The Moderating Effect of Growth Opportunity on the Relationship between Corporate Governance Toward Key Financial Indicators of the Firms: Evidence from Pakistan

Abstract

     Abstract

The aim of this research is to investigate corporate governance influence on firm profitability, liquidity and leverage and also investigate the moderating variable could increase the association between independent and dependent variables. In this research the dependent variables which are profitability (ROA), liquidity (CR) and leverage (TD/ TA) and independent variables which are board size, board independence, managerial and foreign ownership. The moderating variable is growth opportunity and the proxy of growth opportunity is MV/BV. In research use quantitative approach and sample of this research is 70 companies listed on KSE-100 index and the data period is 2011-2018 sequentially. To find out the results panel regression with fixed effect is used, performance and position data has taken from financial statements available at company's official website and PSX website.

The study results show that in the first model where the profitability is taken as an dependent variable is revealed that the board size influenced profitability negatively, which is in consistent with the view that the smaller board size contribute more towards the profitability. Board independence has a negative impact with accounting measure of profitability such as “return on asset”, implying that the autonomous directors are not positively contributing. The interaction term of growth opportunity with BS, BI and FO are also significant at 1% significance level which concludes that growth opportunity moderates the relationship between the BS and profitability, BI and profitability and FO and profitability and further enhances the impact of BS towards profitability, BI towards profitability and FO towards profitability.

In second model where the liquidity is taken as a dependent variable, only the foreign ownership is found to be significant at 1% significance with positive impact of foreign ownership with liquidity, which reveals that higher level of foreign ownerships in firms increase the firm liquidity. The interaction term of growth opportunity with BS, BI and FO are also significant at 1% and 5% significance level which concludes that growth opportunity moderates the relationship between the BS and Liquidity, BI and Liquidity and FO and Liquidity and further enhances the impact of BS towards Liquidity, BI towards Liquidity and FO towards Liquidity.

In third model where the leverage is taken as a dependent variable, only the foreign ownership is found to be significant at 1% significance with negative impact of foreign ownership with leverage, which reveals that higher level of foreign ownerships in firms decreases the firm leverage. The interaction term of growth opportunity with BS, BI and FO are also significant at 1% and 5% significance level which concludes that growth opportunity moderates the relationship between the BS and Leverage, BI and Leverage and FO and Leverage and further enhances the impact of BS towards Leverage, BI towards Leverage and FO towards Leverage.