The current study explores how corporate governance affects firm performance. It also examines the link between corporate governance and firm performance within capital structure, focusing on how financing decisions may moderate this relationship.—This analysis covers 215 non-financially registered firms listed on the Pakistan Stock Exchange from 2010 to 2022. To assess the quality of governance in these sample firms, a governance index incorporating 29 provisions is utilized. In addition, the book value of the debt-to-equity ratio determines the capital structure, whereas ROA and ROE serve as indicators of business performance. The methodology relies on panel data techniques, specifically the Fixed Effects Model and Random Effects Model, as determined by the Hausman test. Furthermore, multiple additional tests are conducted to verify the robustness of the analysis. Regression analysis shows that corporate governance significantly increases profitability (i.e., ROA and ROE), while capital structure significantly decreases it. Furthermore, when examining the capital structure’s moderating effect, the results indicate that the interaction variable significantly enhances firm performance. Still, it is more significant in terms of ROA than ROE, suggesting that market participants consider leverage not a good disciplinary mechanism, as high leverage introduces financial risk and obligations (such as interest payments) that can reduce firms’ ability to translate good governance practices into performance. Interactive variables have a weaker effect on profitability, as measured by ROE. Furthermore, these findings are more prevalent in larger, higher-level, and better-governed firms. The study’s findings could help lenders assess a company’s governance structure before making financial decisions. Similarly, investors should examine the quality of corporate governance and the company’s capital structure decisions. Managers should be extremely cautious when deciding how much long-term debt to include in their capital structure. The study indicates that capital structure plays an additional role in how corporate governance affects a company’s performance. This role is not often explored in research, especially in emerging markets.
Qadri Al Jabri (Wed,) studied this question.