Re-examining the corporate governance – Firm performance nexus: Fresh evidence from a causal mediation analysis

Abstract

AbstractThe role that corporate governance (CG) plays in contributing to firm performance enhancements has been widely acknowledged. However, the conduit through which CG is able to affect firm performance is an emergent theme. This paper re-examines the relationship between corporate governance (CG) and firm performance via means of causal mediation analysis using financial reporting quality (FRQ) as a mediator. The study samples 104 companies listed on the respective stock markets of nine sub-Saharan African countries, and collects annual reports data spanning over a period of 2007 to 2019 for analysis using causal mediation. The study finds that a causal relationship exists between CG and firm performance, albeit through the transmission mechanism of FRQ. Again, the study finds that CG positively affects firm performance both directly and indirectly through the mediation of FRQ. The study is useful in highlighting for mangers and CG practitioners attention, an important channel through which CG would favourably affect firm performance, being FRQ. The current study is unique, in that it is the first panel multi-cross-country investigation within Africa to introduce FRQ in the study of the relationship between CG and firm performance. It therefore extends the agency theory by employing FRQ as a mediating variable in the CG—firm performance nexus within the African context.

Keywords

• Corporate Governance
• Financial Reporting Quality
• Firm-performance
• Causal Mediation Analysis
• Sub-Saharan Africa
• C33