over time.
1.6. Research Problem
The existing literature suggests that board characteristics substantially affect the performance
banks. Aim of this study is finding out impact that the board characteristics has on banking
performance of Pakistani banks and Pakistani based foreign banks. How does board
characteristics affect the profitability of banks and to what level does it affects banks? How
does banks in the large view in financial sector is affected by these characteristics?

1.7. Research Questions

To find out the effect of board characteristics on the performance of banks?
To find out the effect of board characteristics on ROE and ROA?

2. Chapter 2. Literature Review

Corporate governance studies rely on an empirical basis that encompasses board
characteristics and effectiveness within their functional roles. Our hypothesis suggests that
board characteristics' impact on firm performance can be described using multiple theories.

Thought leaders generally agree that to effectively describe the relationship between board
performance and firm success and board of director membership, we need multiple theories
integrated rather than using just one (Gaur et al., 2015). By doing so we may gain more of an
insight into their various roles (Gaur, et al., 2015, Waheed and Malik, 2019). Agency,
resource dependency and stakeholder theories all point towards a correlation between board
size and firm performance (Gaur et al., 2015). Resource Dependence and Agency Theories
offer an explanation for the positive correlation between non-executive members of a board
(as shown by board composition) and firm performances. While agency, resource
dependency, stakeholder, and signalling theories all explain how gender diversity helps
increase firm performance (Cabrera Fernandez et al., 2016; Miller and Triana, 2009), the
theories of stewardship and resource dependency point towards an inverse relationship
between board composition and performance (Waheed & Malik, 2019).

Liang et al., (2013) conducted an exhaustive literature review analyzing how board
characteristics influence bank performance. Herein, we specifically analyze how size,
composition, and diversity affect bank performance.

An effective board of directors is key to creating an effective corporate governance system.

They play an essential role in making crucial decisions that ensure profitability of the firm;
any deviation or moral-hazard issues within this board could have devastating results on it
and even lead to bankruptcy for a firm. According to Bangladesh's Corporate Governance
Code (BSEC, 2017), public listed company board sizes typically range between five and
twenty members.

2.1 Size of the board

According to agency theory, size of the board can have an enduring impact on a company's
long-term performance (Fama & Jensen, 1983). A large board may lead to conflicts of
interest and encourage dominant leaders. Studies conducted in conventional settings revealed
a correlation between board size and performance (Yermack 1996; Eisenberg et al., 1998;
Hermalin & Weisbach, 1991; and Mak & Kusnadi, 2005) while only very limited research
exists within an Islamic context as literature only dates back to 2009. Matoussi & Grassa
(2012) conducted an investigation on 90 Islamic Banks located across GCC Countries and
Southeast Asia. Their study demonstrated that board sizes had a direct inverse relationship to
performance of Islamic Banks; those with smaller boards showed greater success.
Mashayekhi and Bazaz (2007) conducted an Iranian research project analyzing 240
companies listed at Tehran Stock Exchange between 2005-2006. Based on their results,
smaller board sizes proved more efficient in handling day-to-day business affairs.

Other studies, however, have noted a positive relationship between board size and
performance. Benefits associated with having an expansive board account for this perception
(Forbes and Milliken 1999; Dalton et al., 1999). Fallatah & Dickins (2012) conducted a
comprehensive investigation of 94 Saudi firms between 2006 and 2009. Their study
demonstrated that firms with large boards were most efficient, while smaller boards tend to
be easier to control and more effective. Larger boards create coordination issues and require
greater effort for supervision. Studies have also demonstrated that boards with fewer
directors are easier to control and influence by the leader, while larger boards contain an
array of experiences from various administrators that may avoid managers from acting solely
in their personal welfares (Gary & Gleason 1999). This further supports Adams and Mehran
(2003) findings that larger boards tend to perform better than small boards.

Studies favored of minor boards assert that larger boards may increase free riding, direction
issues and communication challenges (Yermack 1996; Eisenberg et al,. 1998; Haniffa &
Hudaib 2006). Supporters of larger boards contend that having multiple experts onboard
provides greater expertise. Outside directors bring a wealth of experience, serving as strategic
resources for the company. These perspectives align with resource dependence and agency
theories (Hillman & Dalziel 2003; Macus 2008). Empirical evidence collected through
studies led by Yermack and Faff (2007) and Nguyen in Australia and the USA indicate that
there may not be a direct association between board size and firm performance and firm size;
there could also be nonlinear effects.

On the basis of these evidence the hypothesis is as follow;

Hypothesis 1 The board size has a positive effect on the performance of banks

2.2 NED
Previous studies measured the degree of independence a company enjoyed by noting the
presence of nonexecutive directors (NED). NED are seen as independent from executive
directors, providing more motivation to perform their roles efficiently (Cadbury Committee
1992). Executive directors should be permanent company staffs with clearly delineated roles
and duties that oversee daily operations of the business, while non-executive directors (NED)
do not belong to or are otherwise associated with it (Weir & Laing, 2001). Fama and Jensen
(1983) asserted that non-executive directors would not work against shareholders' interests
when working alongside executive directors, while increasing NED representation on bank
boards could improve regulation and lessen battle of interests in between stakeholders.
Jensen and Meckling (1976) suggest that boards consisting of at least a majority of Non-
Executive Directors could help alleviate agency problems by overseeing management's
opportunistic behavior and making sure it aligns with shareholder interests. Haniffa and
Hudaib (2006) assert that NED may put pressure on executive directors by creating
evaluation opportunities. Pearce & Zahra (1992) concluded that NED-dominated boards
could affect quality deliberations, decisions and performance measures of directors.

Weisbach (1998), Rosenstein and Wyatt (1990) as well as Brickley et al. (1994) found a
correlation between having larger number of NEDs on board members and firm performance;
in the same manner Black et al (2006) concluded this finding to be true for companies with
boards composed of 50% NED members having higher performance; Brown & Caylor
(2002) similarly discovered this strong and positive link; however, Agrawal & Knoeber
(1996) identified an inverse correlation. Other studies like Bhagat et Black (2002) Haniffa et
Hudaib (2006) Hermalin et Weisbach (1991), however failed to detect this relationship;

AlManaseer et al. (2007) originate a positive correlation between bank performance, NED,
and bank NED ratios; Ghana (Kyereboah-Coleman and Biekpe, 2006) and Jordan (Bino &
Tomar, 2012) showed negative relationships while Praptiningsih (2010) concluded there was
no substantial link between bank performance and percentage NED for four Asian countries
and Adams and Mehran (2003) findings of no substantial relationship between bank
performance and percentage NED rates.

Non-executive directors (NEDs) tend to support shareholders' interests and values more
readily than are non-NEDs; therefore, a board with more NEDs can more often be seen as
monitoring management, restricting CEO opportunism and providing strategic direction that
will improve performance.

On the basis of these evidence the hypothesis is as follow;

Hypothesis 2 The higher the percentage of independent directors, the improved performing
banks will be.

2.3 Board Gender

Recent years have witnessed increased attention on board gender. Campbell and Mi'nguez-
Vera, (2008) noted this business case for including more women on boards. Some
governments passed regulations in 2006 in response to increased interest regarding board
gender dynamics and their impact on company value; in 2005 for instance Norway passed
regulations mandating large Norwegian firms include at least 40% female board members
(Smith et al., 2006, as cited by Hoel, 2004).
Women are increasingly being included on boards as they bring unique skills and
perspectives that can enhance company performance. Women tend to be good at resolving
complicated issues, extra socially disposed, and less risk-taking when undertaking risky
projects than their male counterparts (Byrnes et al., 1999; Croson and Gneezy, 2009; Bertrand,
2011).

Women bring unique perspectives to a board due to their abilities to identify solutions for
problems. Their role is essential in providing direction for a diverse board by contributing to
its formulation of strategy (Konrad et al., 2008).

Women have a tendency to to be more socially disposed than males when making decisions;
when making these decisions, they frequently consider the ripple effects on culture as a
whole (Konrad, 2008). Women have also been noted as tending to be more empathic by
nature and caring more for others' needs than most males do (Konrad 2008). Women tend to
have greater concerns for social and ecological problems. Women also tend to be more
socially aware and exhibit not as much of unethical behavior than their male counterparts.
Board independence increases when boards have more gender diversity, which in turn
improves monitoring effectiveness for manager activities (Furlotti et al., 2019). Zaid et al
(2020) report that women tend to make lower risk decisions such as reducing gearing level of
firms to mitigate financial risk.

Darmadi (2013a), and Ujunwa (2012) provide empirical evidence of a statistically substantial
negative relationship between female participation in boards and firm performance. Ujunwa
(2012) attributes the negative correlation between women in board positions and firm
performance to family ties between their appointments as Nigerian board members and firm
owners; such appointments were made not because these women possessed all necessary
qualifications necessary to make effective decisions within a board setting. Smith et. al
conducted a Danish study that discovered the opposite. Their 2006 investigation indicates
that increasing women on boards has an indisputable positive correlation to firm
performance. Ntim (2015) found a statistically substantial positive relationship between
board diversity and stock value on the South African Stock Exchange, which supports
theories of resource dependence and agency.

Moreno-Gomez & Calleja-Blanco (2018) have found that gender diversity of nonfinancial
companies listed on Colombia's Stock Exchange as measured by female top managers and
CEOs and profitability has an evident positive relationship. Adeabah et al. (2019) study from
Ghana shows that there is a nonlinear relationship between bank efficiency and gender
diversity; they explain that its impact is maximum when there are only two women out of
nine board members on board. At first, adding more women leads to a decrease in
performance at banks. According to Fiador and Sarpong-Kumankoma's (2021) research on
Ghanaian loan portfolio quality banks, female participation on boards negatively affects
banks' performance. Authors propose that the negative correlation between gender diversity
in firms and performance could be due to women being added to boards without having
sufficient expertise, simply due to an increasing global demand for more women on board
rooms - potentially an example of tokenism.

On the basis of these evidence the hypothesis is as follow;

Hypothesis 3 Board Gender Diversity has a positive impact on firm performance

2.4 Control Variables

Two additional variables were introduced as test hypotheses to look out for other possible
effects on bank performance.

First is the size of the bank. Short and Keasey (1998, 1999, 2008, 2018) assert that big
companies can make funds, make reserves and build barriers against entry which ultimately
leads to better performance.

Debt holders tend to apply more effect in management decisions due to greater exposure. As
part of agency theory, debt funding may increase burden on managers because it lessens
ethical risk by decreasing free cash flow available for managers (Jensen 1986). Therefore,
companies with greater leverage typically perform better.

3. Chapter 3. Data and Methodology

3.1 Research Design
The objective of the research is to discover the relationship between a bank performance and
board characteristics in Pakistan. The research has 8 variables.
In these variables board-size, board-composition, board-gender and board-gender-diversity
are independent variables while the dependent variables are Return-on-asset (ROA) and
Return-on-equity (ROE) which are the measures of the bank's performance.
 3.1.1 Return-on-assets
An indicator of profitability called return-on-assets (ROA) demonstrates how much money a
company can make from its assets. Return on assets is a system of measurement used to
assess how well and profitably a company's management generates income from the assets
and capitals it has on hand. The return on investment and return-on-assets have a positive
relationship; when the former is high, the latter will also be high, showing that the business is
effectively using its assets to generate revenue. Return on assets enables a corporation to
assess its effectiveness and generate revenue by efficiently using its resources.
2015's Al Mansoor).
According to Ramadan et al.'s (2011) examination of Jordanian banks, a number of banking
factors affected Jordanian banks' performance.

Given is the historic data of ROA in Pakistan for 20 years

Return-on-Asset = Net Income/ Total Assets
(Ammar, Haitham, Bashar, Yasser 2021)

3.1.2 Return-on-equity
The ROE of a bank demonstrates its capacity to generate profits from its equity. The ratio of
total equity to net income can also be used to calculate it. The ROE gauges how well bank
management manages shareholders' funds by measuring the return to shareholders on the
book value of their equity investments. (2013) Guido, Elisa. The return on equity (ROE) of a
business indicates how effectively it utilises its investments to boost profits.
ROE = Net income/Shareholders' equity.

3.1.3 Board-Size
The term board size is used to explain the total number of individuals who sit on a company's
board. Some directors are executive while some are non-executive.

3.1.4 Board-Composition
The ratio of non-executive directors for a company is referred to as the board composition.

3.1.5 Board-Gender
Board-Gender refers to the ratio of female directors of a firm.

3.1.6 Board-Gender-Diversity
The ratio of female board members to the total number of board members is known as the
board-gender-diversity. If the CEO is a woman, the board's gender diversity index is 1;
otherwise, it is 0.
 3.2 Theoretical Framework

1) Board Size
Independent 2) Board Composition
variables 3) Board Gender
4) Board Gender

Dependent 1) Return on Equity

variables 2) Return on Assets

Control 1) Firm Size

variables
2) Debt Ratio

3.3 Data Sources

20 commercial, Islamic, and foreign banks with offices in Pakistan make up the sample. Our

sample comprises of 20 banks due to the minimal number of Pakistani authorized banks. The

study's data spans a ten-year period from 2013 to 2022. Due to the availability of the

information for the study's time period, a sample of 20 banks was employed.

The financial summary of regulated banks on the SBP website provided the statistics for

dependent factors like ROE and ROA as well as control variables like firm size and debt

ratio. The annual reports of the banks were manually selected for information on independent

variables such board-size, board-composition, and gender-diversity.

 Return-on-equity (Net income/equity book value) and Return-on-assets (EBIT/total assets)

are two metrics used to measure a company's success. A quadratic form board size is used to

test for a non-linear relationship between board size and business performance. Board size is

assessed by the total number of directors on the board. The percentage of NED on the boards

is determined by the board composition. The proportion of women directors to the total

number of board members and a dummy variable that is equal to 1 if a woman is the CEO

and 0 if not are used to measure gender diversity. We also take into account the debt ratio and

firm size. The log of the company's total assets is used to calculate the firm size and the

proportion of total liabilities to total assets is used to calculate debt ratio.

3.4 Research Model

The purpose of this study is to investigate the relationship between board characteristics and
bank performance in Pakistan. We apply the fixed effect regression model provided below to
achieve the goal:
ROAit = β0 + β1BSZit + β2BCOMit + β3BGENit + β4BGENDit + β5FSIZit + β6DRit

ROEit = β0 + β1BSZit + β2BCOMit + β3BGENit + β4BGENDit + β5FSIZit + β6DRit

Where;
β Xit comprises the set of illustrative variables in the valuation model, K represents the
control variables, α is taken to be constant overtime t and definite to the individual cross-
sectional unit i.
3.5 Sampling and Population
The population of the research comprises, public banks, and local banks, foreign banks and
Islamic bank to have comprehensive picture of the overall economy and to better grasp the
link of board characteristics with banks performance. These banks are enough for the study
as these banks represent most of the banking system of Pakistan and the conclusions may be
generalize for wider population after wards.

3.6 Data Analysis

The tool used for the research is STATA. Since STATA is able to manage big data sets and
offer a number of statistical tools to acquire varied findings by performing different tests,
including regression analysis, t-tests, etc., it is the perfect software for doing extensive
statistical analysis on the collected data.
 3.7 Uniqueness of the study
The uniqueness of this study is that a sample size of 10 years has been taken for a more
comprehensive approach, and along with this, the size of the bank sector has also been
increased to include local private banks, specialized banks, foreign banks, and public
commercial banks, which includes nearly all of the banking sector of Pakistan. Previous
studies in the relevant research have limited data; most of the articles used a maximum of 5
to 8 years of sample size.

4 Chapter 4. Analysis
4.1 Descriptive Statistics
Variable Obs Mean Std. Dev. Min Max
ROE 200 .238 3.921 -23.924 49.785
ROA 200 -.006 .138 -1.93 .028
FSIZ 200 11.663 .565 9.758 12.61
DR 200 .933 .062 .849 1.495
BSZ 200 8.565 1.839 4 13
BCOM 200 0.439 1.834 1 12
BGEN 200 .04 .059 0 .167
BGEND 200 .015 .122 0 1

There are 200 observations available. The average return on equity is 0.238, while the
average return on assets is -0.006. The sampled companies' average scale in terms of total
assets or market capitalization is shown by the mean company size, which is 11.663. This
shows a sizable market presence as well as maybe higher levels of assets and skills. The
average capital structure of the tested enterprises has a high percentage of debt, as
indicated by the mean debt ratio of 0.933. This suggests a significant reliance on
borrowed money, which could raise their financial risk and make them more susceptible
to market volatility. According to the reported board size, which ranges from 4 to 13, the
tested companies' boards of directors consist of, on average, 8 members. The amount of
variety in viewpoints and skills within the boardroom can be influenced by the size of the
board. The average board composition is 0.439, which may serve as a proxy for the board
members' diversity and level of experience. The sampled companies' average board
gender representation is 0.04, which indicates that there are often not many women on the
 boards of these companies. The effectiveness of corporate boards in terms of decision-
making, innovation, and overall board effectiveness has been shown to benefit from
gender diversity. While female CEOs make up an average of 0.015, the studied
companies generally have low levels of gender diversity on their boards. This
demonstrates how few women hold board membership seats in the banking industry.

4.2 Correlation Matrix

Variables (1) (2) (3) (4) (5) (6)
(1) ROE 1.000
(2) ROA -0.019 1.000
(3) FSIZ -0.172 0.088 1.000
(4) DR 0.108 -0.070 -0.320 1.000
(5) BSZ -0.172 0.017 0.406 -0.140 1.000
(6) BCOM -0.003 0.081 0.266 -0.151 0.640 1.000
(7) BGEN -0.032 0.059 0.220 -0.017 -0.089 -0.070
(8) -0.003 0.014 0.137 -0.032 0.029 0.041
BGEND

In above table, the correlations are presented between the factors examining how board
features affect the performance of listed banks. It is clear from that table that the BCOM and
BSZ variables have the highest correlation inside the matrix. The independent variables do
not exhibit multicollinearity, as shown by the correlation coefficient of 64%.
 4.3 Regression (Linear and non-linear form of board)

Linear Fixed Effect Model Non-Linear Fixed Effect Model

Variables ROE ROA ROE ROA

Board size -0.654* 0.0291** -1.402 -0.0564

(-0.39) (-0.0134) (-2.008) (-0.0687)
Square of board
0.0449 0.00513
size
(-0.118) (-0.004)
Board Composition 0.266 -0.0064 0.28 -0.0049
(-0.288) (-0.0099) (-0.291) (-0.01)
Board Gender -4.864 0.248 -4.975 0.235
(-6.232) (-0.214) (-6.254) (-0.214)
Board Gender
0.108 -0.017 0.132 -0.0142
Diversity
(-2.775) (-0.0954) (-2.783) (-0.0953)
Firm Size 2.237 -0.125* 2.231 -0.126*
(-1.949) (-0.067) (-1.954) (-0.0669)
Debt Ratio 0.825 -0.104 1.149 -0.0665
(-5.754) (-0.198) (-5.831) (-0.2)
Constant -21.99 1.323* -19.32 1.628**
(-22.07) (-0.759) (-23.22) (-0.795)
Observations 200 200 200 200
R-squared 0.02 0.04 0.021 0.049
Banks 20 20 20 20

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1
 4.3.1 Regression Fixed Effect Model for Linear form of
board
The table shows the results of a linear fixed effect model that looked at how different
independent factors related to two dependent variables, Return on Equity (ROE) and Return
on Assets (ROA), in order to determine the link between them.

Board size is found to have a statistically substantial negative connection with ROE (-0.654*)
and a statistically significant positive association with ROA (0.0291**). These correlation
coefficients show that a larger board is linked to a lower ROE and a higher ROA. It's crucial
to remember that the coefficients have tiny magnitudes. A minor p-value indicates stronger
indication against the null hypothesis, and the coefficients statistical significance is shown by
the p-values in brackets..

Moving on to additional factors, board composition has a favorable and non-significant

correlation with ROE (0.266) and an unfavorable and non-significant correlation with ROA
(-0.0064). Similarly, board gender has a negative and statistically significant correlation with
ROE (-4.864), but not with ROA (0.248).

Additionally, there is a favorable and statistically substantial correlation between board

gender diversity and ROE (0.108), but not with ROA (-0.017). These correlations indicate a
weak correlation between rising board gender diversity and rising ROE; however, it does not
significantly affect ROA.

Although there is no statistically significant correlation between firm size and ROA (-
0.125*), there is a positive correlation between firm size and ROE (2.237). This shows that
while business size does not significantly affect ROA, larger firms typically have greater
ROE.

Finally, both ROE (0.825) and ROA (-0.104) exhibit a positive and statistically substantial
correlation with the debt ratio. This shows that greater ROE and worse ROA are related to
larger debt levels.

The intercept in the linear fixed effect model is represented by the constant term. It affects
ROE and ROA negatively and statistically significantly. There is still a negative base level of
ROE and a positive base level of ROA even when all the independent variables are zero,
according to the negative constant values (-21.99 for ROE and 1.323* for ROA).
The percentage of variation in the dependent variable that is described by the independent
variables is shown by the R-squared values, which gauge the model's goodness-of-fit. Since
the independent variables in the model only account for a small percentage of the variation in
ROE and ROA in this scenario, the R-squared values for the linear fixed effect model are
0.02 for ROE and 0.04 for ROA.

In conclusion, the analysis shows that firm size, debt ratio, board size and board gender
diversity all have different effects on ROE and ROA. The results indicate that while board
composition, board gender, and board gender diversity do not seem to have a meaningful
influence on financial performance metrics, board size, company size, and debt ratio show
statistically significant connections with those measures. It's crucial to take into account the
small coefficient magnitudes and the scant amount of variance that can be described, as
demonstrated by the R-squared values.

4.3.2 Regression Fixed Effect Model for Non-Linear

form of board
The table displays the findings of a non-linear board size fixed effects model that looked at
the correlation between a number of independent variables and the dependent variables
Return-on-Equity (ROE) and Return-on-Assets (ROA).

The board size coefficient in the non-linear board size fixed effects model is -1.402 for ROE
and -0.0564 for ROA. According to these equations, a bigger board is thought to result in
lower ROE and ROA. The negative numbers show an inverse correlation between the
financial success metrics and the size of the board. The p-values in parenthesis (-2.008 for
ROE and -0.0687 for ROA) indicate that the coefficients are statistically significant at the 5%
level.

The model additionally includes a squared term for board size, with coefficients of 0.0449 for
ROE and 0.00513 for ROA. The p-values for these coefficients, which are relatively high (-
0.118 for ROE and -0.004 for ROA), indicate that they are not statistically substantial. This
shows that neither ROE nor ROA are significantly impacted by the squared term of board
size.

The board composition variable has a coefficient of 0.28 for ROE and -0.0049 for ROA,
moving on to the other variables. However, because the p-values (-0.291 for ROE and -0.01
for ROA) are greater than the usual cutoff of 0.05, these coefficients are not statistically
significant. This suggests that there is no meaningful correlation between the board
composition and the financial performance metrics.

The coefficient for board gender is similar, showing values of -4.975 for ROE and 0.235 for
ROA. These statistically significant coefficients show no significant relationship with ROA
but a negative correlation between board gender and ROE. The negative correlation shows
that greater board gender diversity is negatively correlated with ROE. It's crucial to
remember that although the ROA coefficient is positive, it is not statistically significant.

The coefficients for board gender diversity are 0.132 for ROE and -0.0142 for ROA. The
correlation between ROE and board gender diversity is statistically substantial at the 5%
level, indicating a possible relationship between the two. However, the coefficient for ROA (-
0.0953 for ROA and -2.783 for ROE) is not statistically substantial.

The ROE and ROA coefficients for firm size show values of 2.231 for ROE and -0.126* for
ROA. The correlation between firm size and ROE is statistically substantial at the 5% level,
demonstrating a positive relationship between the two. The coefficient for ROA, however (-
0.0669 for ROA and -1.954 for ROE), is only weakly significant.

The debt ratio also shows coefficients for ROE and ROA of 1.149 and -0.0665, respectively.
These statistically significant coefficients show a favorable correlation between the debt ratio
and both ROE and ROA. This implies that stronger financial performance metrics are linked
to higher debt ratios.

In the non-linear board size fixed effects model, the constant term stands in for the intercept.
For ROE and ROA, the coefficients are -19.32 and 1.628, respectively. The statistical
significance of both coefficients indicates that ROE has a negative base level and ROA has a
positive base level.

The R-squared values gauge how good the model fits the data. The non-linear board size
fixed effects model in this instance has R-squared values for ROE and ROA of 0.021 and
0.049, respectively. These numbers show that only a small percentage of the variation in
ROE and ROA is described by the independent variables in the model.
 5. Conclusion:

The research shows that numerous independent factors have a variety of effects on Return-
on-Equity (ROE) and Return-on-Assets (ROA), built on the results of the linear fixed effect
model.
Larger boards are linked to lower ROE by a statistically substantial negative relationship
between board size and ROE. On the contrary side, there is a statistically substantial positive
correlation between board size and ROA, indicating that larger boards have a greater ROA.
It's crucial to remember that these coefficients have a tiny magnitude.
The lack of significant board size squared coefficients shows that the squared term has little
to no impact on either ROE or ROA.
As for other variables, neither ROE nor ROA demonstrate a significant association with
board composition. Similar to ROA, board gender does not show a statistically significant
connection, but it does show a negative correlation with ROE, suggesting that higher board-
gender-diversity is associated with lower ROE.
In contrast, board gender diversity has a positive and statistically significant connection with
ROE, suggesting a tenuous link between rising ROE and expanding board gender diversity.
However, it has little impact on ROA.
The relationship between company size and ROE is positive, meaning that bigger companies
often have greater ROE. However, the size of the company has little impact on ROA.
Additionally, the debt ratio shows a positive and statistically substantial association between
ROE and ROA, showing that higher debt levels are linked to better ROE but lower ROA.
The linear fixed effect model's intercept, or constant term, displays a negative base level for
ROE and a positive base level for ROA. This implies that there is still a negative base level
of ROE and a positive base level of ROA even when all independent variables are zero.
The independent factors in the model only describe a tiny share of the variance in ROE and
ROA, according to the R-squared values, which gauge the percentage of variation in the
dependent variable described by the independent variables. This shows that there may be
more elements that affect the financial performance measures but were not taken into account
during the investigation.
The research concludes by emphasizing the statistically significant relationships between
firm size, board size, debt ratio, and ROE and ROA. On the other hand, it doesn't seem like
board gender, board composition, or board diversity affect financial performance indicators
in a significant way. The model's poor explanatory power and tiny coefficient magnitudes, as
shown by the low R-squared values, must be taken into account, though. To develop a more
thorough knowledge of the drivers of ROE and ROA, further study and examination of
different variables are required.

The analysis provides the following conclusions regarding the link between numerous
independent factors and Return-on-Equity (ROE) and Return-on-Assets (ROA), based on the
results of the non-linear board size fixed effects model:
Board Size: The coefficient for board size indicates that ROE and ROA are negatively
correlated. The ROE (-1.402) and ROA (-0.0564) of larger boards are lower, demonstrating a
negative correlation between board size and financial performance indicators. Further
bolstering their validity is the statistical significance of these coefficients at the 5% level.
Include a Squared Term for Board Size: Neither ROE nor ROA are significantly impacted by
the inclusion of a Squared Term for Board Size. The absence of statistical implication in the
coefficients for the squared term indicates that the financial performance indicators are not
significantly influenced by the squared term of board size.
Board Composition: For both ROE (0.28) and ROA (-0.0049), the board composition
coefficients are not statistically significant. This shows that the board's composition and the
financial success indicators don't actually correlate in any significant way.
Board Gender: The coefficient for board gender exhibits a negative connection with ROE (-
4.975), indicating a link between a lower ROE and a more gender diverse board. The ROA
coefficient (0.235) is not statistically significant, though. Therefore, there is no clear
correlation between board gender and ROA.
Board Gender Diversity: The coefficient for board gender diversity is statistically substantial
for ROE (0.132), suggesting that there may be a positive relation between board gender
diversity and ROE. It is unclear if board-gender-diversity has a substantial impact on ROA
because the ROA coefficient (-0.0142) is not statistically significant.
Firm Size: A statistically significant positive link between ROE and firm size can be seen in
the coefficient for firm size (2.231), which shows that larger businesses often have greater
ROE. The marginally significant ROA coefficient (-0.126*) points to a possible inverse link
between business size and ROA.
Debt Ratio: For both ROE (1.149) and ROA (-0.0665), the coefficients for the debt ratio are
statistically significant. This suggests a positive relationship between the debt ratio and both
financial performance indicators, suggesting that greater debt ratios are linked to better
financial success.
No matter what the values of the independent variables are, the constant terms in the non-
linear board size fixed effects model show a negative base level for ROE (-19.32) and a
positive base level for ROA (1.628).
The independent variables in the model only partially account for the variance in ROE and
ROA, as shown by the R-squared values for ROE (0.021) and ROA (0.049). This implies that
additional, not studied, factors contribute considerably to the financial success
measurements.
The study's findings show that different factors such as company size, board-gender-
diversity, board-size, and debt ratio can affect ROE and ROA in different ways. The squared
terms of board-size and board-composition do not appear to have a substantial influence on
the financial success indicators. When evaluating these results, it is crucial to take into
account the statistical significance of coefficients, the model's weak explanatory ability
(evidenced by low R-squared values), and any relevant restrictions. To fully comprehend the
elements that influence ROE and ROA, more investigation and study of related topics are
advised.

5.1 Limitations
Due to time and resource constraints, the study is only focused on Pakistan's major segment
banks, utilizing the profitability metrics ROA and ROE. The study intends to examine the
relationship between board features and banking performance. Other ratios, such as Tobin's q,
liquidity ratios, leverage-ratios, turnover-ratios, and market-value-ratios, can also be
employed in the study, and the sample of banks can be expanded to include foreign and
Islamic banks for more diverse results. The information was extracted from the State Bank of
Pakistan website and transformed into an excel spreadsheet for Stata analysis. A larger and
more varied population can be employed to get results that are more reliable.
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