IMPACT OF CORPORATE GOVERNANCE ON DIVIDEND POLICY IN THE PAKISTAN PHARMACEUTICAL SECTOR

Abstract

This empirical paper examines how internal board governance shape corporate dividend policy within the pharmaceutical sector of the Pakistan Stock Exchange (PSX). Drawing on a balanced panel of 7 listed pharmaceutical companies spanning 2015 to 2024 (N = 70 firm-year observations), the analysis models the Dividend Payout Ratio (DPR) against three core governance metrics Board Size (BOARD_SIZE), Board Independence (BOARD_IND), and Ownership Concentration (OWNERSHIP) while controlling variable as Firm Size (LOG_FIRM_SIZE), Financial Leverage (LEVERAGE), and Return on Assets (ROA). The diagnostic framework incorporated panel unit root tests, Pearson pairwise correlation analysis, and residual cross-sectional dependence evaluations. Selecting the optimal panel estimator relied on the Hausman specification test, which yielded a Chi-Square value of 30.9288 (p = 0.0000), rejecting the Random Effects specification in favor of a Cross-Section Fixed Effects model. The fitted Fixed Effects model accounts for roughly 54.67% of the total variance in dividend payout distributions (R-squared = 0.5467, Adjusted R-squared = 0.4512, F-statistic = 5.7282, p = 0.000002). The empirical results indicate that operating profitability acts as the sole statistically significant positive driver of corporate distributions across PSX-listed pharmaceutical firms. Precisely, Return on Assets (ROA) recorded positive coefficients across both model specifications (Beta = 0.7842, p = 0.0859 under Fixed Effects; Beta = 1.4702, p = 0.0001 under Random Effects). In contrast, structural governance attributes like board size, board independence, and ownership concentration alongside control variables such as firm size and leverage, exhibited no direct significant influence on dividend decisions. These outcomes highlight a critical economic reality within regulated emerging market sectors. In an industry constrained by Drug Regulatory Authority of Pakistan (DRAP) price controls, persistent currency devaluation, and heavy reliance on imported raw materials, dividend distributions depend strictly on actual asset returns and cash liquidity rather than board structure. Internal governance mechanics primarily fulfill procedural compliance mandates established by the Securities and Exchange Commission of Pakistan (SECP) instead of actively directing dividend strategy. Thus, capital market investors should prioritize fundamental operating profitability over governance metrics when building dividend portfolios, while regulatory bodies must reform price-setting mechanisms to support firm operational cash sustainability.