Corporate governance mechanism and the ratings of Islamic and conventional mutual funds: Evidence from Pakistan

Purpose This study aims to analyze the impact of different governance characteristics on the ratings of both Islamic and conventional mutual funds. Design/methodology/approach This study used panel data ordered probit regression model. Furthermore, to capture the mutual funds rating persistence effect and address the issue of endogeneity dynamic panel model is used and the results are estimated using the generalized method of the moment (GMM) technique. Findings The results indicated that amongst the corporate governance characteristics, board size, the board independence, directors and institutional ownership, and overall governance quality positively affect the ratings of both Islamic and conventional funds. However, chief executive officer (CEO) duality and board gender diversity did not show a significant impact on the ratings of these funds. Practical implications The current research provides input to the asset management firms as to how they can increase the fund ratings by implementing strong governance practises. Furthermore, the study also provides input to the rating agencies to account for governance characteristics along with financial indicators, when issuing the rating of any fund. Originality/value To the best of the author’s knowledge, this study is the first attempt to analyze the impact of corporate governance characteristics on the rating of both Islamic and conventional mutual funds and hence provides a significant contribution to the literature.