Corporate Governance and Firm Performance: Exploring the Mediating Role of Financial Slack

Abstract

Purpose: Generally, prior literature merely focuses on the direct nexus of governance-performance, while ignoring the precise channels through which corporate governance has an effect on the firm performance. Specifically, this study has taken up this issue to capturing the governance-enterprise valuation following the indirect channel of financial slack in Pakistan.  Design/Methodology/Approach: The study examined the corporate governance and enterprise performance linkage, employing financial slack as a mediating variable. A market-based performance measure “Tobin’s Q” and corporate governance index are used. For the years 2005-2019, this empirical study looks at a large number of 180 firms in the Pakistani non-financial sector. For analysis, a variety of alternative specifications and estimate approaches of panel data analysis are used. Findings: The empirical findings support the hypothesis that the association between corporate governance and Tobin’s Q is likely to be significant. The novelty of the study lies in the governance-value linkage considering financial slack resource as mediator. The study also confirms partial mediation of financial slack, between CG and FP.  Implications/Originality/Value: This study examines the corporate governance standards in Pakistan, a developing nation with a fledgling stock market. The findings show that the organizations with effective corporate governance principles strive to deliver the best financial and market performance. It emphasizes that efficient corporate governance policies curtail the agency conflicts and costs. It is also argued that firms with effective corporate governance can enhance the efficiency of financial slack resources to enhance the efficiency of the firms.