Linking Corporate Governance to Firm Outcomes: Mediating Role of Green Innovation and Moderating Effects of Capital Structure

Abstract

Corporate governance (CG) has become a pivotal determinant of accountability, sustainability, and financial performance, particularly in emerging economies where regulatory and institutional structures are still consolidating. In Pakistan, non-financial firms face increasing pressure to strengthen governance mechanisms that enhance transparency, attract investment, and ensure sustainable value creation. Within this context, the present study investigates the impact of CG mechanisms on firm financial performance (FFP), while incorporating the mediating role of green innovation (GI) and the moderating effect of capital structure (CS). The analysis is based on panel data covering non-financial firms listed on the Pakistan Stock Exchange from 1999 to 2019. To ensure methodological robustness, pooled OLS, fixed effects, and random effects models were applied, with model selection guided by the Chow, Breusch–Pagan LM, and Hausman specification tests. Diagnostic checks for heteroskedasticity and multicollinearity were performed, and heteroskedasticity-robust standard errors were incorporated in the final random effects model. Mediation was examined using the Preacher and Hayes approach, while moderation was tested through interaction term regressions. Firm size, sales growth, and liquidity were included as control variables. The findings indicate that board size consistently enhances FFP, while board independence and board meeting frequency yield mixed results. Gender diversity and CEO duality reveal heterogeneous, context-specific effects shaped by institutional and cultural settings. Importantly, GI partially mediates the CG–performance relationship, suggesting that stronger governance encourages sustainability-oriented practices that contribute positively to financial outcomes. CS further moderates these relationships, with balanced leverage reinforcing governance effectiveness and excessive debt diminishing firm performance. Theoretically, this study advances the CG–FP debate by integrating Agency Theory, Trade-off Theory, and the Socially Responsible Investing (SRI) perspective. Empirically, it provides evidence from Pakistan’s evolving governance environment. Practically, the results offer valuable insights for regulators, policymakers, and corporate leaders to strengthen governance codes, align CS policies, and embed GI in corporate strategies to achieve sustainable performance.