Corporate Governance and Firm Performance: Exploring the Mediating Role of Financial Slack
Abstract
Purpose: Generally, prior literature merely focuses on the direct nexus of governance-performance, while ignoring the precise channels through which corporate governance has an effect on the firm performance. Specifically, this study has taken up this issue to capturing the governance-enterprise valuation following the indirect channel of financial slack in Pakistan.
Design/Methodology/Approach: The study examined the corporate governance and enterprise performance linkage, employing financial slack as a mediating variable. A market-based performance measure “Tobin’s Q” and corporate governance index are used. For the years 2005-2019, this empirical study looks at a large number of 180 firms in the Pakistani non-financial sector. For analysis, a variety of alternative specifications and estimate approaches of panel data analysis are used.
Findings: The empirical findings support the hypothesis that the association between corporate governance and Tobin’s Q is likely to be significant. The novelty of the study lies in the governance-value linkage considering financial slack resource as mediator. The study also confirms partial mediation of financial slack, between CG and FP.
Implications/Originality/Value: This study examines the corporate governance standards in Pakistan, a developing nation with a fledgling stock market. The findings show that the organizations with effective corporate governance principles strive to deliver the best financial and market performance. It emphasizes that efficient corporate governance policies curtail the agency conflicts and costs. It is also argued that firms with effective corporate governance can enhance the efficiency of financial slack resources to enhance the efficiency of the firms.
Downloads
Article Analytics Summary
References
Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit Committee Characteristics and Restatements. Auditing: A journal of practice & theory, 23(1), 69-87. https://doi.org/10.2308/aud.2004.23.1.69 DOI: https://doi.org/10.2308/aud.2004.23.1.69
Ashwin, A., Krishnan, R. T., & George, R. (2016). Board characteristics, financial slack and R&D investments: an empirical analysis of the Indian pharmaceutical industry. International Studies of Management & Organization, 46(1), 8-23. DOI: https://doi.org/10.1080/00208825.2015.1007007
Augier, M., & March, J. G. (2008). A retrospective look at A Behavioral Theory of the Firm. Journal of Economic Behavior & Organization, 66(1), 1-6. https://doi.org/https://doi.org/10.1016/j.jebo.2008.01.005 DOI: https://doi.org/10.1016/j.jebo.2008.01.005
Barnard, C. I. (1968). The functions of the executive (Vol. 11). Harvard university press.
Berle, A. A., & Means, G. G. C. (1991). The modern corporation and private property. Transaction publishers.
Bourgeois III, L. J. (1981). On the measurement of organizational slack. Academy of Management review, 6(1), 29-39. DOI: https://doi.org/10.5465/amr.1981.4287985
Bourgeois III, L. J., & Singh, J. V. (1983). Organizational Slack and Political Behavior Among Top Management Teams. Academy of Management Proceedings, DOI: https://doi.org/10.5465/ambpp.1983.4976315
Boyd, B. K. (1995). CEO duality and firm performance: A contingency model. Strategic Management Journal, 16(4), 301-312. https://doi.org/https://doi.org/10.1002/smj.4250160404 DOI: https://doi.org/10.1002/smj.4250160404
Bromiley, P. (1991). Testing a causal model of corporate risk taking and performance. Academy of Management journal, 34(1), 37-59. DOI: https://doi.org/10.5465/256301
Chen, R., Guedhami, O., Yang, Y., & Zaynutdinova, G. R. (2020). Corporate governance and cash holdings: Evidence from worldwide board reforms. Journal of Corporate Finance, 65, 101771. https://doi.org/https://doi.org/10.1016/j.jcorpfin.2020.101771 DOI: https://doi.org/10.1016/j.jcorpfin.2020.101771
Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm (Vol. 2). Englewood Cliffs, NJ.
Daniel, F., Lohrke, F. T., Fornaciari, C. J., & Turner Jr, R. A. (2004). Slack resources and firm performance: a meta-analysis. Journal of Business Research, 57(6), 565-574. DOI: https://doi.org/10.1016/S0148-2963(02)00439-3
Davis, G. F., & Stout, S. K. (1992). Organization theory and the market for corporate control: A dynamic analysis of the characteristics of large takeover targets, 1980-1990. Administrative Science Quarterly, 605-633. DOI: https://doi.org/10.2307/2393474
Denis, D. K. (2001). Twenty-five years of corporate governance research … and counting. Review of Financial Economics, 10(3), 191-212. https://doi.org/https://doi.org/10.1016/S1058-3300(01)00037-4 DOI: https://doi.org/10.1016/S1058-3300(01)00037-4
Denis, D. K., & McConnell, J. J. (2003). International corporate governance. Journal of financial and quantitative analysis, 38(1), 1-36. DOI: https://doi.org/10.2307/4126762
Denis, D. K., McConnell, J. J., Ovtchinnikov, A. V., & Yu, Y. (2003). S&P 500 Index Additions and Earnings Expectations. the Journal of Finance, 58(5), 1821-1840. https://doi.org/https://doi.org/10.1111/1540-6261.00589 DOI: https://doi.org/10.1111/1540-6261.00589
Deutsch, Y. (2005). The impact of board composition on firms’ critical decisions: A meta-analytic review. Journal of Management, 31(3), 424-444. DOI: https://doi.org/10.1177/0149206304272185
Ferreira, D., Ferreira, M. A., & Raposo, C. C. (2011). Board structure and price informativeness. Journal of Financial Economics, 99(3), 523-545. https://doi.org/https://doi.org/10.1016/j.jfineco.2010.10.007 DOI: https://doi.org/10.1016/j.jfineco.2010.10.007
Gangi, F., & Daniele, L. M. (2019). Eugenio D’Angelo, Mario Mustilli.
García-Ramos, R., & Díaz, B. D. (2020). Board of directors structure and firm financial performance: A qualitative comparative analysis. Long Range Planning, 102017. DOI: https://doi.org/10.1016/j.lrp.2020.102017
George, G. (2005). Slack resources and the performance of privately held firms. Academy of Management journal, 48(4), 661-676. DOI: https://doi.org/10.5465/amj.2005.17843944
Hailu, D. H. (2019). Financial Slack and Firm Performance in Africa: The Mediating Effects of the Banking Sector and Stock Market Development. Global Journal of Management and Business Research.
Hayes, A. F., & Preacher, K. J. (2014). Statistical mediation analysis with a multicategorical independent variable. British journal of mathematical and statistical psychology, 67(3), 451-470. DOI: https://doi.org/10.1111/bmsp.12028
Herdjiono, I., & Sari, I. M. (2017). The Effect of Corporate Governance on the Performance of a Company. Some Empirical Findings from Indonesia. Central European Management Journal, 25(1), 33-52. https://doi.org/doi:10.7206/jmba.ce.2450-7814.188 DOI: https://doi.org/10.7206/jmba.ce.2450-7814.188
Hessen, R. (1983). The Modern Corporation and Private Property: A Reappraisal. The Journal of Law & Economics, 26(2), 273-289. http://www.jstor.org/stable/725101 DOI: https://doi.org/10.1086/467034
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. the Journal of Finance, 48(3), 831-880. DOI: https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. DOI: https://doi.org/10.1016/0304-405X(76)90026-X
Joh, S. W. (2003). Corporate governance and firm profitability: evidence from Korea before the economic crisis. Journal of Financial Economics, 68(2), 287-322. https://doi.org/https://doi.org/10.1016/S0304-405X(03)00068-0 DOI: https://doi.org/10.1016/S0304-405X(03)00068-0
Kamran, K., & Shah, A. (2014). The Impact of Corporate Governance and Ownership Structure on Earnings Management Practices: Evidence from Listed Companies in Pakistan. Financial Accounting eJournal.
Khan, N., & Malik, Q. (2020). IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON FIRM PERFORMANCE MEDIATING ROLE OF INVESTMENT INEFFICIENCY. https://doi.org/10.14456/ITJEMAST.2020.238
Kim, H., Kim, H., & Lee, P. M. (2008). Ownership Structure and the Relationship Between Financial Slack and R&D Investments: Evidence from Korean Firms. Organization Science, 19(3), 404-418. https://doi.org/10.1287/orsc.1080.0360 DOI: https://doi.org/10.1287/orsc.1080.0360
Kyere, M., & Ausloos, M. (2021). Corporate governance and firms financial performance in the United Kingdom. International Journal of Finance & Economics, 26(2), 1871-1885. DOI: https://doi.org/10.1002/ijfe.1883
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58(1-2), 3-27. DOI: https://doi.org/10.1016/S0304-405X(00)00065-9
Latif, K., Bhatti, A. A., & Raheman, A. (2017). Earnings quality: A missing link between corporate governance and firm value. Business & Economic Review, 9(2), 255-280. DOI: https://doi.org/10.22547/BER/9.2.11
Latif, K., Chaudhary, G. M., & Waqas, A. (2020). Relationship Between Accounting Conservatism and Investment Efficiency with the Moderating Role of IFRS Adoption in Pakistan. Journal of Accounting and Finance, 6, 1139-1150. DOI: https://doi.org/10.26710/jafee.v6i4.1471
Lee, S. (2011). How financial slack affects firm performance : evidence from US industrial firms [Aufsatz in Zeitschrift, Article in journal]. Journal of economic research, 16(1, (31.5)), 1-27.
Lee, S. (2012). Corporate governance, financial slack and firm performance: a comparative study between US and UK. Seoul Journal of Business, 18. DOI: https://doi.org/10.35152/snusjb.2012.18.1.001
Lee, S. (2015). Slack and innovation: Investigating the relationship in Korea. Journal of Business Research, 68(9), 1895-1905. DOI: https://doi.org/10.1016/j.jbusres.2014.12.009
Liu, Y., Lin, W.-T., & Cheng, K.-Y. (2015). Family Ownership and the International Involvement of Taiwan's High-Technology Firms: The Moderating Effect of High-Discretion Organizational Slack. Management and Organization Review, 7(2), 201-222. https://doi.org/10.1111/j.1740-8784.2011.00220.x DOI: https://doi.org/10.1111/j.1740-8784.2011.00220.x
March, J. G. (1991). Simon. HA (1958). Organizations. New York.
Morse, J. M., Barrett, M., Mayan, M., Olson, K., & Spiers, J. (2002). Verification strategies for establishing reliability and validity in qualitative research. International journal of qualitative methods, 1(2), 13-22. DOI: https://doi.org/10.1177/160940690200100202
Nohria, N., & Gulati, R. (1997). What is the optimum amount of organizational slack?: A study of the relationship between slack and innovation in multinational firms. European Management Journal, 15(6), 603-611. DOI: https://doi.org/10.1016/S0263-2373(97)00044-3
Peng, M. W., Li, Y., Xie, E., & Su, Z. (2010). CEO duality, organizational slack, and firm performance in China. Asia Pacific Journal of Management, 27(4), 611-624. https://doi.org/10.1007/s10490-009-9161-4 DOI: https://doi.org/10.1007/s10490-009-9161-4
Penrose, E., & Penrose, E. T. (2009). The Theory of the Growth of the Firm. Oxford university press.
Penrose, E. T. (1959). The Theory of The Growth of The Firm. Mansfield Centre. In: USA: Martino Publishing.
Penrose, L. S. (1959). Self-reproducing machines. Scientific American, 200(6), 105-117. DOI: https://doi.org/10.1038/scientificamerican0659-105
Pfeffer, J., & Salancik, G. R. (2003). The external control of organizations: A resource dependence perspective. Stanford University Press.
Pitelis, C. N. (2009). Edith Penrose’s ‘The theory of the growth of the firm’fifty years later. Available at SSRN 1477885. DOI: https://doi.org/10.2139/ssrn.1477885
Putri, W., Nurwi, N., Sungkono, S., & Wahyuningsih, T. (2019). The emerging fintech and financial slack on corporate financial performance. Investment Management and Financial Innovations, 16, 348-354. https://doi.org/10.21511/imfi.16(2).2019.29 DOI: https://doi.org/10.21511/imfi.16(2).2019.29
Rudyanto, A. (2019). Impact of corporate social responsibility and capital allocation efficiency on family and non-family firms. Humanities & Social Sciences Reviews, 7(4), 617-633. DOI: https://doi.org/10.18510/hssr.2019.7482
Salehi, M. (2018). The effect of characteristics of audit committee and board on corporate profitability in Iran. Journal of Economic and Administrative Sciences.
Salehi, M., Tahervafaei, M., & Tarighi, H. (2018). The effect of characteristics of audit committee and board on corporate profitability in Iran. Journal of Economic and Administrative Sciences, 34(1), 71-88. https://doi.org/10.1108/JEAS-04-2017-0017 DOI: https://doi.org/10.1108/JEAS-04-2017-0017
Shaikh, I. (2013). Corporate governance and organizational slack in the IT industry. 2013 Proceedings of PICMET '13: Technology Management in the IT-Driven Services (PICMET), 1437-1451.
Shaikh, I., & Peters, L. S. (2013). Board composition, financial slack & R&D investments: changing roles in the presence of volatility. Academy of Management Proceedings, DOI: https://doi.org/10.5465/ambpp.2013.11454abstract
Shaikh, I., Peters, L. S., & O'Brien, J. (2016). Inside Directors & the Underinvestment of Financial Slack into R&D for High-technology Firms. Academy of Management Proceedings, 2016(1), 11710. https://doi.org/10.5465/ambpp.2016.11710abstract DOI: https://doi.org/10.5465/ambpp.2016.11710abstract
Shaikh, I. A., O'Brien, J. P., & Peters, L. (2018). Inside directors and the underinvestment of financial slack towards R&D-intensity in high-technology firms. Journal of Business Research, 82, 192-201. https://doi.org/https://doi.org/10.1016/j.jbusres.2017.09.014 DOI: https://doi.org/10.1016/j.jbusres.2017.09.014
Sharfman, M. P., Wolf, G., Chase, R. B., & Tansik, D. A. (1988). Antecedents of organizational slack. Academy of Management review, 13(4), 601-614. DOI: https://doi.org/10.5465/amr.1988.4307484
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. the Journal of Finance, 52(2), 737-783. DOI: https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Simon, H. A. (2013). Administrative behavior. Simon and Schuster.
Singh, J. V. (1986). Performance, Slack, and Risk Taking in Organizational Decision Making. The Academy of Management Journal, 29(3), 562-585. https://doi.org/10.2307/256224 DOI: https://doi.org/10.5465/256224
Waheed, A., & Malik, Q. A. (2019). Board characteristics, ownership concentration and firms’ performance: A contingent theoretical based approach. South Asian Journal of Business Studies. DOI: https://doi.org/10.1108/SAJBS-03-2018-0031
Zhang, D., Zhang, Z., Ji, Q., Lucey, B., & Liu, J. (2021). Board characteristics, external governance and the use of renewable energy: International evidence. Journal of International Financial Markets, Institutions and Money, 72, 101317. https://doi.org/https://doi.org/10.1016/j.intfin.2021.101317 DOI: https://doi.org/10.1016/j.intfin.2021.101317
Zona, F. (2012). Corporate Investing as a Response to Economic Downturn: Prospect Theory, the Behavioural Agency Model and the Role of Financial Slack. British Journal of Management, 23(S1), S42-S57. https://doi.org/https://doi.org/10.1111/j.1467-8551.2012.00818.x DOI: https://doi.org/10.1111/j.1467-8551.2012.00818.x
Copyright (c) 2021 Aftab Hussain Tabassam, Shahbaz Khan
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
CSRC Publishing and JAFEE adhere to Creative Commons Attribution-Non Commercial 4.0 International License. The authors, submitting and publishing in the Journal of Accounting and Finance in Emerging Economies published by CSRC Publishing, retain the copyright of their work and give the journal right to publish their work agreeing to the licensing policy under Creative Common Attribution-Non Commercial (NC-BY-NC 4.0) International. Under this license, the published authors let others remix, tweak, and build upon their work non-commercially. Yet all the other authors using the content of CSRC Publishing are required to cite author(s), journal name and publisher in their work. CSRC Publishing and JAFEE follow an Open Access Policy for copyright and licensing.
