Impact of Corporate Governance on Financial Performance with Mediating role of Financial Sustainability: Evidence from Non-Financial Firms in Pakistan

Abstract

The study is investigating the impact of corporate governance and financial sustainability on the financial performance of the non-financial companies that are listed on the Pakistan Stock Exchange (PSX) from 2014 to 2019. The balanced panel data from 315 companies is considered in which the research uses multiple regression analysis by focusing on Ordinary Least Squares (OLS), Random Effects Model (REM) and Fixed Effects Model FEM) and Hausman specification test was used for determining the best estimator. It determined that fixed effects model was the best model for the study. The research is trying to determine a unique framework that would allow companies to ensure that they follow corporate governance practices that include transparency, accountability and responsible behavior to all the stakeholders of the company. Corporate governance was measured through an aggregate index comprising board independence, board size, CEO duality, CEO expertise and board meetings. Financial performance is measured by focusing on the Return on Assets of the companies and Financial Sustainability is measured by focusing on the Leverage of the companies. All the diagnostic tests for ensuring data normality are applied and then the final results are achieved. The results highlight that proper corporate governance practices that include board independence, board expertise and separation of the chairman and CEO of the board in terms of CEO duality really positively influences financial performance. The financial sustainability mediates the relationship between corporate governance and financial performance that shows well governed companies maintain proper leverage ratios that allow them to have financial sustainability and they can enhance their financial performance. The findings of the paper contribute to the literature by focusing on a robust governance and sustainability framework that would drive financial performance and ensure financial stability. Regulators and boards should focus on improving the governance codes that help in maintaining optimal leverage which will promote sustainable growth in corporate sector of Pakistan. The study recommends strengthening board independence and expertise while maintaining sustainable leverage policies for improved corporate performance.

Keywords: Corporate Governance, Financial Sustainability, Financial Performance and Pakistan Stock Exchange (PSX)