The Relationship between Corporate Governance Quality and Firm Performance: The Moderating Role of Capital Structure

Abstract

This study aims to explore whether capital structure (CS) has a contingent role in the relationship between corporate governance (CG) quality and firm performance. The empirical findings indicate that CG quality had a positive and significant effect on the performance of Jordanian non-financial firms listed on the Amman Stock Exchange (ASE) from 2014 to 2019. Additionally, the moderate effect of the CS reinforces this relationship. These results are robust to alternative econometric specifications and variable definitions. This study utilizes certain firm-specific characteristics to represent the CS to assess its role as a moderating variable in the relationship between CG quality and firm performance. This study makes a contribution to the literature by showing that CS can strengthen the relationship between CG quality and firm performance. The results have important managerial implications for the practice of CG in developing countries. Firms in developing countries can enhance performance by implementing and abiding by good governance practices. Moreover, firms in developing countries should adopt effective financial strategies regarding CS to enhance the relationship between CG quality and firm performance. Finally, potential investors should consider the debt level in the CS of non-financial firms in Jordan when making investment decisions.

The connection between Capital structure and performance: Does firm size matter?

“…Second, the Jordanian financial market is incomplete and less efficient and suffers from higher informational asymmetry than the markets in more advanced nations (Mansour et al, 2022a). Furthermore, the capital market in Jordan (ASE) is still an equity (Share) market (Mansour et al, 2022b), so the structure of the debt (bond) market is still immature. Thus, this capital market environment might lead to imperfect corporate financing decisions subject to large irregularities.…”

“…That is, large-sized firms in Jordan are better able to earn the benefits of financial leverage than their smaller ones. Thus, the large-sized firms in Jordan's non-financial sectors are better able to position themselves and utilize economies of scale to their advantage (Ibhagui & Olokoyo, 2018;Mansour et al, 2022b). In addition, the expectation is that large firms would be more profitable due to their ability to acquire less expensive funding and would be able to spread their business risks because of greater diversification.…”

“…Thus, the financial judgment that made by a firm's management is quite decisive in deciding the optimal capital structure (Ibhagui & Olokoyo, 2018; Senan et al, 2021). Many theories on capital structure have emerged to identify optimal capital structure and explain this nexus (Mansour et al, 2022b;Stoiljković et al, 2022). From a theoretical viewpoint, the divergence in prior studies may be partly explained by competing theories.…”

Corporate governance, capital structure, and firm performance: a panel VAR approach

“…A good CG is commonly acknowledged to improve FP (Padachi et al 2017 ; Bhatt and Bhatt 2017 ; Sheaba Rani and Adhena 2017 ; Mansour et al 2022 ). Other researchers, such as Rajput and Joshi ( 2014 ) in India and Adegboye et al ( 2019 ) in Nigeria, find a negative connection between CG and FP, or no relationship by Hassouna et al ( 2017 ) in Egypt, and Braendle ( 2019 ) in Austria, or find mixed results by Tariq et al ( 2018 ) in Pakistan, Shao ( 2018 ) in China, Griffin et al ( 2018 ) in various countries, and Dao and Nguyen ( 2020 ) in Vietnam.…”

“…CS is a CG instrument that can assist a company in developing value by preserving CG efficacy (La Rocca 2007 ). Good CG is commonly acknowledged to improve company performance (Beiner et al 2004 ; Black and Kim 2012 ; Padachi et al 2017 ; Sheaba Rani and Adhena 2017 ; Mansour et al 2022 ). However, FP can also influence the level of CG, often measured using the CG disclosure index (CGI) as a proxy for the overall quality of CG in different countries.…”