Abstract
The key purpose of this research paper is to explore the moderating effect of Corporate Governance on the relationship between accounting base financial performance i.e. ROA, and ROE and Capital Structure of 173 Manufacturing firms listed in KSE of Pakistan for the period of 2009 to 2014. In this study multiple regression method is used under fixed effect regression model approach on panel data. The empirical results show that the inclusion of Corporate Governance Index (CGI) as moderating variable has influenced the interaction between Capital Structure and Financial Performance which was positively significant. The result is generally found that the most of Pakistani manufacturing listed firms pursue good corporate governance mechanism and use good and optimal level of Capital Mix to get the better and high financial performance. Furthermore, the corporate governance sub-indices i.e. board structure (BOD-I) and transparency & disclosure (DISC-III) both also have positive and statistically significant association with both firms performance variables: ROA and ROE. Moreover, the ownership structure sub-index (OWS-II) has not significant influence on financial performance. In last, the capital structure also has positive relationship with financial performance, interestingly about 70 per cent of Capital is financed by Equity capital and the Debt capital signifies 30 per cent only. The core significance of this paper is to investigate the impact of Corporate Governance practices on financial decisions from the Pakistani perspective.
Highlights
Corporate governance is basically involves in fare balancing of interests of the corporate investors and stakeholders in a corporation
The regression result shows that the sub-indices of Corporate Governance Practices, board structure (BOD-I) has statistically significant and positive relationship with return on assets (ROA) as the coefficient values 0.25328 shown in the table
The empirical results specify that the inclusion of Corporate Governance Index (CGI) as moderating variable has influenced the interaction between Capital Structure and financial performance, which is positively significant, that indicate, manufacturing sector firms are performing well due to the implementation and focus on Corporate Governance Practices, which provides the opportunity to firms to use of good and optimal level of capital structure, which leads to the better financial performance
Summary
Corporate governance is basically involves in fare balancing of interests of the corporate investors and stakeholders in a corporation. Heretofore, most of studies have been explored the effect of Capital Structure on firm performance but the effect of Corporate Governance (CG) on financial decisions and firm Performance has received slight consideration in Pakistan. Corporate Governance & Financial Performance Corporate Governance rules, regulations, policies and mechanism have great impact on the company performance It takes the perfection in the firm cash flows that is shared among stakeholders (Black, Jang et al 2006). The results display significant and positive relationship between index of CG characteristics and firm performance and negative association between the market valuation and index of corporate governance practices. This study tries to explore the importance of Corporate Governance in Pakistan and how the good corporate governance practices effect the financial performance and financing decisions of manufacturing firms of pakistan
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