Corporate governance and its impact on financial performance and innovation in Chinese‐listed firms

Abstract

AbstractCorporate governance (CG) is the system of rules, procedures, and processes by which an organization is operated and controlled. Effective corporate governance helps mitigate risk by ensuring the company complies with applicable laws and regulations and maintains appropriate internal controls. CG is an essential aspect of the overall management of companies and can have a significant impact on their Financial Performance (FP). In China, CG practices have undergone significant modifications over the last few years as the country shifted from a centrally planned economy to a market‐based economy. The study's novelty evaluated the effect of corporate governance on finance and Chinese‐listed firm creation. Data obtained from 345 employees working in 8 firms in China, the relationship between CG, financial performance, and innovation is investigated. The study adopted PLS‐SEM analysis and the findings of the study indicate that CG is positively related to better FP and innovation output. The study analysis found that firms with stronger governance structures have better access to external financing, lower agency costs, and higher levels of innovation investment. Also, the result identified that improving CG can lead to better FP and innovation, which in turn improves the firm's competitiveness and long‐term sustainability.