CORPORATE GOVERNANCE AND FIRM FINANCIAL PERFORMANCE: THE MODERATING ROLE OF BOARD INDEPENDENCE

Abstract

Corporate governance reform has become a central instrument of financial market development. However, four decades of empirical work still disagree about whether better governance pays and, more fundamentally, about the conditions under which it pays. This study examines whether the level of board independence conditions the financial return that listed firms earn on the quality of their governance architecture. The analysis employs a balanced firm-year panel of 300 non-financial firms listed in twelve developed and emerging markets over the period 2003–2024 (6,600 firm-year observations), combining firm-level governance attributes with accounting, market and country-level institutional indicators, and estimates two-way fixed-effects models with standard errors clustered at the firm level. The results show that a one standard deviation improvement in governance quality raises return on assets by 0.93 percentage points (t = 5.78), return on equity by 1.70 percentage points and Tobin's Q by 0.041; board independence is independently associated with performance (β = 0.44, t = 3.30) but follows a concave profile that peaks at approximately 69.5 percent of independent directors; and the interaction between governance quality and board independence is positive and significant (β = 0.24, t = 3.49). Conditional-effect estimates indicate that the governance performance slope rises from 0.69 percentage points at low board independence to 1.17 percentage points at high board independence, and the moderating effect is roughly twice as large in emerging markets as in developed markets. The findings indicate that, with regard to board independence, there is an enforcement mechanism that converts the formal governance structure into actual financial returns, and that the roles of good governance, accountable institutions, and transparent institutions are complements.

JEL Classification Codes: G30, G32, G34, M14, O16.