Balancing act: how corporate governance shapes investment efficiency in competitive Islamic markets

Purpose This study aims to examine how product market competition impacts investment efficiency in Iran’s Islamic capital market and to investigate the moderating role of corporate governance. It addresses a gap in the literature by exploring whether governance can shield firms from competitive pressures in a unique environment characterised by economic instability, regulatory constraints and Islamic-compliance requirements. Design/methodology/approach Using a panel data set of 189 firms listed on the Tehran Stock Exchange from 2013 to 2022, the authors use logistic regression models. Product market competition is measured using the Herfindahl–Hirschman index (HHI) (industry concentration) and the Lerner index (firm-level market power). Corporate governance is assessed through a novel composite index tailored to the constraints of emerging markets, incorporating board independence, ownership structure and audit quality. Control variables include firm size, leverage and profitability. Findings The results indicate a significant negative relationship between industry-level competition (HHI) and investment efficiency. This adverse effect, however, is substantially mitigated by strong corporate governance. A key nuanced finding is that not all governance elements are equally effective; board objectivity and institutional ownership are the primary mechanisms driving this protective effect. The characteristics of the audit committee showed less significance in this specific context. Furthermore, the firm-level Lerner index showed no significant impact, suggesting that in a highly regulated market like Iran’s, overall industry structure is more influential than individual firm market power. Originality/value To the best of the authors’ knowledge, this study provides the first integrated empirical analysis of this triad in Iran’s Islamic market. It challenges the view of corporate governance as a uniform construct by demonstrating that its efficacy is contingent upon the institutional context and driven by specific mechanisms. The research contributes a contingency perspective to theory and offers practical, actionable insights for policymakers and managers aiming to foster resilient investment and uphold ethical compliance in competitive Islamic economies.