CORPORATE GOVERNANCE AND FINANCIAL DERIVATIVES USAGE: EVIDENCE FROM NON-FINANCIAL FIRMS ON THE PAKISTAN STOCK EXCHANGE

Abstract

This paper focuses on the correlation between the corporate governance practices and non-financial business companies that use financial derivatives to trade on the Pakistan Stock Exchange (PSX). By relying on the agency theory and risk management theory, the study examines how board structure, CEO duality, and audit committee independence impact firms to use derivatives and any other firm specific variables include size, leverage, liquidity, and profitability. An analysis of a balanced panel dataset of 400 firms was done with the use of logistic and linear regression models in SPSS in the year 2010-24. The results also show that independent boards, as well as effective audit committees, largely increase the likelihood of using derivatives in hedging but do not increase the chances of adoption by the CEO duality. Leveraged and bigger firms as well as those, which are more profitable, are more likely to engage in derivatives though liquidity seems to be less significant. Moreover, the correlation between governance systems and the use of derivatives can be enhanced through the exchange rate and interest rate volatility which highlights the significance of the macroeconomic setup in determining risk management activities. These findings generalize corporate governance and risk management theories to an environment that is an emerging economy and has significant implications to regulators, policymakers, managers and investors in Pakistan.