Corporate Governance and Financial Performance of the Firm: The Mediating Role of Capital Structure

Purpose - The governance of firms as assured by the board through good decisions about capital structure is maximum profit with an aim to enhance the wealth of shareowners. We focus on the corporate governance relationship with the financial performance of firms and check whether this relationship is meditated by the capital structure of the company. Design/Methodology/Approach - The study estimates said objectives using Pooled OLS, Fixed Effects, Random Effects, and a test for mediation analysis for total of 205 observations of 41 firms listed on the KSE-100 index of the Pakistan stock exchange for a period from 2013 to 2017. Findings - The results show that there is a strong positive relationship between corporate governance, financial leverage, and firm performance. Non-executive directors and female directorship negatively related to the firm performance and financial leverage of financial firms of Pakistan. The study contributed to existing literature with financial leverage positively and significantly mediating the relationship between firm performance and non-executive directors, audit committees, and ownership concentration in developing nations. Research Implications - The board of directors always consider the capital mix while making decisions as it helps to improve financial performance via good governance. Thus, this research has provided the best picture for firm policy makers, in particular, to help decide which components of corporate governance as mediated by capital structure are necessary for a firm’s financial well-being.