For Plag Check

Abstract
This dissertation investigates the impact of corporate governance practices on corporate
performance. More specifically, the thesis encompasses financial slack as a mediator and earning
quality as a moderator. The study comprises of a sample of unbalanced panel dataset of 222
Pakistani non-financial corporations listed on the Pakistan Stock Exchange (PSX) for 2005-2019.
The thesis analyses mediation and moderation using fixed effect method.
The study uses three proxies, available slack, working capital slack, and potential slack to
gauge financial slack resources (mediator). The results show that both available-slack and
working capital slack indicate full mediation for the impact of corporate governance on return on
assets and partial mediation for Tobin’s Q and return on equity. Furthermore, potential slack
fully mediates the impact of overall governance on Tobin’s Q and return on assets, whereas there
exists full mediation between corporate governance and return on equity
For moderating effect, the findings depict that earnings quality attributes (predictability,
smoothness, and conservatism) positively affect corporate performance. Precisely, predictability
and conservatism positively moderate the association between corporate governance and
financial performance. Furthermore, smoothness positively moderates the association between
corporate governance and Tobin’s Q, while negatively moderate the association among corporate
governance and financial performance (ROA, and ROE).

The novelty of this study is to investigate the mediating role of financial slack and
moderating role of earnings quality in the corporate governance-firm performance linkage rather
than analysing merely the direct linkage of the corporate governance-firm performance. The
analyses will provide insight into the effectiveness of corporate governance compliance and
reporting in the corporate sector of Pakistan. Correspondingly, this investigation can enlighten
regulatory authorities about the potential advantages of increased transparency in the information
disclosure to various stakeholder groups and enterprises. Besides this, the research results will
benefit shareholders and stakeholders engaged with financial slack.
Keywords: Corporate Governance, Financial Slack, Earnings Quality, Firm
Performance
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CORPORATE GOVERNANCE AND FIRM PERFORMANCE
Chapter 1: Introduction
Though meaningful in the contemporary financial sector, business entities
maintain high standards in organisational matters and their overall market and economic
positioning. As little more than a necessary consequence, the top management of
corporations plays an indispensable role in maintaining and promoting a firm's better
reputation. The contemporary research puts forth multiple arguments vis-a-vis corporate
governance and the financial performance of a corporation (Ying & Rayappan, 2020
Guluma, 2021; Farooq et al., 2021; Iyer & Miller, 2008). Corporate governance received
considerable curiosity across the globe, primarily due to the East Asian and South
American financial breakdowns and a succession of corporate collapses in other
innovative republics such as the United States. Hence, corporate governance appears as a
global phenomenon for both developed and developing economies, as the nations’
demand for resources is rapidly increasing.

In the prevailing literature on governance-value linkage, most of the studies have
merely focused on the direct effect of corporate governance on corporate performance
(Arora & Sharma, 2016). Likewise, in the Pakistani context majority of the studies
emphasize on the direct effect of overall corporate on financial performance of
corporations and ignore other influential factors through which overall corporate
governance can significantly affect corporate efficiency (Farooq et al., 2021; Ali, 2018).
For this reason, bearing the insinuations of corporate governance, the ongoing research is
an attempt for the effect of corporate governance on performance through the precise
channel of financial slack. Furthermore, this study also investigates the conditional role
of different levels of earnings quality for the effect of good corporate governance on
performance of companies in the Pakistani perspective. The prior investigations on the
CG-value association either have scarcely or partially focused or even entirely
overlooked some influential factors through which corporate governance can
substantially impact the financial performance of the corporations. Consequently, this
dissertation asserts to explore indirect channels and conditions in the governance-
performance linkage.
Background of the Study

In developed countries, the governance-performance association of corporations
is a highly contentious and well-researched subject matter. Notwithstanding, recently, in
developing countries like China, India and Pakistan, this subject matter has received
acute attention owing to various corporate governance scams and financial embezzlement
(Ciftci et al., 2019; Arora & Sharma, 2016). A governing system's, institutions', and
socio-economic frameworks' performance of every sector are now evaluated by one
word: Governance. Broadly, the notion of governance narrates; the set of principles,
rules, procedures, and legal practices to provide requisite guidelines to the concerned
parties for the smooth execution of the operating activities with transparency, integrity,
and accuracy. A suitable corporate governance mechanism is assumed to help nations
enhance their financial and economic activities. Every country wants its industry to grow
and earn more profit as it contributes to its prosperity. Moreover, promising governance
assists enterprises to achieve sustainable corporate performance and financial sector
expansion by improving companies' profitability and strengthening their access to
external financial resources (Gerged, 2021; Shleifer & Vishny, 1997; Symeou et al.,
2019; Vives, 2000).

Likewise, information is considered the most vital financial market device in the
present-day prevalent, dynamic, challenging, competitive, and globalized environment
for the smooth operation of the corporations. However, corporate scams have shown
serious concerns about implementing corporate governance framework, accuracy, and
reliability of financial reporting quality. These corporate scams have shattered the
stakeholders' confidence. The primary concern was the failure of corporate governance,
the poor quality of reported earnings, the lack of an independent board, the auditor’s
quality, and the efficient exploitation of the organisational financial resources (Kyere &
Ausloos, 2020; Watts & Zimmarmen 1986, Jensen, 1986).
There are two broad schools of thought about the appropriate objectives of
corporate governance structures and arrangements. Since the 1980s, the shareholder
primacy view has dominated the United States, the United Kingdom, and other European
states, focusing on governance issues that arise in publicly traded corporations. Many
individuals with little or no management ties to the firm trade equity shares. This issue
has been dubbed the 'agency cost problem' in the literature due to the separation of
ownership and control' (Berle & Means, 1932; Jensen & Meckling, 1976; Smith et al.,
2017).
In line with the above argument, in many emerging and developing markets
perspectives, the concept of governance is demonstrated other way around, such as in
China, Pakistan, India, and other growing economies. Corporate governance is an
indispensable and critical framework for corporate effectiveness as it is positively
correlated with firm financial performance (Cheng et al., 2021a; Shamsudin et al., 2018).
Conversely, inadequate governance could result in corrupt practices, exchange rate
volatility, and stock market crashes. The stock market crash of 1997 encapsulates how
inappropriate organisational governance mechanisms rapidly compromised the
economies of South Korea, Malaysia, Thailand, Indonesia, and the Philippines in East
and Southeast Asia (Cheng et al., 2021b; Johnson et al., 2000; Mitton, 2002; Momen,
2021; Puni & Anlesinya, 2020). Consequently, numerous shareholders and prominent
investors are inclined to invest capital resources in risk-free corporations with exemplary
corporate governance implementation (Campos et al., 2002; Singh, 2021). In this regard,
the (OECD) adopted a set of corporate governance principles in 1998 to assist member
and non-member states in evaluating and improving their legitimate, institutional, and
political structures to enhance corporate governance.
Hence, the notion of corporate governance is defined from a couple of
perspectives. In a narrow sense, corporate governance assumes that shareholders ensure
they will receive a return on their invested capital (Shleifer & Vishny, 1997).
Nevertheless, in a broader sense, corporate governance is a framework of rights and
obligations that applies to all stakeholders with a legitimate interest in companies, such as
equity investors, lenders, executives, staff members, the government, and society on the
whole (Chen et al., 2021; Koji et al., 2020; Kong et al., 2020).
So, in a nutshell, corporate scandals in market economies like Enron, WorldCom,
and Goldman Sachs in the United States and Toshiba in Japan demonstrate that there is
no single structural model impervious to financial catastrophes. Firms with more
independent, impartial boards and higher institutional ownership, it appears, perform
worse in terms of stock return during the global financial crisis of 2007-08 (Erkens et al.,
2012; Javed et al., 2006; La Porta et al., 1997; Tut, 2021). Indeed, the Enron and
WorldCom scandals refuted the critiques that Asian managerial style is associated with
bad corporate Governance (Aljaaidi et al., 2021; Chen et al., 2021). In today’s market-
oriented economies and with the effects of globalization, the importance of corporate
governance is also growing. That is because governance is an essential way of ensuring
transparency that ensures the interests of all shareholders (big or small) are shielded.
According to the (OECD, 2015) recommendations, CG enables corporations to easily
access external resources, improve performance, add value, reduce investment and
reputational risks (Antounian et al., 2021; Farah et al., 2021; Saleem et al., 2020).
Given the importance of corporate governance, the current research investigates
the CG-FP association in a developing country like Pakistan. This study has investigated
the data of non-financial firms quoted in PSX from 2005 to 2019. Hence, the present
research is precisely in this context that the researcher aims to determine the multi-
dimensional implications of corporate governance and firm financial performance in
Pakistan. On the one side, the study indirectly investigates the overlooked precise channel
effect of overall governance on financial performance. For this motive, the study has
taken up organisational financial-slack resources – excess or uncommitted financial
resources as a mediating variable to capture the indirect effect of corporate governance
on the performance of the firm. These financial-slack resources positively impact
organisational performance (Cyert & March 1963, Railov 2017; Tabassam, 2021). These
resources create a positive return on investment projects, which turn into firm financial
performance.
Additionally, this research has addressed the corporate governance strategies
concerning the reliability and relevancy of the financial reporting quality, which
translates into the firm's earnings quality (EQ) (Ewert & Wagenhofer, 2016). In the
Pakistani context, rare studies are available that look into the indirect effects, primarily
through the precise channel of financial slack (FS) as a mediating variable. Likewise, this
research considers earnings quality as a moderating variable. On the conditional side,
researchers have shown less focus, especially in Pakistan, and they have not investigated
earnings quality as a moderator or conditional variable in the CG-FP relationship since
firms’ earnings may remain at a low, medium or high level. Hence, we have analysed an
environment where earnings vary (Gaio & Raposo, 2011; Menicucci, 2020). Therefore,
to the best of our knowledge, we have not seen any study which would use financial slack
(FS) as a precise channel (mediating variable) and earnings quality (EQ) as a moderating
variable for the effect of corporate governance on profitability and financial efficiency of
corporations, particularly in case of Pakistan.
Motivation Behind the Study

The prosperity of every nation has always been linked with its strengthened and
organised financial system (Husain, 2018; Keynes, 2018; Sheehan, 2009). Before the
1930s great depression, classical economists claimed that all the resources of an economy
were optimally used. However, this Utopia has collapsed during the great depression, and
thousands of people were roaming in the streets of London and New York for a piece of
bread. This dangerous recession-induced researchers to think about coping with such
economic and financial turbulence ahead (Eggertsson & Petracchi, 2021). Therefore,
Keynes (1936) had played a tremendous role in uplifting corporate activities. He argued
that the corporate sector does not optimally use financial and economic resources,
contrary to the classical school of thought, which believed that all the economic and
financial resources are fully employed (Sheehan, 2009).
Given the worst effects of two eminent financial contagions (Asian financial
crisis, 1997 and financial crisis, 2008) on the financial system of many countries,
financial economists have started pondering upon the need for one crucial aspect of
robust governance to cope with such catastrophes, and that is “Governance of Corporate
Sector.”
However, corporate governance in Pakistan, where the majority of the businesses
are either run by family owners or controlled by some influential groups (SECP, 2002), is
evolving and newly adopted in Pakistan. As it is constantly criticized by various
stakeholders, i.e. (political and financial), low-quality governance is one of the pertinent
causes of low corporate performances and poor financial sector in Pakistan (Husain, 2015
; 2018). Therefore, it is essential to conduct research on such themes encouraging good
corporate governance in Pakistan because of the increased pressure arising from
globalization and technological advancement in the financial system (Husain, 2018).
Within this context, ample empirical evidence is available on the direct
relationship between corporate governance and the financial proficiency of corporations.
Since a vigorous corporate governance mechanism strengthens firm performance,
maximises shareholders’ wealth, enhances the firm's value, and provides trust and
transparency (Koji et al., 2020; Kyere & Ausloos, 2020; Bhagat & Bolton, 2019; Ciftci et
al., 2019). However, as per the best of our knowledge, rare literature is available on the
indirect and conditional relationship between governance and corporate financial
performance. Researchers have left significant precise mediating and conditional aspects
unnoticed for the effect of CG on enterprise performance in the previous literature
(Wefald et al., 2010).

Hence, we have been inspired to take up the CG-FP association in a developing
country for in-depth analysis because governance is emerging and at its infant stages in
Pakistan. So being a critical variable, it is needful to emphasize the significant
contribution of corporate governance among businesses, particularly in Pakistan
compared to advanced countries. In this study, these overlooked aspects urged to capture
the effect of corporate governance on firm performance indirectly using financial slack as
mediating variable and earnings quality as a moderator, specifically in Pakistan (Gaio &
Raposo, 2014; Menicucci, 2020; Susanto & Bosta, 2018).
Research Gap
Exploring the Research Gap Empirically
Although, in the existing literature, the researchers have focused on the direct
linkage of corporate governance and corporations' profitability, shareholders’ wealth
maximization, and value enhancement in developed and developing economies. The rare
published literature is available on the indirect effect of corporate governance and the
financial performance of companies in developing countries, particularly in Pakistan (for
example see studies by Latif and Abdullah, 2015; Shahid and Abbas (2019); Lu et al.,
(2021)).
The prior literature is also silent on other unnoticed, indirect precise channels and
conditions through which good governance can impact the value of the companies.
Therefore, the ongoing study attempts to fill this significant knowledge gap in the
existing literature both empirically and theoretically, particularly in the Pakistani context.
The principal intention of this research dissertation is to investigate the impact of overall
corporate governance (CG-Index) on firm performance (Tobin’s Q, return on assets, and
return on equity) using organisational slack resources-called available and potential slack
(excess or surplus and uncommitted liquid resources such as cash, receivables, current
assets, inventories, etc.) as a mediating variable. The study's second phase fills the
knowledge gap by considering the earnings quality attributes as a moderating or
conditional variable (Caskey & Laux, 2017; Dang et al., 2020; Dichev et al., 2013;
Francis et al., 2008; Gaio & Raposo, 2011; Latif et al., 2017; Menicucci, 2020b). The EQ
determinants conferred in the literature are (earnings persistence, predictability, value
relevance, earning smoothness, conservativism, and accrual quality). In Pakistan, the size
and age of the corporations are different. Hence, we argue that small and newly
established enterprises may be inclined towards earnings manipulations because of poor
performance compared to higher performance enterprises. Hence, in low-performing
firms, the association between free cash flows and earnings remains lower than the high
earnings corporations. This disparity of performance and earnings between small and low
performing and high performing firms is emphasized in the current dissertation.
Exploring the Research Gap Theoretically
Behavioural theory, financial- slack theory and resource-based theory favour the
positive impact of financial slack on the performance of the firm (Sharma et al., 2019).
Conversely, Jensen & Meckling (1976, 1986) argued that managers behave
opportunistically due to the separation of ownership and control, which leads to high
agency conflicts, information asymmetries, and deteriorates corporate performance. This
is a type-I agency problem in developing countries due to the high concentration of
ownership. Likewise, type II agency problems exist between local and foreign owners
regarding financial-slack investment (Kim et al., 2008). In this context, type-I and type-II
agency problems have yet not been addressed in Pakistan.
On the conditional side, theoretical literature is inconclusive from the perspective
of developing economies. On the one side, positive accounting theory (PAT) postulates
the positive association between earnings quality and firm performance, while on the
other hand, agency theory explains the inverse effect because of the opportunistic
behaviour of the managers (Ball & Brown, 1968).
In this regard, few studies in developed countries with different corporate
governance structures provide a bit of literature (Jensen, 1986; Jensen & Meckling, 1976;
Kim et al., 2008; Lee, 2012). In Pakistan (a developing economy), where corporate
governance is weak, and ownership is highly concentrated, this study explores these two
theories and fills this significant gap.
Contribution of the Study
This research investigation has made several theoretical and empirical
contributions to the impact of overall on financial value in Pakistan's non-financial sector
and the field of finance and accounting.
Empirical Contribution
This research has investigated the effect of considering both market-based and
accounting-based performance measures of earnings quality on performance at various
levels, such as low-level EQ, medium-level EQ, high level of earnings quality
(Menicucci, 2020a). The behaviour of earnings quality is different in different economic
environments. Neither performance nor earnings level remains the same in all the firms.
Hence, to explore the moderating role of earnings quality, this study has analysed the data
sample of 222 different non-financial firms. For this purpose, earnings quality may
remain low, how independent variable, i.e., overall corporate governance (CG-Index), in
this study affects dependent variable, performance (FP), likewise, how corporate
governance affects performance at medium-level and high level of earnings quality. For
this reason, in the estimation model, we introduced an interaction term of overall
corporate governance and earnings quality (EQ) to measure the effect of governance
(CG) on financial performance of corporations.
There are different possibilities in this mechanism. First, if the coefficients of
both CGI and interaction terms remain positive, EQ enhances the effect of CG on FP. As
EQ increases, the effect of CG on FP also increases. Secondly, in extreme or rare cases,
which is almost impossible, if the coefficient of CG and interaction term is negative, then
it may enhance the negative effect of CG on FP. Therefore, this study has contributed by
filling this significant literature gap of the prior studies.

Furthermore, when the signs of the independent variable and the interaction term
(CG*EQ) remain the same, this shows that corporate governance and earnings quality are
“complement.” It further enhances the total effect. Conversely, if the signs of
independent variables and interaction term are opposite, the independent variable CG and
interaction term (CG*EQ) is “substitute” (Dang et al., 2020; Gaio, 2010; Gaio & Raposo,
2014; Istianingsih, 2021; Menicucci, 2020b). In this study, we confirm through
estimation model whether earnings quality plays its role as a complement or substitute for
corporate governance and its effects on the performance of the firm while categorizing
the firms of different levels of earnings quality, i.e., low-level of earnings quality,
medium-level and at the high level of earnings quality. It means different significance
levels are captured, indicating how the corporate governance index impacts the firm's
financial performance at various levels of earnings quality. To investigate whether this
effect remains the same for all three levels (low, medium, high) of earnings quality or
changes (Gaio & Raposo, 2014; Latif et al., 2017).
Besides, the study included a financial-slack resource, for instance, available and
potential slack, as a mediating variable while determining the overall effect of corporate
governance on the financial performance of the firms. It has buttressed in the literature
that robust governance characteristics, for instance, board characteristics, the ownership
structure, the directors’ independence, the role of external auditor positively impact firm
performance by the allocation and apportioning of firm left-over liquid financial
resources such as cash flows, surplus working capital, accounts receivables, inventory,
and other current assets (Ashwin et al., 2015; Peng et al., 2010).
Contribution to Theory
As per the best of our knowledge, the initiative is novel to address the difference
of opinion of behavioural and agency theorists and explore the missing precise channels
and conditions that can better explain the governance and company performance,
particularly in the developing economy of Pakistan. The study will open with the
corporate governance structures adopted in Pakistan in 2002 and later with the indirect
channel of slack financial resources as a mediator while earnings quality as a moderator,
using a panel dataset of 222 non-financial Pakistani firms from 2005 to 2019.
This study strives to relate corporate governance with the financial-slack and firm
performance and examine to infer the positive or negative conclusions of agency theory
in the Pakistani context conversely to the positive impact of resource-based and
behavioural theorists. From the past literature, it is inferred that highly concentrated
ownership in emerging economies creates high agency conflicts between host and foreign
owners. That is one of the reasons that, if we view annual reports of the Pakistani firms,
we scarcely find foreign equity ownership. It means that type-II agency problems
increase agency costs and asymmetries of information, translating into the high cost of
capital (Ashwin et al., 2015; Peng et al., 2010; Shaikh et al., 2018; Titus Jr et al., 2021;
Yang et al., 2021; Yu et al., 2020). This issue is rarely discussed in the developing
country context.
This research effort adds to the growing body of knowledge in multiple ways.
First, it employs CGI, a comprehensive governance measurement system, to demonstrate
the impact of governance quality on organisational performance in PSX-quoted
organisations. The majority of the preceding investigations have investigated Individual
aspects of governance measures. Therefore, according to the authors’ knowledge, this is
the first study of its kind to look at the governance index with firm performance directly,
indirectly and conditionally simultaneously in a developing economic setting. Second,
the author looks at how CG can indirectly improve the firms’ financial performance
using financial slack as a mediator. Furthermore, this study investigates the conditional
role of earnings quality in the context of the CG-performance association, which has not
yet been studied. The likely potential contribution of the study is that corporate
governance can flourish in a developing country like Pakistan if good corporate
governance compliance is implemented. Strong corporate governance can increase the
effectiveness of financial slack and the quality of earnings. Which further contributes to
the acceleration of the corporate sector's financial performance.
Statement of the Problem

In developed countries, a vigorous legal and social system is dominant. It is
evident that a robust corporate governance structure plays a significant role to improve
financial performance. On the other hand, the loose corporate governance mechanisms
persistent in developing countries, including Pakistan, persuade managers to misuse the
financial slack because of the discretionary nature of managers. Consequently, this will
lead poor firm value because of lesser allocation in investment in research and
development, in low or even in negative return and highly risky ventures (Jensen, 1976,
Shaikh, 2018; Lee, 2012, Tabassam et al., 2021).
Besides, as the Pakistani firms have a strong international competitive position.
However, they still could not get their strategic targets due to the financial reporting
issues. In Pakistan, like other developing economies, concentrated ownership structure
and weak regulations result in different agency problems compared to developed
economies. For instance, managers use earnings as a tool to promote their self-centered
approach to avoid the control of stakeholders in the corporate governance process. Firms
that manipulate earnings do so to disclose financial reporting that does not match with
actual performance (Osma et al., 2005; Price and Sun, 2017). The outcomes of earnings
manipulation methods are certainty harmful; they decrease corporate value, its reputation
and its corporate image (Fombrun et al., 2000; Roychowdhury, 2006). Additionally, it
incites the misfortune of stockholders, investors and other partners and causes an increase
in bad governance practices (Price & Sun, 2017; Zahra et al., 2005). This will result in a
negative impact on firm performance (Sial et al., 2018). Hence, it raises the question of
whether good corporate governance conditionally impacts organisational performance at
different levels of earnings quality.

In the current scenario the significant role of corporate governance is far reaching
and beyond the corporations’ internal performance due to globalization and dynamic
nature of businesses. For the success of corporate sector and to be competitive firms need
to adopt good corporate governance compliance to accomplish not only its internal
performance but also to build trust across the borders to attract the foreign stakeholders
and investors by discouraging the managers’ opportunism and proving reliable, relevant
and timely information.
Scope of the Study
This research study is an empirical investigation of the Pakistani non-financial
firms to explore the missing precise channels of the linkage between corporate
governance mechanism and corporate financial performance. The study problem is
exploring the governance-performance association through the indirect channel of
financial-slack as a mediating variable that enhances firm performance. Also, this study
captures the role of earnings quality for the effect of corporate governance on the
financial performance of corporations. Since, the prevailing literature neglected several
critical dimensions of governance structures in developing countries, as there is a vast
difference in corporate governance settings in developing countries as compare to the
advanced economies. Accordingly, the purpose of the ongoing dissertation is concerned
with the Pakistani corporate governance setup while analysing the updated panel dataset
of the selected non-financial corporations.
The distinctiveness of the present research is to explore the indirect effect of
corporate governance on the financial performance of firms through the channel of
financial slack and the moderating role of earnings quality in the governance-
performance interaction, as contrasted to merely evaluating the direct connection between
corporate governance and financial performance of corporations. The investigations will
shed light on corporate governance compliance and reporting performance in Pakistan's
financial industry. Accordingly, this evaluation can advise regulatory authorities on the
prospective benefits of increased transparency in disclosing information to various
stakeholders and rather than organisational players.
Research Questions
The following pertinent research questions have been established for further
research examination;
i. Does corporate governance affect the financial performance of the companies?
ii. Do financial-slack resources mediate the nexus between the firm level corporate
governance and financial performance?
iii. Does earnings quality moderate the association between the corporate governance
and the financial performance of the companies?
Research Objectives
The following potential objectives of the study are set to achieve during this
research journey.
i. To investigate the direct impact of the corporate governance mechanism on
financial performance of the firms.
ii. To explore the mediating role of financial slack among corporate governance and
firm performance.
iii. To investigate the moderating role of earning quality between CGI and corporate
financial performance in Pakistan.

Significance of the Study
For the past several years, the primary emphasis of governance-performance
research has been on the direct link between corporate governance and the value of a
company in either advanced or emerging economies. Likewise, in the case of Pakistan,
most of the studies are available on the direct association among corporate governance
attributes and the value of the corporations. The existing studies have shown less
attention or neglected to ponder other precise channels and conditions, such as the
mediating and moderating variables, through which CG can positively impact the firms'
financial performance (FP). For this reason, this study has taken up this significant and
unnoticed issue and attempted to investigate the impact of corporate governance on the
financial performance of enterprises indirectly through the mediating channel of
financial-slack resources and conditionally through the moderating role of earnings
quality determinants. For this purpose, the study has employed two measures of firm
financial-slack; for instance, available slack resources consist of surplus liquid resources
available at the firm and the potential slack-capacity of firms to get resources from
external sources following (Lee, 2011, 2012, 2015). In addition, besides the precise
channel, the study also considered the precise conditional role of earnings quality (either
substitute or complement) in probing the impact of overall corporate governance (CG-
Index) on the performance of the corporations in a developing economy context, Pakistan
(Abd Alhadi et al., 2021; Fan et al., 2021; Menicucci, 2020b; Perotti & Wagenhofer,
2014b; Saleh, Afifa, et al., 2020).

Contextual Significance
Most of the past literature is available on the direct association between corporate
governance and firm value in developed and emerging market economies. Nevertheless,
the governance system is entirely different in developing countries than in advanced
countries. Since the governance structure in developing countries is at its infant stages,
for instance, Pakistan. In developing economies, governments face the challenges of
political instability, higher corruption, low investors’ protections, highly concentrated
ownership, unprofessional company boards, and rare whistleblower protection laws as
governance is assumed to provide rules, regulations, and transparent governance
mechanisms for the successful operation of a corporation and to protect the interests of
the stakeholders. Nevertheless, this research attempts to contribute to the existing
literature on CG-FP linkage, particularly in developing countries, by investigating the
indirect role of financial-slack and the conditional role of the suitable earnings quality
attributes in the governance-value association.
To validate the basic agency theory that implies the diverse shareholders and managers
are well aware of the proper allocation of financial-slack resources, even with conflicts
among themselves (Allen, 1993). Conversely, this argument does not become consistent
and supports the relationship in highly technological and risky firms. There may be a
conflict of interests among stockholders while making decisions regarding allocating
financial slacks (Davis & Stout, 1992). They might even differ in the decision of the
amount of slack that a firm requires (Iyer & Miller, 2008; Kim et al., 2008).
Furthermore, the value-added function of the current study is, above and beyond, the
decisive role of the quality of financial reporting as it is a significant output of effective

corporate governance mechanism. A reliable, relevant, and trustworthy financial
reporting quality ensures the reliability of firms' earnings because EQ is an output of
quality financial reporting. In the light of the stated importance, it is desirable to do
empirical analysis in corporate governance and earnings quality and their effect on firm
performance regarding Pakistan. We argue that if the sign of overall corporate
governance (CG-Index) and earnings quality (interaction term) is positive, then the
behaviour of overall corporate governance quality and earnings quality is a complement.
Conversely, if the signs of interaction term OCGI and EQ are negative, then overall
corporate governance quality and earnings quality are substitute. Even then, the
association is not very easy to understand. Still, whether the association is a substitute
phenomenon or complementary is not apparent (Gaio & Raposo, 2011; Gaio & Raposo,
2014; Menicucci, 2020; Nissim, 2021; Perotti & Wagenhofer, 2014).
In recent times, investigators have been more concerned with the quality of earnings
rather than the number of earnings. Research scientists are looking at creating
methodologies to understand earnings quality better to overcome potential conflicts of
interest and lower opportunistic behaviour and asymmetry of information, thereby
protecting stakeholders' expectations and ramping up investor market confidence.
Henceforth, in the light of the stated importance of CG and EQ, it is desirable to examine
the impact of CG on FP at varying levels of earnings quality (low, medium and high) in
Pakistan empirically. The role of CG and EQ may be either complement or substitute.
This study uses three EQ attributes (predictability, smoothness, conservatism).

Practical Significance
To the best of our knowledge, there is no thorough investigation on this area of research
and rare literature is available. However, this is a composite investigation in a developing
country such as Pakistan, having an evolving CG culture with a diverse ownership
structure. Hence, the research questions and objectives can provide valuable insights for
policy-makers, regulators, and academics. The SECP and the State Bank of Pakistan, in
particular, may benefit from the findings due to their corporate governance reform
policies. Thus, the findings will assist policy-makers and regulators in implementing
practical financial reporting regulatory requirements. This research benefits the
government, policy-makers, businesses, investors, and research scholars for decision-
making. It uses the directions and guidelines given in this research to take advantage of
the results and suggestions documented in the study to encourage and implement good
corporate governance and firm performance through precise channels and conditions in
Pakistan (Aidt, 2009; Rezaee et al., 2018).
In a nutshell, this study is significant in the following directions:
i. This research will assist lawmakers in developing policies that could modernize
the monitoring of publicly listed companies in developing countries.
ii. This study is a guideline for the government to curtail the problem of money
laundering financial and political corruption.
iii. Researchers and scholars could use this investigation to undertake a causal
analysis of a corporation's accounting policies and financing decisions.
iv. This research will aid managers of major corporations to make an investment
decision about financial slack and financial reporting.

v. This study would help internal and overseas investors to make more informed
investment decisions.
vi. This assessment may benefit the government in developing a more sophisticated
corporate governance mechanism for listed companies.
vii. This research investigation will benefit to overcoming the problems that arise due
to the separation of ownership and control. For instance, problems arise because of
agency conflicts regarding allocating firms’ financial-slack resources. The suggestions
will be beneficial in controlling managers' discretionary power in utilising financial
resources.
viii. Above all, the study will highlight the differing views of agency theory, resource
dependence theory, and behavioural theory about allocating and reinvesting slack
resources of the organisation in promoting financial performance.
Theoretical Significance
 In terms of theory, the research will be significant as it will open new avenues of
agency theory, positive accounting theory and financial slack theory, for the
impact of corporate governance on firm performance regarding the optimal
exploitation of FS and earnings quality attributes, particularly in developing
countries, by addressing and controlling managers’ opportunistic behaviour and
discouraging the managers’ manipulative practices for earning personal benefits.
Besides, this theoretical insertion will amplify the inconclusive stance of FS &
EQ on the impact of corporate governance on the financial performance of
corporates, especially in emerging economies.

Roadmap of the thesis
The ongoing thesis outlines as follows: Chapter 1 elaborates on the introduction and
background of the research topic. The forthcoming sections outline the problem
statement, research gap, research contribution, study's inspiration, questions, objectives,
significance and scope of the study. Chapter 2 comprises a detailed account of the related
literature, accompanied by the respective hypothesis for the study, identifying variables,
and the overlooked research gap. Chapter 3 covers theoretical literature and underpinning
theories, based on which theoretical model is established. Chapter 4 elaborates complete
research design, estimation models, construction of variables and sample selection.
Chapter 5 outlines the estimation and data analysis. Lastly, chapter 6 consists of the
conclusion, implications, potential future research and limitations of the research.
Summary of the Chapter
The study is all about the governance-performance association in Pakistan corporate
sector. Therefore, the current chapter covers the significant role of corporate governance
and its impact on firm financial performance, focusing on the agency cost, information
asymmetries, and type-II agency problem of principal-to-principal conflicts. The in-depth
focus on corporate governance index, firm’s financial performance, and other ignored
precise indirect channels and conditions are examined. The research covered earnings
quality as a moderator-conditional variable, whereas organisational financial slack is an
indirect-mediating variable. The rest of the chapter comprises the research objectives,
problem areas, research questions, motivation, and significance.
Organization for Economic Cooperation & Development

Chapter 2: Review of Literature
Introduction
This chapter provides review-related contributions to the theoretical and empirical
literature. It integrates theories to the research questions raised in the preceding chapter
related to the interaction between corporate governance mechanisms in advanced and
emerging states' financial and economic environments, such as corporate governance,
financial-slack resources, earnings quality attributes, and firm performance. The
following sections fleetingly summarize the existing studies to explore the interactions
between these five variables. Correspondingly, this chapter illustrates how unprecedented
profit growth and valuation could be accomplished by introducing robust corporate
governance strategies and the efficient and reliable exploitation and utilization of firm
resources, thereby establishing a link between corporate governance and performance.
Additionally, the moderating role of earning quality attributes while determining firm
performance has also been addressed.

Background of Corporate Governance
Power structures worldwide have been divided into liberal and conservative until
the 1960s and 1970s. With this separation spreading across many realms of society and
fueled by a moral fury, there were hardly any murky regions. With increased dependence,
synchronization, and the proliferation of communication, these barriers have not only
weakened but sometimes appear to have vanished altogether. A governing system's,
institutions', and socio-economic frameworks' performance of every sector are now
evaluated by one word: Governance. It has vividness on core governance challenges.
Broadly, the notion of governance is doped out as; the set of principles, rules, procedures,
and legal practices to provide requisite guidelines to the concerned parties for the smooth
execution of the operating activities with transparency, integrity, and flawlessly. A
suitable corporate governance mechanism is assumed to help nations enhance their
financial and economic activities. It enables countries to promote financial markets,
strengthen economic growth and achieve sustainable economic and financial
development. The primary objective of good governance is to portray a fair picture of the
current perspective to the concerned stakeholders at large. Indeed, the same concept of
good corporate governance is applied in the corporate sector at the firm level.
Therefore, the idea of a corporate governance framework is elaborated among
corporations as; CG requires adherence to a set of policies and procedures that
shareholders, directors, and corporate boards employ to govern themselves and their
commitments to financial stakeholders. The expression "corporate governance"
corresponds to the structures and institutions that govern and control companies and
institutions. Corporate governance is concerned with the interactions between
management, the directors, majority and smaller investors, and other interested parties.
Moreover, promising governance assists enterprises to achieve sustainable economic
growth and financial sector expansion by improving companies' profitability and
boosting their access to external resources (Gerged, 2021; Shleifer & Vishny, 1997;
Symeou et al., 2019; Vives, 2000).
In line with the above argument, information is considered the most vital
financial market device in the present-day prevalent, dynamic, challenging, competitive,
and globalized environment for the smooth operation of the corporations. However, the
Asian financial crisis European and U.S corporate scams have shown serious concerns
about implementing corporate governance framework, accuracy, and reliability of
financial reporting quality. These corporate scams have shattered the investors'
confidence, creditors, lending financial institutions, and other stakeholders. The primary
concern was the failure of corporate governance, the poor quality of reported earnings,
the lack of an independent board, the auditor’s quality, and the efficient exploitation of
the organisational financial resources.

The concept of corporate governance became popular in the 1980s and is
frequently used to refer to the system of rules and laws that control relationships between
direct corporate participants in publicly listed companies, most notably shareholders,
directors, managers, and occasionally employees. However, problems about control over
business activities have historically been highly significant. Even though the
organisational model became the dominant functional structure for big multinational
companies in the second half of the 19th century, policy constraints about corporate
giants have centred on antitrust, consumer protection, pollution control, employee and
protection of investors, corporate representation in government, and corporate
contributions to charitable causes. There are two broad schools of thought about the
appropriate objectives of corporate governance structures and arrangements. Since the
1980s, the shareholder primacy view has dominated the United States, the UK, and other
European states, focusing on governance issues that arise in publicly traded corporations.
Many individuals with little or no management ties to the firm trade equity shares. This
issue has been dubbed the 'agency cost problem' in the literature due to the separation of
ownership and control' (Berle & Means, 1932; Jensen & Meckling, 1976; Smith et al.,
2017).
In line with the above argument, in many emerging and developing markets
perspectives, the concept of CG is demonstrated other way around, such as in China,
Pakistan, India, and other growing economies. Corporate governance is an indispensable
and critical framework for organisational effectiveness, profitability, and sustainable
growth, as it is positively correlated with firm financial performance, shareholders'
wealth and minority protection, and overall value enhancement (Cheng et al., 2021a;
Shamsudin et al., 2018). Conversely, inadequate governance could result in corrupt
practices, exchange rate volatility, and stock market crashes. The stock market crash of
1997 encapsulates how inappropriate organisational governance mechanisms rapidly
compromised the economies of South Korea, Malaysia, Thailand, Indonesia, and the
Philippines in East and Southeast Asia (Cheng et al., 2021b; Johnson et al., 2000; Mitton,
2002; Momen, 2021; Puni & Anlesinya, 2020). Consequently, numerous shareholders
and prominent investors are inclined to invest capital resources in risk-free corporations
with exemplary corporate governance implementation (Campos et al., 2002; Singh,
2021). In this regard, the (OECD1) adopted a set of corporate governance principles in
1998 to assist member and non-member states in evaluating and improving their
legitimate, institutional, and political structures to enhance corporate governance.
Subsequently, effective corporate governance is essential to protecting investors and
regulating the development and success of global capital markets.
1
Organization for Economic Cooperation & Development
Later on, the (OECD, 2019) corporate governance guidelines serve as a
framework for International Finance Corporations' work in this area, identifying the
following critical practical issues: First: Shareholder rights and equitable treatment of
essential ownership functions. Second: Institutional investors, stock markets, and other
intermediaries. Third: Stakeholder involvement, disclosure, and transparency. Fourth:
The board's responsibilities.
The principles are widely apposite for any corporate governance structure in
economic and financial developmental phases. IFC's challenge is to take this framework
of international best practices in corporate governance and apply it to a diverse range of
emerging and developing Asian financial markets. Hence, the notion of corporate
governance is defined from a couple of perspectives. In a narrow sense, corporate
governance assumes that shareholders ensure they will receive a return on their invested
capital (Shleifer & Vishny, 1997). Nevertheless, in a broader sense, corporate governance
is a framework of rights and obligations that applies to all stakeholders with a legitimate
interest in companies, such as equity investors, lenders, executives, staff members, the
government, and society on the whole (Chen et al., 2021; Koji et al., 2020; Kong et al.,
2020).
Furthermore, in line with the above concept of CG, the industrialized capitalist
economies have seen the highest sophisticated forms of corporate governance. For
instance, the corporate governance systems of the transition markets, China, Russia, and
Vietnam, are still muddled, complex, and contentious. In the Anglo-American corporate
governance paradigm, corporate ownership is widely distributed among many small
shareholders. It is characterized as the market-based or shareholder value model of
corporate governance in which high-tech capital markets handle most surveillance and
financing. Neoclassical economists view this model to be optimal because no single
shareholder can exert monopolistic influence on the operation of these kinds of
companies. Moreover, in Anglo-Saxon markets such as the United States and the United
Kingdom, minority investors' preservation is rigorous, and a high focus is on shareholder
wealth maximization (Koji et al., 2020; Kong et al., 2020; La Porta et al., 1997).
On the contrary, however, the German-Japanese bank-based (Dedajanov, 2021;
Jackson, 2018) corporate governance model followed a few significant shareholders who
own many enterprises. Despite a highly developed financial market structure, the banks
are still very influential in undertaking most financial and monitoring activities in such
giant firms (Ciftci et al., 2019; Goergen et al., 2008). Nevertheless, in Pakistan's
perspective, being an emerging economy having a poor corporate governance structure,
highly concentrated ownership structure, and weak investors’ protection, Pakistani
corporations rely on big banks for financing following the German-bank-based CG model
(Javed et al., 2006; La Porta et al., 1997).
So, in a nutshell, corporate scandals in market economies like Enron, WorldCom,
and Goldman Sachs in the United States and Toshiba in Japan demonstrate that there is
no single structural model impervious to financial catastrophes. Firms with more
independent, impartial boards and higher institutional ownership, it appears, perform
worse in terms of stock return during the global financial crisis of 2007-08 (Erkens et al.,
2012; Javed et al., 2006; La Porta et al., 1997; Tut, 2021). Indeed, the Enron and
WorldCom scandals refuted the critiques that Asian managerial style is associated with
bad corporate Governance (Aljaaidi et al., 2021; Chen et al., 2021). In today’s market-
oriented economies and with the effects of globalization, the importance of corporate
governance is also growing. That is because governance is an essential way of ensuring
transparency that ensures the interests of all shareholders (big or small) are shielded.
According to the (OECD, 2015) recommendations, CG enables corporations to easily
access external resources, improve performance, add value, reduce investment and
reputational risks, create capital markets, and achieve sustainable growth and economic
and financial development (Antounian et al., 2021)
Corporate governance in Pakistan
Being a developing economy, Pakistan desperately needs good corporate
governance best practices, given the pressure from the FATF and other prominent
financial institutions such as the IMF, ADBP, and the World Bank (Shah, 2014; Shamsi
et al., 2017). As the market economy and civil society evolve rapidly, corporate
governance is becoming increasingly important in Pakistan. Former Pakistani Prime
Minister Shaukat Aziz emphasized the importance of corporate governance in Pakistan,
stating corporate governance is not new in this world; it gained popularity among both
developed and developing countries as capital investment became necessary in these
economies. Additionally, family-owned businesses/concentrated ownership and

ineffective and unprofessional boards of directors contribute to the increased need to
implement corporate governance. Since in this situation, we assume that the
management's decisions serve the interests of one party, undermining the confidence of
another stakeholder.
In Pakistan, the Securities and Exchange Commission of Pakistan (SECP)
introduced a corporate governance code in March 2002. This code is an amendment to
the 1984 Companies Ordinance; SECP made it mandatory for all companies listed on the
stock exchange to adhere to the code when conducting business (Nosheen & Faisal,
2018). These codes contain numerous propositions that are consistent with best
international practices. The border area they cover is about director reforms to increase
their accountability to shareholders and improved disclosure with enhanced internal and
external auditing for publicly traded companies (Nazir & Afza, 2018; Farooq et al.,
2021). The code incorporates the Companies Ordinance 1984's requirements (Afza &
Nazir, 2014). It safeguards the interests of minority shareholders. It also tends to draw on
the expertise of other countries — in particular those with a virtually identical legal
system to Pakistan, in developing corporate governance mechanisms. As a result of
compliance with the corporate governance code, this area of research has become
increasingly important.
Recently, corporate governance in Pakistan has been in its infancy; economic
distortion, organizational weakness, a lack of professional skill, concentrated ownership
structure, and audit independence are all significant factors impeding the implementation
of effective governance mechanisms, resulting in companies engaging in unethical
governance practices. The firms misrepresent the financial reporting and report low
earnings to avoid taxes. In addition, Pakistan's stock exchange companies do not fully
adhere to corporate governance standards (Khan & Sethi, 2009). In line with the above
arguments, corporate governance is essential for economic development and capital
movement in the financial sector. Many people have drawn to the imperative of
stabilizing the economies of these countries as a result of the recession in Asia. In 1999,
the Organization for Economic Cooperation and Development (OECD) documented
corporate governance guidelines, proven valuable for evaluating national corporate
governance. In order to invest in a company, good corporate governance is essential. Due
to financial difficulties, researchers have been focusing on gears and rare industries, such
as Pakistan.
La Porta et al. (2000) and Johnson et al. (2000) well-defined, corporate
governance is, to some extent, a set of layers of external investors to protect themselves
against expropriation by insiders." They represent a "third party, which is the
management of controlling shareholders and managers. "Corporate governance involves
private and public base organizations (both official and unofficial) that jointly manage the
association between the company's management and those who invest in the company.
These facilities often include national economic policy, safety regulations, and a list of
market needs, market acceptance, and critical business priorities. " (Klein, 2002).
Thus, fluctuations in Pakistan's corporate governance coordination appear to
significantly impact the structure and practice of themes. The corporate governance
company's involvement in the banking sector also has important implications for the
financial industry. SBP has developed a policy that governs the business environment and
has published several recommendations for corporate governance.

Nevertheless, the legal agreement restricts the administrator's independence and
provides internal control, risk management, and payment policy information. The
summary of the chapter is as follows. The Agency's model is presented in Chapter 2.
Section 3 briefly describes Pakistan's regulatory framework.
Institutional Framework
Western Asian investors and non-profit organizations, such as Enron, have played
a critical role in reducing the cost of the economic management system necessary for the
state's economic expansion, consideration has been given to economic development. This
robust management system will foster sound governance and business development while
increasing customer satisfaction and streamlining processes. The Pakistani security and
exchange commission (SCEP) of Pakistan Security and Transitional Organization is
essential in improving governance for Pakistani business wealth. The Pakistan Securities
and Exchange Commission (SECP) (Commission) was recognized by the Pakistan
Securities and Exchange Commission Policy 1997 and entered into force on 1 January
1999. CLA), which is a federal building. Connect with the Ministry of Finance. At first,
he was concerned with managing business entities and resources. Following the
recommendations of the government plan, the Board of Trustees has established six (6)
positions: the insurance division, the company law division, the finance and admin
division, the securities market division, the human resource and training division and the
specialized company’s division.
Respectively, the division is distributed into units and subdivisions for proper
operation. The offices are headed by supervisors, overseen through Executives directors.
The Board of Trustees for modern affairs includes improving modern business and
industry and business resources; following international legal standards.
Respect the Adhere to the principles of good business management of companies
and protect employees while maintaining sound business performance and efficiency.
The SECP is governed by the Securities and Exchange Commission of India Act 1997,
which contains commitments of the Pakistan Securities Commission and the obligations
and functions of the Board of Directors and the Board of Directors.
The role of accountability is to strengthen the financial policy. The Pakistan
Security and Exchange Commission governs many policies. These include Insurance
Regulations, 2000 (formerly Insurance Law, 1938; Securities and Exchange Commission
of the Pakistan Act, 1997; Company Rules, 1984 (amended and amended 2002).
Company Modaraba and Mojaraba company Ordinance (float and control), 1980;
Securities and Exchange Agreement and Law, 1969. The Research Council was
established by the Pakistan securities exchange commission Approval and Exchange Act
of 1997 to guide the group on all aspects of the Commission's role and policy-making.
The Board of Directors has more than 09 members elected through the government. The
09 members 05 will be police officers, and five will be from the federal government.
Several significant changes have been made to law firms to adopt these laws in line with
the improvements in the corporate industry. These include the shift in Insurance and
Reform, 1969; Modaraba Company and Modaraba Company (Combined and Managed),
1980; Company Rights, 1984; The Office of Security and Legal Affairs of Pakistan Act
1997. Amendments to the 1984 Strategic Institutions, proposed by the SECP, were
approved by the Executive Committee of 2002

The changes were related to the involvement of a single-member company. Due
to this change, the contractor or manufacturer can set up a company that has its
uniqueness and thus enjoy the right to be held liable. This new concept will help expand
disciplinary companies. Companies have up to four months to deposit money in front of
the owners. The firms have remained delivered the historical of four months on
instruction to existing audited explanation earlier shareholders. After one year of
establishment, private companies that become public companies are exempt from holding
their rights meetings. The update makes it necessary for the minutes to be announced to
all leaders within 14 days from the date of those meetings. The opportunity to select a
qualified company leader at all times by a reputable company is essential to the
company's success. With these updates, a company can eliminate its inspectors with
specialized solutions, a maximum of 75%.
However, the choice of new inspectors to replace the removed clinics will be
made with the approval of the Council.
The minimum of the general meeting of companies increased from three to ten
members present, representing no less than 25 % of the total. Goods are an essential
source of financial investment for organizations in developed countries. Currently, our
leading exchanges are in Pakistan, namely Karachi Stock Exchange (KSE), Lahore Stock
Exchange (LSE), and Islamabad Stock Exchange (Eisenberg et al., 1998). It is
respectable for the trade of our three exchanges. Our offices are also connected to a
central storage system (CDS). In the last ten years, Pakistan's capital investment has
benefited dramatically, which has led to further economic growth.

Seizure and inspection of physical documentation require the supervision of
significant expenses by individuals and entities, and certificate disposal is not possible. In
addition, the speed manual is also affected by delays, risk of damage, negligence, and
significant investments in time and investment. The Central Corporation of Pakistan
(CDC) was recognized in 1993 and began operations in 1997 to manage and administer
the Central storage System (CDS). The central storage system is an electronic registry
used for registration and transfer security. The release of the e-book means that the name
does not change physically, and the transfer will be available in the user account of
another user of the device. The CDC provides the mainstay for reconciliation and
prosperity in Pakistan's economic investment. The CDS now sets practically all tuition
fees. To sustenance the company's management, Joint Venture of Pakistan is a non-profit
corporation established following Article 42 of the 1984 Business Code.
It is a public-private corporation. The security exchange commission of Pakistan,
the State Bank of Pakistan (STATEBP), 03 foreign exchange and insurance and banking
sector, and non-listed firms are observing for associations of through this association. In
2007, PICG, in teamwork with the IFC and the State Bank of Pakistan in Islamabad,
convened a discussion on foreign affairs in Pakistan state. The meeting was designed to
understand better the need for good governance in the Pakistani financial sector.
Code of the Corporate Governance
SECP several new financial tools have been introduced to improve the
management process. The regulatory policy was promulgated in March 2002 by the
Pakistani Security and Exchange Commission to improve efficiency, regulation, and
protection of investors by providing better information to banking companies.

The corporate governance of the company's Regulatory Commission is the result
of a joint venture between the Pakistan Securities Commission and the Regulatory
Organization of the Pakistan Regulatory and Regulatory Commission (ICMAP), and our
Pakistani Stock Exchanges. The policy includes several agreements in line with
international practice. Each company has its announcements and announcements and its
annual reports to establish compliance with the best business rules and regulations. The
law is primarily designed to create a way in which companies are governed and governed
by their directors following best practices to protect their interests in different parts. He
called for a change in the board's leadership to include a broad representation of
minorities and leaders and non-partisan leaders.
The code explicitly emphasizes openness and consensus in the organization of
work and decision-making and invites leaders to fulfil their responsibilities without
listening, knowing, being active, and dedicating time to all those affected. The main
points of the code include establishing a governance body and internal business
management audit procedures (2002) for each company. In August 2002, the SECP
began its financial management work in collaboration with UNDP and the Office of the
Treasurer of the Government of Pakistan. This campaign aims to apply good corporate
governance and business policies to companies in Pakistan. In 2007, the Pakistan
Securities and Exchange Commission, the International Finance Corporation (IFC), and
the Pakistan Institute of Corporate Governance (PINCG) conducted a study on the
"Pakistan Corporate Governance Code." The research focused on listed regional
companies and large unidentified regional companies, and corporate finance companies.
According to one of the most critical assumptions of the study, it is necessary to make
company executives aware that there are benefits to using the code to move closer to
using the code and understand and apply for the number in its proper form. The Office of
Security and the Pakistan, Safety, and Trade exchange commission has developed a
Development Consultants (BDS) network with assistance from the IFC. The PICG has
organized several meetings to understand business management and the role of the board
of directors.
Assessment of Corporate Governance
Security exchange commission of Pakistan (SECP) manages business
management SECP receives advice from the Asian Development Bank to improve the
direction of the business management system and similarly after the World Bank (WB) to
develop knowledge and experience. Training other aspects of the regulator remain not as
sturdy ICAP has particular self-regulation, and the exchange of goods does not have the
resources and expertise to supervise the application of the instructions. Karachi Stock
Exchange established the Boarding of Directors of the overall corporate governance and a
unit inside the Company's Corporate Governance Committee to oversee compliance with
the rules. Fundamental membership rights have been protected in Pakistan, at least by
law. Registration is safe and cannot be obtained from the Central Data Center (CDC).
Overall corporate governance and the relationship Shareholders can request much
information directly from the company, and the policy recommends attending the annual
general meeting (OGM). Elected directors use a single vote and may remove
shareholders to resolve disputes. Business changes, increased investment clearance, and
more extensive product sales are required for approval by shareholders.

While better management has helped improve efficiency, some companies do not
have yearly meetings with the shareholders (GMS) or in areas where traders have easy
access. In addition, the law does not accept elections by mail or electronic means. It
restricts the control and impact of minorities and reduces their adequate protection
against abuse. When families manage meetings of members and leaders, the leader's
responsibility for others is paramount, and now in Pakistan, the responsibility falls
severely on many institutions. Wisdom. The process of storing information to be brought
to the CDC works well.
Nevertheless, though registering responsibilities have been summarised by CDC
activities, some shortcomings have been noted. Some companies do not pay on time, and
it takes more than five days to re-register the deposit. The annual SECP data shows that
the percentage of companies that pay dividends is 35%, with members complaining to
Pakistan's SECP security exchange commission about non-payment of bonuses.
However, the office's business model, integration, and lack of cooperation make it
challenging to understand the organization of companies, especially groups. The
proprietors themselves still run the majority of domestic businesses. Such a state situation
and many corporations, frequently associated with the relationship between the
governor / foreign and the administration, disregard the recommendations. Many
important corporate decisions have not yet been made at the level of the Board of
Directors' Annual General Meetings. The law clearly states that the director's work aims
to make independent decisions and satisfy the company. In the business quorum are the
presidents and non-executive leaders of the family and the electoral administration that
represents them.
Inter-managerial leadership is often used for general management. Family
councils have been unable to defend the rights of minority members and risk non-
competition, as other boards have become authoritarian. The law improves the role of the
president by limiting the representation to 75% of non-financial companies and stating
that companies operate in 75% of non-financial companies. Maker was represented.
However, it has been suggested that the property management model guarantees no
survivors to manage the family after an ongoing reform that is not necessary.
The acceptance of the Corporate Governance Code has improved all areas of
business and business, making companies responsible, passionate, and committed to their
mission because it would prevent the interests and support of employees for the benefit of
members of minorities. In addition, the incorporation of non-executive memberships has
enhanced the decision-making procedure, which in addition to being slow, is also opaque
due to the disinterest of the first group making sure to answer when needed (Hassan et al.,
2014). The interpretation of companies' quarterly results announcements allows investors
to make better investment decisions. By law, listed companies will engage with SECP
and the Commodity Exchange to discuss all evidence that may disturb the market value
of their products. The revelation of relevant evidence is a necessary business focus.
Corporate governance currently Concentrated Ownership
There is corporate governance for many business owners in Pakistan. The
significant share of business associations for 60 companies in 2003-2007 shows that over
50% of the participation is calculated from the three main participants.
In Pakistan, the central proprietors are the family of municipal companies and the
families behind them, the state, and many leaders' affiliates. Conversing to (Gani &
Ashraf, 2005), "The occupational public in Pakistan (formerly recognized as the Twenty-
Two Families firms) is a combination of the family and the independent business
community. The ancestral family is the majority member more and more executives,
while people near and far in the family help work at different companies in the group. In
various countries, pyramid membership, which key members and business associations
use to manage group companies, is a possibility. The association with the pyramid makes
it conceivable to execute certain companies smoothly with an insignificant part of their
total investment.
The consequences of (Gani & Ashraf, 2005) show that from the point of view of
outside investors, the companies involved in the business venture are not transparent, and
the business management is weak. As a result, marketplace participants reduce the worth
of collection companies, uniform if they benefit additional than companies outside the
collection. They appreciate this measure which measures equipment operating on the
Pakistan-type serener to qualified field members better than the non-serene group.
Cheema et al. (2003) describes the history of Pakistan's corporate growth and shows a
general overview of ownership, the financial services industry, and the market. They
highpoint the critical elements of the membership of the 40 largest firms in the Pakistan
stock exchange.
Corporate Governance in South Asia
The rise of non-performing industries in South Asia is also isolated. Pakistan, Sri
Lanka, and India see the importance of financial management. India adopted the
Financial Regulation in 1998, Pakistan enacted the Financial Regulation in 2002, and Sri
Lanka also adopted the Corporate Governance Code. The development of the design
policy has led to a greater consensus among companies in these countries.
The 04 countries close inspection through (Sobhan & Werner, 2003) offers
quality business products that can be applied to a wide range of knowledge applications
and the key to business management. Furthermore, they are the key to business
management (Sobhan & Werner, 2003). They extract a lot of essential data from four
countries on the management of companies' business. In his opinion, the company's
management cannot be separated from several reforms (macroeconomic, microeconomic,
accounting, legal, banking, and company) cannot change other means to achieve all goals
without a business management leader. In addition, it is essential to inspect the trends in
diverse industries. According to the national report, they also emphasized the importance
of acknowledging the effectiveness of the company, legal contract, and regulatory
compliance. It is worth noting that each country has established specialized economic
courts of one kind or another to settle disputes over the economy, but each declaration
makes sense, almost desperate when it comes to the effectiveness of the law and the need
to address economic dissatisfaction.
The OECD and World Bank Group (WBG) have worked together to facilitate
discussions on the regulatory framework for corporate governance. They have developed
the Regional Economic Agenda for meeting and evaluating regulatory institutions'
business in close cooperation with national legislators, regulators, and business
associations. It extracts data from the 1997 Recommendations of the 1997 Asian financial
crisis, measures growth and other challenges, and develops existing goals and reform
structures for improvement business management in Asia. Company Politics. Asia's

economic turmoil measures growth and other difficulties and develops common policy
objectives and updated procedures to improve governance in Asia .6 India has large
companies registered as quasi-listed companies or following the Business Rules.
Since the first report on the Observance of Standards and Codes (ROSC) regulatory
review on 31 July 2000, many legal and regulatory changes have changed the regulatory
industry in India and improved the level of roles/responsibilities of internal parties
practices and focus. In particular, the safety manager has outlined business management
strategies in the contract that have identified various issues. Specifically, the sanctuaries
controller presented a corporate governance section in the registered agreement that
illuminated multiple subjects. Recent defence consolidation efforts have improved
investor confidence in the market. The financial press has reported more and more
desecrations of members' moralities. These are good factors for modification. However,
the governance and enforcement of law and order are still fundamental challenges, ROSC
(2004). In Bangladesh, credit companies have been primarily incorporated into banks and
banks that do not provide information. Inclusive presentation procedures of the stock
exchange demonstrate short trading capacity, discontinuous and insufficient innovative
contributions, and diminishing assessments (Sobhan & Werner, 2003).
The Australian Securities Commission and the Bangladesh Securities
Commission have expressed satisfaction with executing International Accounting
Standards (IAS) and the International Standards on Auditing (ISA) to expand the
information of the organisation. Good financial statements. Preparing financial
statements and conducting research, often incompatible with international standards and
practices. Most university graduates do not engage in accounting, as they do not meet the
standard of holding positions of responsibility and reputation. Minor laws, protests
against non-compliance with audit and financial procedures, unprofessional police
officers, poor education and training and lack of transparency have undermined the
power of financial management", ROSC (2003).
Corporate Governance and Performance of the Firm
The "principal-agent" dilemma in financial markets has long been associated with
corporate governance. The concept "principal-agent" relates to an individual who
founded a company, but one is not the same person who controls it on a management
level (Khatab et al., 2011). According to this rationale, governance practices originate in
the financial market, and its essence has concentrated primarily on the corporation-
shareholder interaction as the primary vehicle for implementation. The Organization for
Economic Co-operation and Development (2004) states corporate governance as the
complete series of relations among an organization, board of directors, stockholders, and
other relevant parties. Hence, CG sets out the framework for establishing the overall
objectives and determining the method of attaining and surveilling those goals. (Spiers et
al., 2018), CG is characterized by how an enterprise interacts with various stakeholder
groups. Analogously, according to the world bank (1999), internal control contributes to
long-term economic development and sustainable growth by improving the competency
and efficiency of the corporate sector and maximizing their access to global financing.
External corporate governance is closely associated with various stakeholder groups
external to the organisation, so internal corporate governance is fully engaged with the
management board and investors and shareholders' preferences (Morse et al., 2002).
Herdjiono and Sari (2017), in an Indonesian economy, concluded that relatively
unique internal control factors determine the value of the company even though this is a
constricted study focusing primarily on manufacturing industries. While the concurrent
investigation illustrated that the size of the board, internal audit autonomy, managerial
ownership, and institutional shareholdings all influence corporate efficiency and
sustainable growth. The research indicated that the directors appear to have a relatively
sizable positive effect on the performance of the business.
From a stewardship and agency perspective, Kyere and Ausloos (2021) discussed
the interaction between corporate governance and financial performance. Conflicting
pieces of evidence were discovered, according to the findings. The agency schools of
thought favour the presence of non-independent directors on the board, while a staunch
advocate of the stewardship model of philosophy prioritizes the function of internal
directors in the profitability and success of the enterprises. They claimed that because of
imperfect information, the role of Independent non - executive directors is minimal. The
author used a sample of 252 London Stock Exchange-listed companies and found varying
findings. Corporate governance has a significant and positive effect on organizational
performance, but it also has a negative impact on corporate efficiency. However, the
study found that an efficient corporate governance phenomenon has a significantly
positive impact on the profitability and growth of corporations.
The diligence of the Board and Firm Performance
The regularity of the meetings of the board of directors is a substitution for how
diligent the board is when it comes to board diligence. A board meeting is an essential
function of good corporate governance practices. Board members can think about the
various wide range of issues and make strategic decisions for the benefit of the company
as a direct consequence. Decisions are crucial to a business's success and achievement of
its ultimate goals (Sanyaolu et al., 2020). According to the findings, board diligence
lowers financial efficiency. Consequently, it is argued that the consistency of board
meetings be prioritized throughout those sessions, so these concerns that impact results
be given primary focus at the meeting of the board members.
Thanks to the global economic downturn, corporate governance problems have
gotten much coverage from academics in the last three decades. For this study, the
principal purpose is to determine how corporate governance contributes to the
effectiveness of publicly traded companies in Sri Lanka and identify the right ways of
improving the opportunities for different financial markets. The researchers have
described the financial performance of an organization in terms of return on equity and
return on assets as primary variables to accomplish these set objectives. Company
businesses. It was a challenge for the corporate heads and government to restore the
investors’ confidence for future investment activities. Based on the current reports,
corporate governance variables significantly affect enterprises’ operating and financial
performance, with the board and audit committee size having a favourable effect. On the
opposite side, the meeting frequency has a detrimental effect on the company's financial
performance (Danoshana & Ravivathani, 2019).
Regarding board diligence measured by the frequency of board meetings during a
specific period, reported contradictory findings in various corporate governance settings,
particularly in developing economies like India (Ghosh, 2007). The findings showed a
significant and positive correlation between the board's diligence, the busyness of the
director, and firm financial performance. Contrarily, according to (Ferris et al., 2003),
researchers have indicated that particular vigilance can clash well with directors' busy
schedules. On the opposite side, when boards interact frequently and are well
represented, they will stay aware of the firm's related results, interested in taking or
control and guide the necessary actions to address the issues (Abbott et al., 2003; Aljaaidi
et al., 2021; Vafeas, 1999).
Moreover, while evaluating a research investigation of 169 South African firms,
Ntim and Osei (2011) established a substantial and robust correlation between the
frequency of meetings of the board of directors and corporate profitability. Their analysis
confirmed that regular meetings of the board members tend to increase earnings and
profits (García-Ramos & Díaz, 2021; Saadaoui, 2021).
Arora and Sharma (2016) investigated a significant relationship with
organizational success at committee meetings because frequent meetings certainly
positively affect the company value. Palaniappan (2017) has reported conflicting findings
regarding what director’s meetings are concerned about. The results implied that frequent
meetings could cause firm resources to deplete because such resources help generate
positive cash flows. Nevertheless, instead, the fruitless meetings become an expense for
the firm. The inside managers invest the firm’s resources in damaging NPV projects to
show good results. This notion is called the wasteful hypothesis (Jensen, 1993),
consistent with the findings (Cashman et al., 2012).
Vafeas (1999) investigated that the board meetings refer to corporate dispersed
ownership properties, according to the findings, in a manner compatible with the
philosophy of contracting and agency. The value of a company is inversely proportional

to the number of board meetings held each year. This conclusion is attributed to an
increase in shareholding following a decrease in the share price. It is found out, too, that
operational productivity is increasing after years of unusual board operation. The most
practical benefits of these changes are companies with poor prior performance and those
not interested in market control activities.
In a nutshell, my results indicate that board conduct is an essential factor, as
measured in terms of board meetings. Overall, the results imply that board engagement,
measured in board meetings, is indeed an essential feature of board operations. The same
agreement exists on the relationship between too many busy boards (individuals of
several independent non - executive directors) with profitability. Some opined that a
director's success is demonstrated by their hustle, so directors value the organization.
Some even make the argument that “over-boarded” directors are costly and If a company
uses funds effectively to achieve greater efficiency
CEO Tenure / Horizon/ and Firm Performance
A thriving has the capacity, particularly his or her peers and associates, to juggle
many vital duties and maintain a trustworthy decision-maker and reverence for others. A
skilled and expert chief executive officer (CEO), with his or her wisdom, foresight plays
a vital role in firm strategic thinking about future planning and opportunities. A rational
CEO always thinks outside of the box and ponders the pros and cons of a firm’s
decisions. Saidu (2019) conducted a study using panel data and OLS for analysis. Three
variables, including CEO origin, education, and ownership, are examined concerning
organisational growth. These features are some of the essential features of CEOs rarely
considered in previous research. The results showed that learning for CEOs increases
sustainability. Likewise, share value is enhanced once the company's CEO has previous
knowledge and is hired as a CEO. The results are helpful for investors in deciding on the
best CEO to lead the company; likewise, Liu and Jiang (2020) examined the effect of
Chief Executive Officer features (CEO) on company efficiency (Chen et al., 2021). The
data consists of 10,446 factors identified between 2008-2016 by listed Chinese firms.
Researchers found that CEO's age did not affect firm results following a quantile
regression methodology, which is different from past studies. CEO tenure has a
considerable adverse effect only on high-value companies. Moreover, while CEOs'
political relations are positive to low-value undertakings, the exact opposite result is
evident (Disli et al., 2022).
Oppositely, Brochet et al. (2021) investigated and shed light on the possible
controversy between scholars and professionals over the presence of CEOs for much too
long. CEO perpetuation and the consistency of a CEO-company match have been the
factors for CEO decisions for a long time, but they have made vague or no predictions
about the relationship between the tenure of CEOs and the valuation of the company
(Garrett & Pavan, 2012). In line with the CEO turnover and firm value association,
Brochet et al. (2021) systematically demonstrate the relationship between tenure and the
importance of a hump-shaped chief executive officer. This trend is confirmed by reports
of premature deaths of the chief executive officer, which alleviate endogenous problems.
However, the bump form is prone to significant transversal variations: firm worth
decreases after fewer years of CEO tenure.

CEO Duality and Firm Performance
The Executives dichotomy describes the phenomenon in which the Chairman of
the Executive Board preserves his stance. On behalf of the shareholders, a Management
Board should be established to oversee managers, along with the Chief Executive. The
Chief executive officer must be rewarded for his or her services. In this regard,
Wijethilake and Ekanayake (2019) conducted a study to synthesize the conflicting
arguments, the commonalities of the agency theorists, and the perspective on stewardship
of CEO duality and firm performance based on the theory of resource dependence. Data
obtained primarily on a database of 212 major, listed companies across Twenty domains
on the Sri Lankan Columbus stock exchange was analyzed by multivariate techniques.
When the CEO's additional informal control is equipped to endorse agency theories, the
CEO duality negatively influences company efficiency. Contrarily, where Board roles are
vital, the CEO duality significantly impacts the business outcome, reinforcing the
correlations theoretical views on resource dependency and stewardship.
Furthermore Boyd (1995) Fama and Jensen (1983) argued that board members
who isolated Chairperson and Chief executive roles, called independent, such a structure
dilutes the authority of the CEO and enhances the board's capacity to carry out its broad
mandate efficiently. Nevertheless, somehow the implication of the board's sovereignty
cannot be explicit at a mere independent board. The CEO has recommended that the
director have autonomy as a necessary consequence of his or her alleged ability to
mediate conflicts. According to CG's pedagogical perspective, the current research study
extends the board of directors as a resource provision and the potential of Chief
executives to contribute to the performance of companies in the broadest sense.

Shareholding Concentration and Firm Performance
Murtaza et al. (2020) found the effect of concentrated ownership on the
organizational value of Pakistani chemical industries. This study used secondary data
gathered from the financial statements of the corporations from 2012 to 2017. In this
study, the GLS method is applied for estimation. According to the findings, firm value is
strongly related to concentrated ownership. It is endeavoured to claim that substantial
shareholders could perhaps fix principal-agent problems between management and
owners.
Lefort and Urzúa (2008) argued that in the sense of high shareholding
concentration, what influences the structure of firms' boards? Are the independent
directors of firms with high shareholder volume relevant as an internal governance
mechanism? Do markets favour firms that use voting rights of elective career directors by
managing shareholders? The research analyzes these three relevant issues using a 4-year
160-company panel data and endogenously monitoring, concluding that an increased
share of external management affects the corporation's valuation. This research further
found that firms with more aggravated agency problems aim to integrate specialist
managers into the boards to improve company governance and improve the agency's
crisis (Tleubayev et al., 2021).
Foreign Ownership and Ownership concentration
The mainstream media often link top-level governance in the executive board.
Although, a variety of board structures governs the activities of managers. Specific
techniques, such as the governing directors and the executive incentive compensation, are
specific to the company. Some are endogenous, such as the state surveillance sector,
competitiveness, applicable laws, and formal and informal agencies. The current research
analysis shows the impact of the shareholders of the firm, which govern the behaviour of
managers and functions as an internal and external control device, increasingly essential
and densely concentrated (Waheed & Malik, 2019).
According to Thomsen and Pedersen (2000), the proportion of the most
significant shares is held by a company. Furthermore, according to Salas and Deng
(2017), anyhow the exceptionally high ownership concentration, which is ubiquitous
market corporations as either a direct consequence of uncertainties, there seems to be no
investigation into how this broad, concentrated ownership impacts foreign ownership
consequently corporate efficiency. The popular agency theory (Jensen & Meckling, 1976)
is based on the separation of ownership and management hypothesis. This theory stresses
the principal-agent relationship. In accordance with the agency cost proposition,
increasingly concentrated ownership of developing markets links the interests of the
shareholders (stewards) and managers (agents), forcing principals to be cautious when
entering volatile foreign markets.
Conversely to the agency theory, according to (Kim et al., 2008), agency theory
ignored the very significant aspect of foreign investors’ interest. Therefore, another vital
conflict arises amongst local and foreign shareholders, which is principal-principal
conflict. According to the research, local owners prefer long-run projects, whereas
foreigners’ priority is a short-run investment of financial resources (Ashwin et al., 2016).
Additionally, developing countries view foreign shareholders as competent
stakeholders who are more adept at acquiring, analyzing, and interpreting the annual
report. Professional investors may oversee management's accounting reporting activities,

particularly in emerging markets, by leveraging their expertise and resources (Ajinkya et
al., 2005). In line with the previous argument by In line with the argument made by, it is
further argued that the interaction amongst overseas shareholders and the value of the
company in Romania demonstrates that overseas shareholders serve as an even more
appropriate monitor for a given point foreign shareholding proportion. It demonstrates a
curvilinear association between external shareholdings and value creation. It further
demonstrates that the firm's value grows with the expansion of overseas equity ownership
(Vintilă & Gherghina, 2014).
Director Independence and Firm Performance
The independence of directors, non-executive directors, and outside directors is
used interchangeably. NED’s, though, are not neutral. The research reveals inconsistent
findings, either favourable, unfavourable, or sometimes inconclusive association between
NED's and business valuation (Merendino & Melville, 2019). The success of enterprises
is critical positions of independent managers. Effective control in a company may
minimise the problems of the agency. Ramdani and Witteloostuijn (2010) demonstrate
that a straightforward and unequivocal forecast is difficult to render on theoretical and
pragmatic grounds regarding the impact on firm profitability of the independent board
members. Al-Saidi (2020) evaluated the proportion of independent directors to have a
deleterious impact on the firm's growth based exclusively on Tobin's Q, and the
correlation between variables was between board independence and firm performance
Accordingly, Ganguli and Deb (2021) conducted research utilizing a selection of
265 non-finance, non-banking, and non-PSU Indian firms from the S&P 500 index. Firm
efficiency is improved by moderate-to-high holding concentrations ranging from 25 to 75

per cent. The board size positively impacts organizational efficacy but not board freedom.
SEBI regulations establish an upper cap on promoter shareholding and a minimum
number of foreign directors on the board of directors for listed Indian firms. In
Bangladesh, similar findings have been observed that board independence and firm value
do not positively correlate (Souther, 2020).
Liu et al. (2015), assessed the relationship between board independence and firm
valuation. The conclusions shed light on the extent independent directors have on the
earnings of enterprises. The evaluation was carried out using the GMM method. The
positive and significant association between board independence and firm performance
seems more rigorous in state enterprises with lesser information acquisition costs than
commercial businesses. Additionally, it is well established that Chinese board
independence seems to be essential in curbing insiders’ opportunistic behaviour, self-
dealing, and strengthening growth and performance (Fama & Jensen, 1993, Zhange,
2021).
Shares held by Institutions (ISH) and Firm Performance
It has defined the number of shares held by the institutions, such as insurance
companies, banks, and other firms. It is a vital part of the governance system.
Furthermore, it is supposed to be the essence of a company's ownership, and it acts as an
additional monitoring mechanism for its activities, thus impacting firm valuation.
Institutional shareholding is also supposed to have a favourable association with
company goals. It is calculated as the proportion of shares held by the institution divided
by its overall number of shares.

Waheed and Malik (2021) purposefully constructed a contingent theoretical
context, this analysis sought to investigate the aspect of banking and non-institutions with
the impact of corporate governance financial performance. This same research has
examined an unbalanced panel of 287 non-financial companies quoted on the Pakistan
Stock Exchange (PSX) from 2005 to 2015 and used the Arellano-Bond dynamic panel-
data estimation methodology following generalised methods of moments assumptions
(GMM). The contingency paradigm established in this study demonstrated financial
firms' moderating influence between governance and firm value linkage. Moreover, in the
existence of institutional ownership as an interaction term, the contingency approach
outlined throughout this analysis identifies the relationship between board independence
and the size of the board. The researchers also exhibited that, theoretically, value
relationships may exist among reality variables.
The existence of a specific number of specifications appears to be in reason to
suspect, and when changes are made, there makes it appear to be no assurance that
certain customary circumstances of such an association will continue to exist.
Nevertheless, some gaps have been leftover in this study. Further studies may look into
the possible scenarios that emerge from several other settings throughout the
environment. For instance, managerial ownership, government ownership, and overseas
shareholding have been added in the current research while determining the overall
governance-firm performance association of an emerging economy of Pakistan. Besides
this Connelly et al. (2010) found that enterprise ownership seems to be a more powerful
component of contemporary governance. Even though various kinds of stakeholders can
hold companies, several studies have looked into the impact of investors on the success
of big corporations. The authors further argued. The authors further delve into the
motives of multiple kinds of investors, their strategies to control the company’s investors
invest in, and the influential company effects they aim to dominate. It is worth noticing
how increased managerial understanding of diverse shareholder expectations strengthens
an indispensable part of organizational performance (Ciftci et al., 2019).
For this reason, after the opening of Taiwan's capital markets to international
investors in 1991, foreign investment has significantly influenced market efficiency.
Overseas investors have a more incredible opportunity than domestic institutional
investors to oversee managerial behaviour. They are far less attached to institutional
investors and could therefore render the financial decisions and independently evaluate
management activities (Dahlquist & Robertsson, 2001). These arguments follow the
innovative investment theory (Zhang et al., 2019).
Accordingly, Desender et al. (2016) research demonstrated that shareholder-
orientated foreign owners could change the governance practices arguments in
stakeholder-oriented contexts by integrating shareholder corporate governance. We
concentrate on onboard surveillance and argue that because the range of policies used
throughout the framework of stakeholders does not protect the interests of shareholders,
they strive for their strategies. Our research found that board regulation will enable
shareholder-oriented foreign ownership, particularly in companies with high risk and low
performance without large domestic owners.
Last but not least, Desender et al. (2016) and Gaar et al. (2020) highlighted the
significance after the inclusion of foreign investors, institutional investors have begun in
international equity diversification and have entered stakeholder-driven schemes, mainly

from Anglo-American countries, for over the past two decades. Consequently, national
enterprises are subjected more and more to international standards that almost always run
counter to local standards. The authors further added that oversight of boards should also
be reviewed in the context of a contingency framework relating to foreign ownership of
companies. The board of supervision's conduct depends upon foreign ownership for a
broad range of listed Japanese companies. The analysis discovers that the association
between independent board and audit fees is only relevant to a high degree of overseas
shareholding, but for the lower level of foreign ownership, this relationship does not
matter (Nguyen et al., 2021).
Audit Committee Characteristics and Firm Performance
Afza and Nazir (2014) sought that one of the central techniques to ensure an
effective corporate structure is the audit committee. However, far less documentation of
the effect and attributes of the audit function on the company's performance in Pakistani
research is recognized. That is why four features of the audit committee were recognized:
scale, independence, operating capacity, and quality of external audit to evaluate the
effect on corporate profitability, employing return on assets as an accounting measure,
and market-based performance (Tobin Q). The findings of panel data provided a solid
and substantial positive effect on the ROA and Tobin's Q on two characteristics of the
audit committee, namely the size of the audit committee and the external audit efficiency
(Dakhlallh et al., 2020).
Hypothesis 1: Corporate governance positively impacts firm performance.

Corporate Governance and Financial Slack
The Financial Slack in Firm
Berle and Gardiner (1932) documented that, initially, the entire emphasis of CG
was merely on the firms of a few advanced countries like the United States.
Subsequently, at the beginning of the 1990s, other areas of exploration were initiated to
investigate a conceivable bearing of divergent institutions. The power of CG on
corporations has been triggered by the changing trend of internationalization and
globalization (Denis, 2001; Denis & McConnell, 2003).
Voss et al. (2008) classified four distinct types of financial slack that an
organisation can pile up: financial, functional, consumer, and human resource-related
slack. Financial - slack relates to financial resources over what is required to achieve its
business objectives. Alternatively, financial slack refers to financial resources that are
essential for the survival of corporations (Ang & Straub, 1998). Unlike other slack, this
one is rare and can be absorbed. Financial slack is a term used to describe a lack of
financial resources that are both scarce and difficult to use (Ashwin et al., 2015; Voss et
al., 2008). These include incredibly liquid resources (cash or equivalent) and the ease of
getting credit facilities (credit lines, reserve borrowing capacity) (Baloc et al., 2014).
The idea of financial slack is organizational slack. For instance, Bourgeois III and
Singh (1983) divided slack into available, recoverable, and potential slack categories.
Bourgeois III (1981) distinguishes among these resources formed by the firms. Singh
(1986) splits slack further into two main sub-categories: absorbed slack taken as costs
and unabsorbed slack called the firm’s uncommitted liquid resource (Lee, 2011, 2012). In
line with the financial slack-performance relationship, a study has been conducted in
China to explore comprehensively. The study explores that there is a positive impact of
unabsorbed slack on firm performance (Bourgeois III, 1981).
Afterwards, owing to repercussions of governance demise during the Asian financial
crisis 1997-1998 and 2007-2009 and certain corporate frauds, e.g., Enron, WorldCom, and
Tyco, as abundant scholars have pointed out, the subject of governance became the most
prominent one amongst academicians, researchers, strategist, and policy-makers both
theoretically and empirically. It has been detected during different empirical and theoretical
investigations that good governance practices are highly correlated with the good corporate
return, higher shareholders’ wealth, and value maximization. Concerning corporate
governance, organizational downsizing is frequently anticipated to produce financial
competence. (Jensen, 1986) asserts that the principal-agent theory of Corporate
governance explicitly exemplifies controversial issues emanating from seemingly
contradictory dispositions resulting from managerial' opportunistic behaviour.
Unsurprisingly, this kerfuffle seems to have a detrimental effect on a tangible and
intangible resource and, sooner or later, on its overall quality. Top management is driven
to spend the money on poor investments and even slack reserves in ventures with a
negative net present value (NPV) to achieve well-being successfully (Kim et al., 2008;
Lee, 2012).
In line with the above argument, other researchers have established the association
between different ownership structures and the apportioning of financial slack resources for
different investment motives of the firm. For this reason, we argue that insiders and outsiders
are distinguished in the corporate governance literature as the internal have easy access to
inside information and strongly influence strategic investments than outsiders (Shaikh et al.,
2018). Competing shareholders may have diversified investment horizons and objectives to
monitor the firm attributable to unequal access to inside knowledge and power to influence
firm governance, leading to different approaches to exploiting organizational slack (Ashwin
et al., 2015; Fiss & Zajac, 2004; Kim et al., 2008; Lee, 2012; Shaikh et al., 2018; Tabassam
& Khan, 2021). Shareholders may vehemently disagree upon what financial slack exists and
how that slack should be used at times. Accordingly, we argue that the deployment of
financial slack for Investment opportunities is conditional on the shareholders' characteristics
and seemingly contradictory priorities. In emerging economies, most businesses are family-
owned. Our argument concerning the association between internal owners and the allocation
of financial slack is that the founders or the owners have excess control over the firm's
operational and managerial issues. Sometimes they appoint their CEO to influence the board
of directors (Kim et al., 2008). Further, the insiders can have a considerable proportion of
shares and act as a board chairman. In this way, the insiders could manoeuvre the allocation
of financial slack for their interests.
Likewise, La Porta et al. (2000) envisaged that according to several published
findings, in developing economies, family members are alleged to use their information and
control perks for selfish enrichment, even at the price of small investors. However, this type
of expropriation of financial slack is more common where outside investors are less informed
and well protected than insider owners. Correspondingly, it illustrates that family members of
certain emerging market trade groups funnel earnings from our low-cash-flow associates and
into high-cash-flow affiliated companies, consequently expanding their lavishness and
confiscating fortunes from shareholders and investors. Such findings demonstrated a
potential conflict of interest between local and global shareholders regarding rent
appropriation. Even so, Anderson and Reeb (2003) documented that families contribute
differently to rent creation. Due to the close relationship between family wealth and firm
wealth, family members have substantial economic benefits to optimize the company's value.
In line with this, it is discovered that a high level of institutional ownership is linked
with a significantly higher level of risky high-tech investments of financial resources in some
advanced countries, for instance, the USA (Hansen & Hill, 1991). Thus, it also confirms the
same findings on a sample of 176 Fortune 500 companies (Baysinger et al., 1991).
Correspondingly, David et al. (2006) and Kim (2011) demonstrated that foreign ownership
benefits long-term investments such as R&D and capital investments in high-growth
Japanese firms. Internal and overseas shareholders in emerging economies are typically
short-term oriented due to the lack of protection they receive (Kim et al., 2008; La Porta et
al., 1997). The foreign investors prefer to invest their financial slack short-run projects to
generate a quick return on their investments due to the risk of expropriation by controlling
shareholders (Ashwin et al., 2015; Jensen, 1989; La Porta et al., 2000; Shefrin & Statman,
1984).
In a similar spirit, Peng et al. (2010) did extensive research in China on CEO
duality and a wide variety of concentrated ownership. Different kinds of enterprises had
been taken into account for this intent: owned by the public companies (POEs) and govt
entities (SOEs), and a correlative investigation was made. The study's analysis revealed
that although the CEO with double response might well fit private sector companies, this
might be detrimental for government firms when allocating slack resources. Handful
study results have asserted that slacks directly affect firm value. (Daniel et al., 2004).
Nevertheless, how the company uses its slack has a significant impact. Because the CEO
plays such an essential role in slack deployment, CEO duality could affect how they
utilize their slack (Boyd, 1995).
Besides that, the CEO's responsibility in dispersed ownership corporations is quite
intricate and comprehensible when deciding how to allocate slack resources—seeing as
family owners tend to invest in large projects, while international firms consider
investing in short-term projects. Stakeholder protection in emerging market economies is
vulnerable, as national financial firms and international investors concentrate solely on
short-term aspirations. Kim et al. (2008) identified that national and international
financial institutions pursue short-term targets as a side effect of poor regulatory investor
protections under the law (La Porta et al., 2000). Facing the risk of asset detention by
block holders, several shareholders may actively seek short payback periods from
financial slacks in high-risk economic circumstances like Afghanistan, such as dividend
income (Jensen, 1989; Shefrin & Statman, 1984). Ashwin et al. (2015) and Ashwin et al.
(2016) established that board attributes contribute to redistributing financial slack to
diversified investment projects, especially in India's emerging market, by analyzing data
from the national longitudinal from 172 ﬁrms over a seven-year time frame. According to
the study's findings, board members view the board as a resource provided by the board's
directors, coherent with the evolving marketing viewpoint. Analogously, this
investigation demonstrated how particular components of corporate governance, such as
director autonomy, the board size, and interlocks, influence the financial slack in various
and diverse companies' capital investments. These board directors should serve as a
check on managers. As nothing more than a direct consequence, they avoid under-or
over-investing in policies that improve or damage a firm’s financial performance.

Nonetheless, the board indirectly influences the channel through which financial slacks
influence organizational performance by investing in highly lucrative Net present capital
investments. (D’Angelo, Mustilli, Gangi, & Daniele, 2019).
Researchers found that the crucial role of the board regarding the provision and
converting organizational resources into profitable investments such as R&D. It is also
considered that performance does not enhance merely by investing in R&D. To achieve
high-performance companies, need some other necessary financial assets and economic
resources (Teece,1986). The board of directors grants its cultural and natural resources to
businesses in the form of technological and business expertise, credibility, and ties to
important external stakeholders, such as states, suppliers, as well as creditors (Pfeffer &
Salancik, 1978), that are necessary for successful developments.
That is particularly the case of enterprises throughout the developing world., like
India, that need primary technical abilities and have only barely started concentrating on
R&D (Fagerberg, Mowery, & Nelson, 2005; Fagerberg & Godinho, 2005). As a result,
companies will allocate their excess capital funds to research and development to access
the required additional funds from corporate boards. Besides, we can argue that the
ownership structure of a company has a significant effect on the decision on the
investment of slack (Ahuja et al., 2008).
Ashwin et al. (2015b) and Subramanyam et al. (2012) found that family
ownership and control positively impact R&D investments. Following stewardship
perception, we argue that in highly technological settings, family-controlled firms are
more prospective to perform like stewards devoting their resources in long-run firm
value-added events rather than short-term ventures. Jensen (1986) investigated that
managers can spend excess financial slacks on their private lavishness. A high degree is
associated with severe agency issues, so company governance needs extra care to protect
slacks (wasteful measure). Apart from these, financial slacks could be utilized to
safeguard upcoming unforeseen financial threats. CG could be a valuable tool for low
slacks (precautionary measure). Such enterprises might not wish to invest in ventures;
instead, they merely breathe for survival (Lee, 2012; John et al., 2017; Lee, 2012).
John et al. (2017) and Lee (2011) posited that corporate governance plays a
significant role in the firm where financial slacks of the firms are high (the wasteful
spending hypothesis). On the contrary, financial slacks provide fortification against
forthcoming risks and fears; a low level might indicate deviation from stockholders' best
interests and other stakeholders. Here corporate governance would be the critical tool to
manage firms’ resources having a small number of financial slacks (the precautionary
hypothesis). This study also shows that better governance practices can protect the interest
of all stakeholders and, above all, a secure wealth of shareholders because all the firm
financial slack resources are in the control of managers. Hence, it is assumed a vital
indicator of the conflict between internal management and shareholders (Jensen, 1986;
Dharwadkar et al., 2000; Pfeffer & Salancik, 1978; Pfeffer & Salancik, 2003).
Jensen (1986) investigated that the free cash flow hypothesis narrates that slacks are
not subject to similar inspection and checking by the capital markets as resource raised.
Selfish executives are supposed to devote the company’s funds for their luxuriousness at the
cost of the owner’s fortune. Therefore, the likely wasteful spending and financial slack are
positively associated with agency conflicts. Hence, it refers to at “ceteris paribus,” the impact
of corporate governance is very high for firms with a high level of financial slacks—we name
it the wasteful spending hypothesis. It is also posited that low financial slacks might favour the
owners. In an uncertain fluctuating environment, outside resources are more costly than
inside. Therefore, financial slacks are significant for the firms in case of crisis and
uncertainty, as they provide a cushion against future threats. Furthermore, this is
consistent with the precautionary hypothesis for holding cash suggested by (Fang et al.,
2018; Keynes, 1936).
In contrast, the efficiency of resource allocation in publicly traded corporations is
low due to ineffective over-investment induced by the agent problem and insufficient
investment due to financial constraints. The study investigates the relationship between
free cash flow and ineffective investment in our capital market and the effects of the
agency problem and information symmetry on the relationship as mentioned earlier.
Findings demonstrate that under conditions of overwhelming investment, the dilemma of
intensely invested capital of companies with greater free cash flow and a more noticeable
agency cost concern is more severe (La porta et al., 2000). Since, under conditions of
woefully inadequate investment, the challenge of companies with more significant
external funding restrictions and limitations and increased information asymmetric
information is more severe (Xu & Zhang, 2009).
Correspondingly, in a study conducted using panel data on Chinese public
companies, it has been found that firms hiring Big-8 auditors are correlated with reduced
managerial slack. Big-8 auditing firms are reported to be more effective in reducing slack
in privately owned businesses. International Big-4 auditing firms are more productive
than the domestic Big-4 and are more competitive and less regulated (Fang et al., 2018).
In line with the above corporate governance and financial slack association, it is
demonstrated how various directors assign financial slack under alternative dynamic and
challenging environments to R&D innovative ventures. It is inspired by both Agency and
Stewardship theories that in allocating financial slack into R&D investments in highly
technological services industries, both managers and independent directors remain viable.
Following our theory, the board control position, a high percentage of independent
directors, remains essential in ensuring that financial slack is spread into R&D
investments in R&D-intensive IT industries. However, we find that too much reliance on
strict controls can risk R&D investments in the presence of cash flow disruptions. In the
face of cash flow fluctuations, the collaborative position of the board, a board composed
of a high proportion of executives, remains essential in maintaining R&D investments. In
line with our theories, the component “function, a significant number of independent
directors, appears essential in achieving that financial slack is dispersed into R&D
investments in R&D intensive IT industries. However, we find that too much reliance on
strict controls can risk R&D investments in the presence of cash flow disruptions. In the
face of cash flow fluctuations, the organizational position of the board, a board consisting
of a large concentration of managers, continues crucial in protecting R&D investments—
governance mechanisms to mitigate managerial exploitation of firm resources (Shaikh,
2013).
In addition to this, Palaniappan (2017) and Jensen (1993) have reported
conflicting findings regarding the director’s meetings. The results implied that frequent
meetings could cause firm resources to deplete because such resources help generate
positive cash flows. Nevertheless, instead, the fruitless meetings become an expense for
the firm. The inside managers invest the firm’s resources in damaging NPV projects to
show good results. This notion is called the wasteful hypothesis, also consistent with the
findings reported by (Cashman et al., 2012).
Minola et al. (2021) recently conducted a research study considering and
analyzing panel data of Italian firms. The study investigates the relationship between
family-owned firms and firms' potential, unabsorbed, and absorbed slack resources. They
predicted that family-owned and controlled medium-sized firms negatively struck
financial resources on financial performance. The research subsequently added the
argument that the founder members on the board and the involvement of a familial CEO
alter the role of financial slack due to the profound heterogeneity of the family owned-
firms. The findings validate their assumption that the previous studies that absorbed
slack, unabsorbed sack, and potential slack resources are favourable for the firm’s
performance. Furthermore, it also yields counterintuitive insights that contribute
significantly to the existing body of knowledge. On the contrary, Nagar and Raithatha
(2016) investigated similar research from an emerging Indian market perspective. The
research used data from 2005 to 2011 and GMM and multiple regression estimation
techniques consistent with (Lee, 2012). The findings revealed that firms with considerable
ownership concentration and control have a greater tendency to manipulate firms’ liquid
financial resources (cash flows). The findings further added that corporate governance
attributes, for instance, the diligence of the board and quality of auditing, cannot
constrain such manipulation activities by the firms. The study also suggests that adopting
suitable corporate governance mechanisms such as mistreatment and firms' resources
abuses can be mitigated. Further, it demonstrates that after adopting the good CG codes
in India, the board diligence has significantly discouraged the wastage of cash flows.
Therefore, these surplus cash resources may be used for further innovative investment
projects to enhance firm performance.
In line with the opinions discussed in the prior research, the corporate governance
attribute, for instance, CEO tenure and independence of the board of directors, have a
unique stance in the relationship between corporate governance attributes and managerial
slack. In this connection, Fang et al. (2018) explored that the CEO actions and objectives
vary throughout the CEO's tenure, a phenomenon known as the horizon problem.
Researchers investigated how the horizon problem affects organizational slack, a proxy
for managers' operational inefficiencies and resource loss. They find that organizational
slack grows in the latter two years of CEO tenure, relative to initial periods, using data on
Chinese publicly traded firms from 2003 to 2011. Additionally, researchers illustrate that
the expansion in organizational slack resources during the latter years of a CEO's tenure
in a private firm is lower than in government-owned firms. Further, the findings revealed
that managerial slack is also low in firms with CEO shareholding and robust board
independence. However, the results also suggest that more robust corporate governance
measures mitigate the perverse incentives associated with the CEO horizon dilemma that
lessen CEOs' proclivity to raise managerial slack during their final years in office.
Likewise, (Casamatta & Guembel, 2010; Laverty, 1996) supported the argument
explained by (Fang et al., 2018). These researchers further added that during executives' later
years in power, such slack to shift corporate resources for private gain might become
more and more problematic. Since executives' decision timeframes are smaller than
owners', managers sometimes prioritize quick profits over lengthy progress. This type of
temporal myopia is exacerbated when managers prepare to depart the company.
Whenever executives' authority over firm resources lapses due to the completion of their
employment contract, their motivations to increase shareholder value deteriorate. Simply
brief, as managers are less concerned with the long-term impact of their decisions on firm
value, they have a greater proclivity to engage in opportunistic self-dealing activities
designed to maximize short-term advantages at the expense of shareholders.
Hypothesis 2: Corporate governance positively affects financial slack.
Financial Slack and Firm Performance
According to the organization's resource and behavioural theories, there is a
significant correlation between slacks and the company's value. According to Jensen and
Meckling (1976), slacks negatively correlate with the company’s financial performance
due to opportunistic managerial behaviours. Owing to the differences in opinion between
the principal and subordinates, type-I and type-II agency conflicts occur, as does the high
agency cost (Hailu, 2019; Kim et al., 2008; Lee, 2012). Barnard (1968), in a contrasting
manner, provided enough clear understanding of the concept of slacks and associated it
with the purpose of administrative personnel. Theorists, such as March and Simon (1958)
and Simon (2013), have gone into greater depth and conciseness about the role of slacks
resources. The firm's concept was thoroughly explained by resource-based (Penrose,
2009, 2013) proponents of steadfast theories (Cyert & March, 1963; Pfeffer & Salancik,
1978; Thompson, 1967) and other scholars. An organization's ability to regulate
efficiently in a challenging environment is enhanced by leeway or slack (Bourgeois,
1981; Nohria & Gulati, 1997). Given the resource-based proposition, slack resources are
hugely beneficial. (Penrose & Penrose, 2009; Penrose, 2009) protect businesses from
environmental risks and help them advance their strategies and plans. Slacks can assist
firms in surviving exclusively during times of chaos. (Sharfman et al., 1988) Bourgeois
(1981; 1983) emphasized the importance of slacks' efficient use in enhancing the value of
the corporation. The extended concentration of deficiencies might have a detrimental
impact on the performance. Very few slacks remain more efficient and effective during
the chaos, financial meltdown, and failure. (Penrose &Pitelis, 2009; Penrose, 2017).
(Sharfman et al., 1988) and Bourgeois (1983) emphasized the importance of slacks in
enhancing firm value. Excess absorption of deficiencies would have a detrimental effect
on performance. A few slacks can be more successfully performed (Penrose &Pitelis,
2009; Penrose, 2017).
Contrastingly, Zheng et al. (2021) has recently conducted a research study taking
the data at the firm level from 2002 to 2019 in the tourism industry of a developed
economy, the united states. Following resource-based hypotheses, the research has used
absorbed and unabsorbed slack resources to moderate the relationship between political
risk, firm performance, and business failure. The findings confirm the role of such slack
resources impact as a moderator between risk, performance, and business failure during
pandemic COVID-19.
Likewise, Zhang et al. (2021) conducted a research study recently in China. The
study examined the relationship between institutional ownership and innovative
investment of financial slack in firms by analyzing a dataset of A-share listed companies.
The findings posited that institutional shareholders' financial slack contributes positively
and significantly to investment innovation and firm operations. The results indicated that
utilizing financial slack resources is beneficial during COVID-19's exogenous adverse

shocks, dubbed a global financial crisis. Additionally, the findings add to prior research
on the cross-sectional variation in the relationship between firms' strategies and
accounting choices in China.
Hypothesis 3: Financial-slack resources positively impact firm performance.
Corporate Governance, Financial Slack and Firm Performance
After the financial crisis of 2007- 08 and COVID-19, governance has become a
burning and long-standing dispute among researchers, enterprises, and government
leaders. Even so, researchers began to criticize corporate governance's robustness in the
wake of the reported money laundering and corruption cases in the Pandora Box Papers
and Panama Leaks. It has been found that corporate governance monitoring mechanisms
have failed. Traditionally, corporate governance research has concentrated on the conflict
between managerial behaviour and the availability of slack and its effect on an
enterprise's financial viability. (Handorf, 2019). Financial slacks may be called leftover
funds or “spare funds that are necessary to survive the business” (Ang & Straub, 1998,
p.537). Financial slack is an expression used in the finance literature to refer to an
organization's surplus financial resources, also known as absorbs and potential slack
resources. That is well characterized in theoretical approaches as those resources which a
corporation has accumulated that are not used for critical cash outflow" but instead
"could be used in a discretionary manner (Dimick& Murray, 1978, p 616; Golshani et al.,
2019). Numerous organisation theorists address the issue of slack resources in
commercial enterprises. In general, stretched slack resources are deemed to have adverse
effects on firms' behaviour in the future and, consequently, on organizational
performance. As a result, it is believed that financial slack in firms affects their

profitability and performance. Oppositely, numerous researchers challenge this notion
and hold divergent opinions on what those financial slack resources benefit or seriously
damage profitability. (Lee 2010; 2011; 2012; Jensen & Meckling, 1976).
Resource-based model (Penrose, 1959) and Behavioural theory (Cyert & March,
1963) defined financial slacks play an adaptive and positive role in dynamic and
challenging economies and enhancing firm productivity and performance. Conversely,
agency theory (Jensen & Meckling, 1976) argues that shareholders' and managers'
preferences always differ. The managers steal investors’ resources for their household
purposes dishonestly. This dishonesty and unfairness by the agents compromise the claim
of good governance, and the managers' deceitful actions destroy the firm's reputation and
performance. It is supposed that managers always work in their own best interest rather
than working for the best interest of the shareholders (Odum, Odum, & Okoye, 2019;
Vanacker, Collewaert, & Zahra, 2017).
Lee (2012) carried out an empirical study on the slacks-performance correlation
incorporating panel data from firms in the United States (USA) and the United Kingdom
UK). Using the GMM estimation for analysis, the results demonstrate inconsistent
findings due to widely divergent governance systems. In the United States, the
association between slacks and financial performance is statistically insignificant, owing
to the predominance of agency issues. In contrast, the correlation between slacks and
profitability is statistically significant in the U.K, based on behavioural theory.
Notwithstanding, the relationship between corporate governance, financial slack, and
firm performance is poorly understood. Thus, the dissertation researcher's objective is to
examine the indirect effect of corporate governance on financial performance via the
mediating channel of financial slacks resources while also taking into account other
critical aspects of corporate governance such as ownership concentration, board
members, managerial ownership, diligence, director of a company, CEO dialectic,
overseas investors, interlocks, and audit quality and committees (Boso et al., 2017; Putri
et al., 2021; Wang, Sun, Yu, & Zhang, 2014; Lin & Lin, 2018).
Conflicting Theoretical Role of Financial Slack
Several research scholars have shed light on the nature of slack in firms and
accounted for their significance and contribution to the performance of firms and value
addition, but they barely coincide with the spirit of slack resources.
Behavioural Theorists
Cyert and March (1963) and Penrose (1959) introduced a behavioural approach
and established that an organisation comprises distinct people involved with
contradictory intentions. In this frame of reference, slacks refer to "outflows to pool
involved parties." Consequently, these resources can be used to resolve conflicts between
members. Putri et al., (2021) and Perrow et al. (1977) stated that financial slack could be
used to settle disputes, subvert controversies, and political confrontations within and
between multiple organizations to boost the company's financial performance (Moch &
Pond, 1977). As a result, enterprises utilize slack to optimise their operations, optimising
financial and monetary potential advantages at the lowest possible cost.
Agency Theorists
The importance of governance has accelerated as commercial enterprises have
become more popular. Proponents of this theory introduced the concept of a principal-
agent among corporate giants. In the contemporary literature, the significance of

corporate governance has become indispensable both at the country level and at the firm
level owing to the recent financial embezzlement, money laundering, and corruption
reported in Panama Leaks and Pandora Box papers. The model describes that a firm with
fewer slack resources will perform better because managers could not exploit its
resources for their lavishness. As managers always inclined toward self-dealings owing to
their opportunistic behaviour. It also argues that if a firm had abundant resources, they
could put these resources in the deadly projects to benefit themselves rather benefiting
shareholders. As resources remain under the discretion of managers and due to the
discretionary nature, they can misuse these resources just to please shareholders. This is
called wasteful hypothesis by Jensen and Lee. This opportunistic and self-serving
approach might very well jeopardize the owner's resources and, in direct consequence
jeopardize the company's overall worth. (Jensen, 1986 ; Lee, 2012), consistent with
(Kornai, 1979; Cardoso et al., 2014; Lee, 2011).
Hypothesis 4: Financial slack mediates the association between corporate governance and
financial performance of the firms.
Corporate Governance and Earnings Quality
Everything being equal, insomuch as the Organization for Economic Cooperation
and Development (OECD), corporate governance is the process by which corporate
boards oversee and oversee a firm's operation by the company's managers (1999).
Specifically, it outlines how responsibilities are balanced between the shareholders, the
directors, the managers, and a range of many other stakeholders such as the company's
employees and society, and the government. All of a company's financial stakeholders,
including shareholders, are considered part of its governance practices. Effective
corporate governance is necessary to maintain the integrity and efficiency of the capital
markets while also increasing the quality of earnings. Contrarily, ineffective internal
monitoring can lead to significant financial complexities, such as fraudulent activities that
lower the quality of a firm’s earnings. Earnings ensure more information about the
corporate's performance, which is appropriate for a particular decision that a decision-
maker has made (Dechow et al., 2010). So earnings quality is defined as the reported
earnings that show the information about the financial performance of enterprises
relevant to diverse decisions. (Dechow et al., 2010). Since it is not visible, earnings
quality has become one of the most challenging concepts for academics to comprehend.
As a result, it has been characterized depending on a range of reported earnings criteria.
To determine earning quality, researchers examined various factors, including
persistence, accruals discretionary, smoothness, timeliness, loss avoidance, and investor
reactivity. Earnings persistence, for example, is determined by the ability of reported
earnings to endure and recur in the later (Ewert & Wagenhofer, 2015; Richardson, Sloan,
Soliman, & Tuna, 2001; Schipper & Vincent, 2003; Sloan, 1996). Low persistence
implies that perhaps the earnings are ephemeral, which is an unfavourable feature
regarding earnings for investing reasons (Dechow et al., 2010).
However, the earlier researchers of the corporate world have been trying to
combat and visualize the complex phenomenon of the association between corporate
governance and firms’ financial strength, profitability, and wealth maximization of
shareholders. As advocates of governance-value phenomena have always argued, good
corporate governance enhances the firm's financial performance and provides protection
and incentives to investors, reducing risk and agency costs. In light of the principal-agent
model, incorporate businesses the conflict of interest arises, where the managers act in
their self-interest at the cost of shareholders, rather than acting in the best interest of the
shareholders and other stakeholders. Due to this agency problem, corporate governance
appears and plays its role in eradicating these agency issues. As advocates of the agency
principle, they have always stressed the principal-agent separation, which produces
information asymmetry, which further leads to an agency problem. Eventually, this
problem trapped the organisation and caused them a serious threat, such as increased risk,
the rise in the cost of capital, reduced expected future cash flows, damages investors and
shareholders’ confidence, and ultimately diminishes firm performance. Here corporate
governance plays its role and provides specific protective measures with its governance
mechanism to monitor insider’s activities like managers, to put the restriction on the
moral hazard of asymmetric information, curbing risk and increase shareholder’s wealth
and increase the performance of the firm.(Dang et al., 2020; Darjezi, 2016; Jones, 1991;
Sarun, 2016).
Adeyemi and Fagbemi (2010) found that firms’ inside governance is influenced
by various ownership, directors’ independence, skills, and proficiency of the board of
directors and institutions. They also argued that the quality of good corporate governance
protects and provides reliable financial reporting and firm value. The study also stressed
directors’ contribution, director’s independence, number of directors on the board, CEO
duality, and diversity of the board (Ashwin et al., 2016; Bourgeois III & Singh, 1983;
Bradley et al., 1999; Mallin, 2019)

In a similar fashion, a research investigation has been made in Korea regarding
the relationship between corporate governance and earning quality. Shin and Kim (2018)
argued that the strength of good corporate governance is concerned differently with the
high earning quality and disclosure of earnings. During their investigation, the
researchers have taken data of non-financial firms quoted in the Koren Stock Exchange
for 2013-206. The research highlights that the spread across unaudited and actual
earnings is even worse for enterprises with the impartial board of directors and foreign
shareholding, implying that organizations with effective governance structures have a
greater level of earnings reliability. Additionally, this article investigated how foreign
stockholders respond toward the earnings differential. Stock market returns to earnings
differential have become less pessimistic for firms with independent corporate boards of
directors and become even more adverse as shareholding rises, showing that every
corporate governance mechanism has a distinct impact (Ajinkya et al., 2005).
The Concept of Earnings Quality
As per the International Accounting Standards No. 1, earnings quality is
connected with delivering pertinent information about the efficiency of the corporation
enable in making decisions. Thus, earnings quality stands distinct to discretionary
accruals in how it quantifies the actual remarkable level of earnings to investors in
making essential decisions, notwithstanding how much relevance is attributable to the
discretion of the management (Dechow et al., 2010).
Earnings quality (EQ) is a fundamental issue that has garnered significant
attention inside the accounting information system. There is no widely acknowledged
definition of EQ throughout academia, nor is there a well-accepted methodology for

testing it. Numerous studies examine earnings, including their persistence, information
quality, sustainability, reliability, predictability, and lack of variability. Likewise, EQ is
dynamic, as it has varying interpretations for different users of accounting records.
Therefore, the word "earnings quality" on its own has no significance because it can only
be articulated primarily from the perspective of a particular forecasting model. To begin,
EQ is dependent on the information's deciding relevancy. Moreover, firm performance
depends upon the reliability of its earnings quality information (Menicucci, 2020a).
Before delving further, the idea of earnings quality and firm performance
phenomena, it is worth remembering here to divulge the notion of quality of earnings.
Earnings quality is a significant component to measure firm performance as earnings
quality is considered a significant variable during contracting and investment decisions
(Francis et al., 2004). In earlier investigations, it has been observed that when gone
through the empirical and theoretical literature, large organizations have collapsed due to
the window dressing of accounts and misappropriation of accounting information like
Enron and WorldCom and Tyco, (Handorf, 2019; Kumar & Singh, 2013). The
researchers of corporate finance called this a corporate governance failure. However, the
role of different key company players such as the board of directors, the role of
independent directors, the crucial role of auditors and audit committees, managers and
accountants have been re-analyzed, and various measures have been introduced to avoid
such corporate scandals and also to attract the investors (Bartunek, 2002). These efforts
have been taken to escalation the investor’s confidence. Financial statements show the
financial health of a corporation during a particular course of action, and these statements
also give a clear snapshot of the business to all the stakeholders accountable for the
success or failure of the financial performance. Therefore, it is vital that the accounting
information, financial reporting, and information about earnings quality must be crystal
clear from the investor's point of view to make decisions about investments (Latif et al.,
2017).
Firms are under pressure to perform specific tasks, such as meet or beating analyst
targets. As a result, the firm is followed by several analysts. These analysts forecast
earnings for a particular quarter. Additionally, if the firm does not meet that target, there
will be consequences. So, the analysts might decide that they want to downgrade the
stock. Ultimately, this pressure comes back to the management. After all, they might
eventually get fired because they are not meeting or beating the targets. Much research is
available if firms do not meet targets; there can be financial repercussions. It suffices to
say that firms have powerful incentives to meet those targets. The second pressure firms
face compliance with the covenant agreements, as stated in the positive accounting theory
(PAT) (Menicucci, 2020; Watts & Zimmerman, 1986). If managers cannot pay debt or
interest on debt, the lenders might pressure the management. This pressure continues
because firms have to show earnings growth because of the market pressure and
expectations. The financial market wants to see a smooth increase in the profits of the
firms. However, firms’ earnings do not follow smooth progression in reality and have a
volatile and zig-zag pattern (Menicucci, 2020a). This fluctuating behaviour of the firms’
earnings compels managers to manage earning numbers. From this point, the idea of
earnings management emerges. It does not mean illegal manipulation or bump up or
sometimes bumps down the earnings. The timing of transactions to smooth out earnings
to produce gains or losses ensures that the earnings keep going up smoothly that investors
want to see (Hidayah et al., 2021).
From here, we better understand the idea of earnings quality. Some firms have
high earnings quality, and some have low earnings quality. The bottom lines are how
transparent and trustworthy the earnings numbers we see in the income statement are
whether the quality of earning is high or low because earnings quality is the function of
two features of numbers. First: the repeatability and the believability of the profits of the
firm. Repeatability, also known as the sustainability of the earnings, is supposed to be
high-quality earnings based on plausible assumptions that are of higher quality. At the
same time, the latter is called the lower quality of earnings based on unrealistic
assumptions or unjustified changes in accounting assumptions. For instance, if firms are
overly optimistic about the collectability of credit sale or how long the building will last
are deemed to be of lower quality earnings (Melgarejo, 2019; Watts & Zimmerman,
1990).
Earnings is a standard accounting unit of measurement and a description of a
firm's operations that characterizes the firm's historical and contemporary condition and
empowers projections or expectations about future outcomes. Earnings quality is
negatively interrelated to earning management and financial reporting quality (Crews &
Wilson, 2021; Dechow & Dichev, 2002). So, earnings management is enhanced once the
content publicly released in financial statements is minimal. It means that when provided
information is reliable and transparent, there is less likelihood of bumping up or bumping
down the earnings. It demonstrates low management of earnings (Menicucci, 2020a).
According to the (SFAC) Statement of Financial Accounting Concepts No.1, earning

quality could be described as a measure of by what means much information a financial
statement contains about a particular feature that is appropriate for a specific decision
belonging to a particular decision-maker. It reveals that the reported earnings are more
relevant for investors and other stakeholders. (Dechow et al., 2010) categorized earning
quality as reflecting current performance, predicting future performance, and annuitizing
intrinsic value. The quality of financial reporting is assessed quantitatively—measures of
relevance and reliability (Gray et al., 2011; Palea, 2013). The International Accounting
Standard Board (IASB) states that financial reports are valuable and reliable when they
are reliable. We use persistence, predictability, and value relevance for reliability, while
we use smoothness and accruals quality for relevance (Gaio & Raposo, 2014).
For this reason, researchers and analysts do not rely solely on one method of
determining earning quality. However, earnings quality is sub-divided into two
categories: (1) accounting-based measures (2) market-based indicators. Accounting-based
earnings quality includes predictability and smoothness—however, markets-based
earnings quality encompasses conservatism (Francis et al., 2005a; Ho et al., 2015).
Earning quality is subtle. There is no universally accepted measure of earnings quality
but several proxy measures (Ecker et al., 2015; Menicucci, 2020; Perotti & Wagenhofer,
2014). Prior research studies have applied and tested one or two measures of earnings
quality. However, instead of using just one or two proxies to measure earnings quality,
this study employed six proxies to demonstrate the various aspects of earnings quality.
Multiple proxies are employed to ensure that no erroneous conclusions are drawn about
the quality of the earnings. The following sections provide in-depth descriptions of these
proxies.
Predictability (RRED)
Lipe (1990) Quantifies earnings predictability based on earnings variation, with
higher earnings variance implying poorer predictable. (Francis et al., 2004), using the
square root of the predicted error variance from the earnings-persistence model,
determine the predictability of earnings. Earning predictability refers to a firm's tendency
to forecast its potential income based on its existing earnings (Zhai & Wang, 2016). As
defined in Financial Accounting Standard Board (FASB) principle no. 2 (Para 53), the
predictive ability is an input-independent predictive procedure. As per the Financial
Accounting Standards Board (FASB), predictability of theoretical foundations is a
component of persistence and is thus critical for standard setters. Earnings persistence
and predictability both contribute to the precision of earnings forecasts and are hence
regarded as good proxies of earning quality. Earnings predictability is significant for
investors since they want credible data of predicted future cash flows to calculate the
current value of their investment. Earnings predictability enables the projection of future
income or earnings and gives a sound basis for decision-making. Earnings predictive
ability also assists in estimating stock market returns, as the market value of equity is also
dependent on the earnings growth made by organizations. Increased predictability implies
a higher quality of earnings; however, decreasing predictability implies lower earnings
(Menicucci, 2020; Mollaha et al., 2015; Sakawa & Watanabel, 2021). Further, PRED
results above a certain threshold indicate poorer reliable earnings and, as a result, lesser
quality of earnings.
Smoothness (SM)
An accounting method (differing revenues from a good accounting year if the
following accounting year appears to be difficult and deferring expense recognition
during a bad accounting year if the following year seems to be good or more profit-
generating) are used to smooth out fluctuations in a net income of the corporations over
one period to the next. This is called earnings smoothing. Earning smoothness refers to
all of the efforts made by management to minimize irregular variation in earnings
(Tucker & Zarowin, 2006). Financial analysts and accountants employ this strategy to
mitigate the impact of unexpected increases and decreases in organizational revenue.
Companies engage in earnings smoothing because investors pay a premium for equities
with a more predictable and stable earnings stream. (Dechow & Schrand, 2004) asserted
that smoothed earnings and not including one-time or non-recurring items are high
quality (Sri Kustono et al., 2021).
Managers engage in earnings smoothing for two reasons: (1) incentives and (2)
investor expectations. When investors invest in an organization, they do not just look for
a high rate of return; they also want a consistent and less fluctuating earnings stream
(Kirschenheiter & Melumad, 2002). Considering the behaviour of investors, financial
professionals and accountants usually attempt to hedge their income fluctuations so that
their financial statements do not include all severe cases of volatility; as a result, the share
price increases. Managers are also involved in earnings smoothing to avoid paying undue
taxes, particularly in nations with a progressive tax system, which mandates enterprises to
pay a higher tax on huge profits. There are two different views on smoothing as a
measure of earnings quality: (1) managers smoothing out relevant cash flow fluctuations
leading to lower earnings, and (2) managers smoothing out irrelevant cash flow
fluctuations leading to higher earnings (Francis et al., 2008).
Earnings smoothing has both positive and negative consequences. It
simultaneously informs and misinforms shareholders and other users. It is categorized as
legitimate, illegitimate, moral, or immoral since it encompasses a wide variety of both
good and wrong conduct. Simultaneously, a company may be utilizing a strategic
measure to smooth its earnings, while another organization may be using dubious
methods to Smooth its earnings. Accounting also establishes broad guidelines such as
complete disclosure, comparability, and consistency. Any technique of earnings
smoothing that contravenes this will be ethically questionable. Nevertheless, it is
widespread in various economies (Dechow et al., 2010).
Conservatism (CONS)
There is no specific definition of this attribute of EQ. Some authors have used this
term as a proxy for measuring earnings quality. EQ is demarcated as the degree to which
a firm's reported earnings are conservative (White et al., 2003). The FASB defines
accounting conservatism in Statement of Concepts No. 2 as "a vigilant response to
volatility to ensure that the volatility and risk inherent in organizations are taken into
considerations." Similarly, (Watts, 2003) stated a standard definition of accounting
conservatism, “Anticipating no profit, but anticipating all losses. Accounting
conservatism is frequently defined in the scholarly literature as "the accountant's
proclivity to necessitate a higher degree of confirmation for acknowledging good news
than bad news in financial statements (Basu, 1997). Conservatism is used to quantify EQ
based on stewardship (or accountability). Conservatism obtains financial statement

transparency by constraining managers' managerial opportunism and compensating for
managers' prejudices through asymmetric financial information (Menicucci, 2020a).
Identifying financial reporting quality standards is defined as the level to which
accounting principles are aggressive or conservative. The contradiction between
information professionals and shareholders, the prediction of specific income
components, the potential to utilize alternative appropriate accounting techniques, and
concepts such as smoothing and EM pose challenges to using earnings as a decision-
making benchmark. Such conditions amplify the importance of taking into account the
EQ matter, as reported earnings should be of top quality.
Linkage of Corporate Governance and Earning Quality
According to the financial reporting standards, a corporation's practical corporate
governance framework objective is to enforce GAAP2 adherence and maintain accounting
information integrity. Prior research scholars have examined the link between corporate
governance and earnings quality and checked out to elucidate the presence of
assorted earning quality attributes. However, most studies are associated with
developed economies and empirical literature regarding corporate governance and
earnings quality, giving uneven and weak results. Thus, this issue is unsettled among
researchers (Pergola, Joseph, & Jenzarli, 2006) who investigated corporate
governance results upon earnings quality and realized that entrenched board member
area units are helpful to attenuate governance constraints.
Shin and Kim (2019) aimed to see if corporate governance systems are linked to
earnings quality, remarkably accurate earnings reporting and if investors react differently
to inaccurate results depending on governance effectiveness. Earnings accuracy is one of

2
Generally Accepted Accounting Principles
the most critical elements affecting a company's long-term viability, as projected
earnings convey information about a company's long-term viability and are also linked to
its cost of capital. This article uses the board of directors' independence and foreign
ownership as governance mechanisms to explain the discrepancies between verified and
unverified earnings. The research finds that the gap between unaudited earnings and
actual earnings is smaller for firms with independent BODs and foreign ownership,
implying that earnings accuracy is higher for firms with effective corporate governance,
utilizing 1976 non-financial firm-year observations listed on the Korea Stock Exchange
from 2013 to 2016. The impact of the earnings disparity on investors is also observed in
this study. Equity return to the earnings gap is less damaging for companies with
independent boards of directors and more negative as foreign ownership grows, showing
that each corporate governance method has different implications (Meeampol et al.,
2013).
Moreover, Meeampol et al. (2013) demonstrate that a high level of earnings
quality is critical because it leads to an adequate disclosure and, as a result, strong
corporate governance. This study aims to use the newly-created Corporate Governance
Scores of the Thai Institute of Directors in the Stock Exchange of Thailand (Olivia &
Setiany, 2021) in the year 2011 as an independent variable, with the higher institute of
directors (IOD) score usually reflecting a higher level of Corporate Governance and
earnings quality as the dependent variable. The standard deviation is a common metric
for assessing investment risk. This IOD score compares practically all publicly traded
companies to the standards outlined in the corporate governance principles. At 95%
confidence, the chi-square was utilized to test this association. The investigation results
show that the standard deviation of enterprises listed in the SET for 2011 is linked to the
IOD Score.
In conclusion, the high Corporate Governance score as evaluated by the IOD
score indicates strong earnings quality. In this study, a company with a high IOD score,
which indicates good corporate governance, will earn excellent, as measured by standard
deviation. Conversely, the findings of this study reveal a link between the two variables.
This conclusion could explain that we only employ standard deviations in our study even
though several techniques quantify quality earnings (Gaio & Raposo, 2014).
Similarly, Melgarejo (2019) investigated the impact of realistic corporate
governance procedures on the value relevance of accounting information for firms listed
on the Lima Stock Exchange employing multivariate regression analysis (LSE). This
study also used a two-stage regression model to account for the sample's self-selection
bias. The LSE's Good Corporate Governance Index includes companies that provide
more value-relevant, consistent, and conservative accounting reports. After accounting
for self-selection bias, the results remain the same.
Elzahaby (2021) recently attempted to consider Egyptian financial market data in
line with the prior CG-EQ linkage. This research study has addressed the CG-EQ linkage
by adding firm performance as a mediator. This research study has taken up data from
2011-2017 and analyzed the sample analytically both directly and indirectly by
employing structural equation modelling. The study has used both market-based and
accounting-based performance measures. The findings demonstrate the significant effect
of corporate governance on earnings quality, consistent with (Al Nasser, 2021; Asogwa
et al., 2020; Dang et al., 2020; Latif et al., 2017; Melgarejo, 2019). This investigation
also confirms EQ's complement or substitute behaviour in the relationship between CG
and FP. Moreover, the analytical investigation has concentrated on a single measurement
of assessing earnings quality: the value of discretionary accruals. The research, however,
is missing some significant proxies for earnings quality features, including income
smoothing, earnings persistence, conservativism, timely loss detection, predictability,
and persistency.
Hypothesis: 5 Earnings quality attributes significantly affect firm performance.
The Role of Earnings Quality for the Effect of CGI on the Firm Performance
There are two opposing perspectives on corporate governance and earnings quality in the
literature. Researchers discovered that companies with lower underlying earnings quality
have superior governance structures, coherent to firms developing governance practices
concerning earnings quality attributes underlying their enterprises and different
situations. Researchers comprehend a link between higher discretionary earnings quality
and good governance, which is commensurate with managers having to respond to
systems of governance once attempting to make reporting decisions. A corporation is a
distinct artificial legal person governed by a series of agreements (formally and
informally) that permit shareholders to hire a management team (managers) to
accomplish specified objectives and services there for the company. The managers are
accountable for acting in the owners' (principals) best interest (Cheffins, 2021; Jensen &
Meckling, 1979; Nugroho, 2021; Wu, 2021). According to the authors, the agency
problem exists because "if both the principals and agents are utility maximizers, then
there is a reasonable cause why the preferences among both stakeholders are at cross
purposes." The stewardship theory is also pertinent when it comes to the principal-agent
relationship. In juxtaposition to the agency cost theory, it contends that either the
principal and the agent see an interest in getting the maximum long-term corporate
stewardship and are, as a result, on the same page (Koji et al., 2020; Kong et al., 2020;
Kyere & Ausloos, 2021).
In the past, the researchers of the corporate world have been trying to combat and
visualize the complex phenomenon of the association between corporate governance and
firm financial efficiency, profitability, and wealth maximization of shareholders. As the
advocates of governance-value interaction have always argued, good corporate
governance enhances the firm's financial performance and provides protection and
incentives to investors, reducing risk and agency costs. According to agency theory, in
corporations, the conflict of interest arises, where the managers act in their self-interest at
the cost of shareholders, rather than acting in the best interest of the shareholders and
other stakeholders (Cheffins, 2021; Jensen, 1986; Jensen & Meckling, 1976). Due to this
agency problem, corporate governance appears and plays its role in eradicating these
agency issues. As advocates of the agency principle, they always stressed the principal-
agent separation, which produces information asymmetry, which further leads to an
agency problem. Eventually, this problem trapped the organisation and caused them a
serious threat, such as increased risk, the rise in the cost of capital, reduced expected
future cash flows, damages investors and shareholders’ confidence, and ultimately
diminishes firm performance. Here corporate governance plays its role and provides
specific protective measures with its governance mechanism to monitor insider’s
activities like managers, to put the restriction on the moral hazard of asymmetric
information, curbing risk and increase shareholder’s wealth and increase the performance
of the firm. (Latif et al., 2017) (Latif et al., 2017; Sarun, 2016).
Klapper and Love (2004) analysed for each of the 14 emerging stock markets
(Chile, Hong Kong, Brazil, Indonesia, Pakistan, Taiwan, and India), evaluating the firm-
level data of Tobin-Q and ROA for each 14 emerging markets. They conclude a robust
positive correlation between its performance and corporate governance. Firm-level
corporate governance differs significantly across markets, and it is simply inadequate
with relatively weak legislation.
The research examined hypotheses and their impact on earnings quality and how
corporate governance control mechanisms and monitors pertaining agency conflicts
within the corporation, using the conceptual model of positive accounting theory.
According to positive accounting theory, the market is efficient, and managers make their
best choices due to the low level of information asymmetries, and low cost of capital
ensure higher earnings quality (Saksessia & Firmansyah, 2020). Nevertheless, the
agency relations are severe as opportunistic managers always try to act for private gains.
This selfish behaviour of the management creates a threat for the investors. The investors
always remain under the pressure of expropriation of their wealth.
According to Habib and Jiang (2015),), relatively high quality of financial reporting
contributes to corporation valuation in three ways; 1) assistance for choosing or ignoring
positive or negative investments. 2) The decline of manager embezzlement 3)
Minimisation of information asymmetry between managers and shareholders. They
theorise in their survey-based investigation that studies to date for both governance
and performance of the corporations are undertaken without taking into consideration the

pertinent role of the quality of financial reporting, which is an actual output of
appropriate corporate governance frameworks.
The available empirical literature and reasoning sophisticated by (Habib & Jiang,
2015) persuade us to investigate whether the quality of earnings plays a role in
strengthening or weakening the governance-performance interaction. Hence, our study
explored the moderating (conditional) role of the earnings quality determinants in the
association between corporate governance and corporate performance in Pakistan.
Consequently, the following hypothesis is postulated in response to the research question
"Does earnings quality moderate the association between corporate governance index and
the corporate performance:
Hypothesis: 6 Earnings quality moderates the association between corporate
governance and financial performance of the enterprises.
This chapter highlights the empirical literature to explain the linkage between corporate
governance, financial slack, earnings quality determinants, and the corporation's financial
performance. The first part of the chapter elaborates on corporate governance in Pakistan.
The second part relates the governance-performance linkage. In the third part, the
justification of financial slack as a precise indirect channel is elaborated. While in the last
segment of the chapter, the rationalization of earnings quality as a measure of financial
reporting quality and reasoning of using EQ as a moderating variable is documented.
Therefore, the three dimensions of earnings quality, like predictability, smoothness, and
conservatism, are demonstrated.

Chapter 3: Theoretical Literature and Framework
Introduction
The underpinning theories and theoretical literature that are relevant to this
dissertation are comprehensively discussed in this chapter. Theoretical evidence is
closely related to develop the research argument and supporting it. The theoretical model
developed in this chapter is the subject of continuing empirical and theoretical literature
brainstorming that supposedly occurred prior to its development. The theoretical model is
comprehensively discussed and justified in the specific context of a developing country
based on related theories in the sections that follow and beyond that.
Theoretical Evidence
The relationship between corporate giants and their shareowners is characterised
by agency cost theory (Donaldson & Davis, 1991). It aims to overcome squabbles
between the aspirations of the organisation's management and investors by implementing
strategies for overcoming such interpersonal skirmish, such as entrusting decision-
making prerogative to the management (agents) responsible for a project's planning.
Corporations could enhance their financial effectiveness by cost containment, which goes
hand in hand with the agency theory. Because managers and owners have different goals,
shareholders may see the agency cost as a loss of value (Jensen, 1986; Jensen &
Meckling, 1976). Subsequently, the agency's cost is reflected in the current market,
affecting the stock's market value.
Consequently, if agency issues are handled and resolved efficiently, they may also
increase the stock price, maximise shareholder wealth, and bump up the company's
current operational and financial performance. According to Jensen and Meckling (1976),
agency cost is measured as the sum of monitoring costs, bonding costs, and residual
costs. Therefore, to reduce the agency cost, the corporate governance mechanism should
unravel the reasons for these conflicts, whence the prerequisite for grasping the “agency
theory.” Effective corporate governance control should encourage managers to act in the
principal's best interest (Allen & Gale, 2001). There is a supposition in the agency theory
that corporate controls are absent in an underdeveloped market. The consequences lead to
market failures. The non-existence of the markets, moral hazards, asymmetric
information, incomplete contract, and wrong selection of decisions emerge. However,
various studies have suggested that proper monitoring, healthy market competitions,
control of executive pay, prudent debt sourcing, efficient board of directors, and
concentrated shareholdings assist in resolving agency problems (Bonazzi& Islam, 2007).
The agency theory advocates argue that the role of the CEO and chairperson should be
assigned to separate individuals. The chief executive officer (CEO) position may ensure
proper monitoring and balance between the CEO and the chairperson (Kabir, 2010; Watts
& Zimmerman, 1990).
Financial Slack Theory
The concept of slack is a complex phenomenon. Nevertheless, the research has made
utmost efforts to distinguish the meaning and definition of a slack resource clearly.
Considering the significance of slack resources as a vital driver for investment motives,
performance, and sustainable economic growth and development, the researchers have
avoided its ambiguity while defining slack resources. The investor prefers liquidity, liquidity,
and liquidity (Handa & Schwartz, 1996). According to Bourgeois III (1981), organizational
slack is the cushion of actual or potential resources that enables an organization to cope
with interior or exterior challenges. For policy decisions and perhaps strategic
adjustments concerning the environmental context. Similarly, firms’ slack resources may
be distinguished and pronounced in different ways. Slack is indeed the surplus of
resources of the organization over what would be required to generate a specific amount
of performance, or it is the amount of required surplus cash resource available to make
the necessary payments or pay off obligations (Richard Michael Cyert & James G.
March, 1963; Nohria & Gulati, 1997; Rezende & Macedo, 2021).
We define organizational slack as employing available financial resources to achieve
a set of firms’ goals. Based on slack resources theory, we hypothesize that optimal
exploitation of slack resources is critical for both firm and country-level sustainability and
performance (Crilly et al., 2012). However, Waddock and Graves (1997) argued that the
fundamental theoretical foundation for examining firm responsiveness to stakeholder
pressures had been slack resources theory. According to this idea, organizations with
significant financial, organizational, and technological resources are more responsive to
stakeholder pressures than counterparts with limited slack resources.
Correspondingly, one of the advantages of slack is thinking outside the box and
extending an overall thorough inspection. In other words, slack opens up the prospect of
increasing corporate involvement to boost innovation and growth. Lee (2012) posits that
firms retain and use slack to buffer during a recession, economic downturn, or other
contingencies. We define organization slack as “a cushion of actual or potential resources
that enables an organization to successfully respond to internal pressures for adjustments or
external pressures for policy change, as well as to initiate changes in strategy towards the
external environment (Bourgeois III, 1981; Shaikh et al., 2018).
Moreover, varying degrees of slack affect the level of discretion and flexibility
available to managers to lessen internal pressures from shareholders and stakeholders.

Available resources might be pretty discretionary, and although more discretionary resources
have more potential and options for use, less discretionary resources have fewer (Sharfman et
al., 1988). Highly discretionary resources involve cash flow, whereas low discretionary
resources include plant capacity flexibility. The primary aim of this study is on highly
discretionary resources, for instance, cash flows, current assets, working capital etc.
According to behavioural theorists, financial slack resources always impact firm performance
positively. Therefore, firms may use financial resources as a cushion during a crisis and
financial emergencies.
Contrastingly, Jensen and Meckling (1976) presented the contradictory strand to
behavioural philosophers. He argued that insiders might use firms’ resources for their private
lavishness rather than investing in productive and favourable present value investment
ventures (NPV) due to the managers' opportunistic and self-dealing behaviour. Even these
resources are used in low NPV and risky projects. They use resources as a political bribe to
please the shareholders to show their efficiency (Jensen, 1986; Lee, 2012).
Likewise, an investigation regarding corporate governance, cash flows as a firm financial
resource, and investment create hurdles for investors. The study also indicates that poor
corporate governance and overpowering agency problems create severe information
asymmetries among the principal stakeholders such as local, foreign investors, and managers
(agents). Furthermore, the study concludes that while allocating resources into an investment,
these agency problems may ascend if abundant free cash flows are available (Xu & Zhang,
2009).
Therefore, it is evident for an enterprise to introduce good corporate governance
practices to protect firm resources, ensure investors' confidence, and enhance sustainable firm
performance and growth.

Stewardship Theory and Earnings Quality
Stewardship theory comes as a result of the inadequacy of agency cost theory.
Thus, according to stewardship theory, inside managers are efficient stewards who do not
require acute control and continuous supervision to accomplish their organizational
fiduciary duties (Clarke, 2004; Yusoff & Alhaji, 2012). According to the argument, good
governance is not compulsory for assuring earnings quality because managers will
always act in the best interests of shareholders (Yusoff & Alhaji, 2012) rather than act
opportunistically, as stated in the agency theory presented by (Jensen & Meckling, 1976),
thereby ensuring earnings quality. They are responsible stewards of the resources
entrusted to their care and trust. According to the stewardship theory, managers seek to
increase firms' value and refrain from making decisions detrimental to earnings quality.
Stewardship theory, across the other side, alleges that directors can best serve
shareholders by maximizing their utility rather than their interests. The proponents of the
stewardship theory can refer to empirical evidence to back up their claims (Donaldson &
Davis, 1991). Henceforth, according to stewardship theory, allowing managers to
exercise discretion can encourage them to perform at a higher level of performance.
Research scholars on this side of the debate agree that managerial behaviour is motivated
by financial rewards and that discretion is required to maximise the value of a company's
shareholders.
Furthermore, stewardship theory emphasises that managers' concern for their
reputation and intended career progression compel them to serve for the best interest of
the shareholders, thereby depressing agency costs for the company (Donaldson & Davis,
1991). If managers are happy and content, they will give their best effort has a
psychological component. Clarke (2004) theorizes that allowing managers to take
decisions on their own without having to go through bureaucratic processes improves job
satisfaction that contributes towards the overall earnings quality, shareholders wealth
maximization, and financial performance of the firm (Shleifer & Vishny, 1997).
Apart from that, Fama and Jensen (1983) recommended that management have
significant exposure to far more detailed insider information about the company's
operational processes than independent directors do. Hence, managers are expected to
have an acute knowledge of its operations to help them make well-informed accounting
decisions. The stewardship theory suggests that a few independent directors are ideal for
companies (Donaldson & Davis, 1991). In addition, the stewardship theory affirms that
an insider-dominated board of directors is more effective in achieving the organizational
objective because of easy access to information and innovative technologies. Lastly, the
stewardship theory maintains that the CEO essentially wants to work well rather than
opportunistically exploit the stretched resources —as also suggested by the agency theory
(Donaldson & Davis, 1991). Additionally, the researchers emphasize the five pillars of
the stewardship managerial approach: trustworthiness, information sharing, autonomy,
long-term vision, overall quality assurance (Patrick et al., 2015).
Opportunistic Perspective and Earnings Quality
Agency theory was one of the first theories to explain the relationship between
good corporate governance and earning reliability. Agency theory originated as a theory
of firm. The model suggests that when ownership and management are separate, there
seems to be a much higher probability of apparent conflict of interest (Jensen &
Meckling, 1976). Due to the interaction of interests, both the principal and agent want to
optimize financial gain at the expense. Typically, managers accomplish it by tricking
owners by manipulating financial reports to benefit their personal needs, affecting the
quality of earnings. Frequently, interpersonal concerns arise due to the contracting
engagement (Ewert & Wagenhofer, 2015; Lehmann, 2016). In this situation, the
managers fudge financial statements to hide accurate accounting information. So they
behave as an opportunistic actor to act for their self-dealing based on the quality of the
firms. These acts affect the earnings quality of businesses.
Oppositely, effective governance can lessen the conflict of interest. Nonetheless,
this concept is limiting to the principal and the agent. Hence, this implies that it neglected
other participants, such as society, while examining the governance-earnings quality
relationship. It predicts that managers will choose an accounting method from within the
accepted set to enhance their well-being at the expense of the other parties.
Theoretical Model
After going through the prominent theoretical and empirical academic literature
and based on arguments developed and propagated by re-known researchers and
conclusions drawn from the past studies, the likely theoretical model is developed for the
current research study. The significant variables of the model are Corporate Governance,
Financial Slack Resources (FSR), Earnings Quality Attributes (EQ), and Financial
Performance (FP).
Figure 1
Theoretical Framework
Financial Slack
Agency Theory (-ive)
Behavioural/Resource-
Based Theories (+ive)
Indirect Effect
CG-Index
Performanc
e
Earning Quality
Substitute (opposite signs)
Conditional Effect
Complement (Same signs)
PAT (+iv) if EMH
Where
CG-Index (OCG - CGI) = Corporate Governance Index
FP = Performance of the firm
TQ = Tobin’s Q
ROA = Return on Assets
ROE = Return on Equity
PAT = Positive Accounting Theory
EMH = Efficient Market Hypothesis
Theoretical Model (Justification)
Several researchers have envisaged that slack financial resources are essential for
corporate performance. However, they have demonstrated differently the role that
financial-slack resources have. Although, the usual behavioural theory of the firm tends
to claim for the optimistic correlation between slack and performance of the firm (Cyert
& March 1963; Penrose, 1959). Jensen (1986) asserts in the agency cost model that
financial slack has a negative impact on the corporation's performance. According to,
behavioural theory a company contains the interests of sponsors, and they frequently
clash. In this perspective, slack signifies “overheads to contributors of the partnership in
extra of what is essential to hold the organization” (Cyert & March, 1963) and, therefore,
performs the function of clash perseverance. Organizations may utilize extra financial
slacks to reduce internal coordination costs of the company to enhance overall company
profitability.
Conversely, agency theory gave an entirely different opinion regarding financial
slacks resources and opposed the organization theory viewpoint (Davis & Stout, 1992).
Agency theory clearly castoffs the idea that the company is an entity with human
characteristics. The company is not a human being. It is an artificial lawful entity that
lines up the conflicting individuals and complex procedures with prescribed agreements
and relations (Tan & Peng, 2003). In line with this, the firm is considered a relationship
between shareholders (principals) and managers (agents).
Due to this explicit separation of ownership and control, advocates of agency
theory object to the conception that having financial slacks are always valuable for a
firm. According to Jensen and Meckling (1976), slack resources are suitable for managers
who behave as agents. Managers naturally have different opinions and objectives on
apportioning firm slack resources as expected by the principals. Therefore, due to the
opportunistic behaviour, the managers-agents try to divert slack financial resources for
empire-building. Consequently, these resources become the cause of conflicts between
principals and agents and create agency problems, for instance, high capital cost and
instigate information asymmetries, leading to organizational inefficiency (called ‘X-
inefficiency’ by (Leibenstein, 1969) and incompetency. This pessimistic facet of agency
theory portrays a negative association between financial slacks and firm profitability and
value. Therefore, they argue favouring a minimum level of slack resource to avoid the
executive’s exploitation of resources for their material welfare and private benefits since
executives have motivations to divert firm resources merely for the lavishness (Jensen &
Meckling, 1976). Theoretically, we may recommend that agency theory stresses financial
resources from the principal’s perception, rather than managerial organization theory
(agents)orientated. Yet, the principal-agent school of thought regarding governance
focused on owners and directors among the company. The clashes are triggered by
following the notion that both parties seek their respective benefits. At the same time, the
agent gets an advantage at the cost of the owner’s benefits which is against governance
norms according to the agency school of thought. The administrators destroy the firm’s
resources in pursuing private advantages (Kim et al., 2008; Jensen, 1986).
Accordingly, financial slack may also endanger the company's financial health.
Organizational slack resources are viewed as needless expenses (Jensen, 1986; Lee,
2012; Tan & Peng, 2003). The stakeholder point of view considers the firm as a wealth-
generating group and its board of directors as independent corporate managers (Jensen,
2000, 2001). So, a board of the firms should be a team and dedicated individuals who add
value, take up downside risk and retain strategic statistics (Kaufman & Englander, 2005).
To offset executive smugness and falling causes for novelty, the board of directors,
according to Pound (1995), ought to be well versed in the difficulties of the firm,
comprising of financial laws and structures (Susanto &Bosta, 2018; Cardoso, et al.,
2014).
Competing Theoretical Views
The agency theory and positive accounting theory merely highlight the principal-
agent confrontations. The managers usually have more information than outside
stakeholders because of the separation of management and ownership hypotheses, which
leads to poor governance and high information asymmetries. Due to bad managerial
corporate governance and managers’ opportunistic attitude, managers always pursue their
private benefits (Jensen & Meckling, 1976; Ndjetcheu, 2012; Watts & Zimmerman,
1990). The positive theory argues that low agency costs and agency conflicts may
enhance earnings quality. Corporate governance is concerned with the supervision,
monitoring, and smooth execution of the firm’s operation to safeguard the interest of all
stakeholders(Shleifer & Vishny, 1997). Both principal-agent (agency) and stakeholder
theories favour the role of corporate governance to enhance the shareholder’s wealth and
value of the firm by curtailing any risk and ensuring a high return on their investments.
In comparison with the agency theory, the stewardship theory emphasizes that the
principal and agent ought to strive to maximize the long-run stewardship of the firm that
is in line with (Lambright, 2009). In the light of, stewardship argument, managers merely
strive to accomplish company goals. Similarly, resource dependence theory argues for the
slack financial resources (Ashwin et al., 2015). Both theoretical and empirical literature
claims that good corporate governance lessens the problem of asymmetric information
with the help of reliable financial reporting increase earnings quality and firm
performance (Ashwin et al., 2016; Bourgeois III & Singh, 1983; Bradley et al., 1999;
Dang et al., 2020; Latif et al., 2017; Mallin, 2019).
This chapter posited the underpinning theoretic strand and associated theories.
Following the related literature and theories, the testable hypotheses have been
constructed to confirm the study's selected variables. Besides, the relevant theories such
as agency theory, financial slack theory, positive accounting theory, stewardship theory,
and asymmetric model provided a solid theoretical foundation for developing a
theoretical model for the said issue.

Chapter 4: Research Methodology
Introduction
This part of the dissertation offers a clear strategy for outlining the dataset's type
and sources, operationalizing and constructing variables, and estimating methodologies.
Additionally, the following sections describe sample selection and sampling design. This
chapter also provides the materials and methods used in this study. It describes the
population of the study and the sample size to be extracted from the population. The
succeeding chapter demonstrates the evaluation approaches used during the study. The
preponderant target of this research dissertation is to investigate the relationship between
corporate governance structure and firm financial performance, either indirectly through
the precise channel of financial-slack resources as a mediating variable or through the
precise condition of the earnings quality attributes as moderating or interacting factor.:
the research has inferred the conclusions is directly, indirectly, and conditional
conclusions inferred. The research thesis mainly emphasizes the importance of the CG-
Performance linkage of Pakistan's developing economy. Besides other appropriate
proxies, this dissertation also included firm-specific control variables in the forthcoming
sections. Lastly, it describes the estimation methods for data analysis with the help of
STATA-17 and Eviews-12 software.
Methodology
The researcher used pooled OLS, fixed effect, and random effect models to
estimate the data and draw conclusions from the findings. The Hausman test was
employed to determine the most appropriate model for unbalanced panel data in the final
selection between fixed and random effect regressions. After thoroughly examining and
testing each of the three models mentioned above, we have decided on a fixed-effect
model for the current investigation. Eventually, we have rejected random effect (null
hypothesis) and accepted fixed effect (alternative hypothesis) after applying Hausman
estimation.
Panel Data Models
Panel data is simply the combination of time series and cross-sectional units in
data analysis. Panel data are used in econometric research to examine cross-sections of
the same individual over time. Panel data analysis is a powerful technique frequently
applied in econometrics. It applies to both time series and cross-sectional data. When
panel data are used, the same cross-sectional unit such as industry, firm, or country is
premeditated over time; this data is thus spatially and temporally pooled (Wooldridge,
2010). The econometric model is as follows:
y ¿ =α + β x ¿ +u¿
Where;
y ¿ = Dependent variable.
α = Intercept.
β = Parameter measures the rate of change in DV due to change in IV.
The easiest method to carry out these statistics would be to measure a single,
pooled regression on all the observations. Nevertheless, pooling the data considers no
heterogeneity, i.e., there is the same relationship for all the data. Panel data suggest that
individuals, firms, states, or countries are heterogeneous. Time-series and cross-section
studies do not control this heterogeneity, which leads to the risk of getting biased results
(Moulton, 1987).
Fixed Effect Model
The term set for estimation (also called internal estimation) applies to the
indicator for estimating the coefficients in the regression model. When considering fixed
effects, we use time-lapse independence for all related correlations with the repression.
The fixed effects estimator used within variation (within the same individual, overtime)
using time demeaned variables (Wooldridge, 2010). The fixed-effects model for some
variables is as follows;
y ¿ =α + β x 1¿+ γx 2¿+ u i+ v¿ ¿ ¿
y ¿ =β o + β 1 X 1¿+ β 2 X2¿+ e ¿ ¿ ¿
With e ¿ =μ i+ μ ¿
Then
y ¿ =β o + β 1 X 1¿+ β 2 X2¿+ μ + μ ¿ ¿
i ¿
Hence,
y ¿ =( β o + μi ) + β 1 X 1¿+ β 2 X 2¿+ μ ¿ ¿ ¿
In this final model, “𝜇𝑖” is now a part of the constant term but different for
different individuals; however, the individuals have different intercepts but the common
slope.
The individual-specific effect ( v ¿) is potentially correlated with the explanatory
variables. Where ui is an abbreviation of whole the variables that impact v ¿ Skip periods,
but do not vary over time? EQ describes heterogeneity in the μi hair process that
distributes the different effects for each cross-section. The easy method to estimate
separate intercepts for each individual is to use dummy variables. This method is called
the least squares dummy variable estimator. Dummy variables are used to measure
segregation for different groups. With the panel information, we have multiple
assessments for everyone. We can team up for these assessments.
Fixed Effect Model Estimation: First Difference
Eliminating unobserved heterogeneity by first differencing. Since FE eliminates
the effect of cross-sectional variation
y ¿ =( β o + μi ) + β 1 X 1¿+ β 2 X 2¿+ μ ¿ ¿
¿
With one-time lag
y ¿−1 =( β o + μi ) + β 1 X 1−1+ β 2 X 2−1 + μ¿−1
y ¿ − y ¿−1= β1 ¿
Δ y ¿ =β 1 Δ X 1¿+β 2 Δ X2¿+ Δ μ ¿ ¿
¿
Hausman Test
We have discussed both fixed and random effect regressions in the preceding
sections, but we have not concluded. We must select the model that will work best for our
investigation. So, we used the Hausman test to choose between these two models.
Consequently, we will use the Hausman test to evaluate our fixed and random effects.
Following the Hausman test, the p - values of each explanatory and control variable are
less than 0.05. As little more than a result, we can reject null hypothesis H0; while
accepting alternative: H1. It is concluded that a fixed-effects model is more appropriate in
this type of analysis (Wooldridge, 2010).
The hypothesis of the Hausman Test
Ho: The random effect model is appropriate in this situation.
H1: The fixed-effects model is the most appropriate.

Robust Standard Errors
Newey and West (1987) and Hoechle (2007) frequently employed time dummies
to circumvent the cross-sectional dependence problem. Oppositely, Sarafidis and
Robertson (2009) affirmed that the time dummy is counterproductive once all clusters of
cross-section components do not exhibit equal cross-section dependence, which is
particularly common. Customarily, investigators agree with this opinion to prevent cross-
section dependence in their modelling techniques from including time dummies.
According to Moscone and Tosetti (2015), a time dummy eliminates cross-sectional
dependence if the time-effect is fixed. If the time-effect is not constant and cross-
sectional dependence persists, a firm's robust standard error can be skewed. As a result of
using fixed effects panel data regression using STATA based on (Driscoll & Kraay,
1998) standard errors, cross-sectional dependence was eliminated. The standard error of
Driscoll and Kraay is a nonparametric estimator of covariance matrices that is insensitive
to cross-sectional dependency, heteroskedasticity, and autocorrelation. This method was
carried out in STATA utilizing the xtscc syntax (Newey & West, 1987).
Outliers Handling
In finance, we frequently encounter situations that are out of the ordinary. As a
result of these extreme highs and lows in financial outcomes, organizations are
confronted with the problem of extreme values, also known as outliers. These extreme
values may affect the normality and the statistical results for the data. Extreme values can
cause problems with variance, standard error, and normality. However, outliers
Transformation is one of the methods for resolving these problems. Contrarily, some
authors have voiced their opposition. Grissom (2000) commented that the means of
converted data may occasionally reverse the difference in means between the original and
converted data. Tabachnick (2022) stated that although data modifications are not often
recommended, they effectively treat outliers and normality inadequacies. The hadimvo
syntax was used, which is more reliable than the (Hadi, 1992). The extreme points were
examined in greater detail to ensure that a data entry error did not cause (Weber, 2010).
After removing the outliers, the total number of firm-year observations was reduced
(Fithria et al., 2021; Lyu, 2015; Okui & Wang, 2021).
Regression Models to Measure Direct, Indirect and Total Effect
Model-1: Direct Effect, Indirect Effect, and Total Effect of CGI on F
Baron and Kenny (1986) have estimated direct and mediation effects using
different regressions. Nevertheless, Preacher and Hayes (2014) used path analysis for
indirect and conditional effects. The current study has followed (Hayes, 2022; Zaho et al.,
2010) and established the following regression models for the estimation of direct effect,
indirect, and total effect (Hayes, 2022).
TQ i ,t =γ 0 + γ 1 CGI i , t + γ 2 FSize i , t +γ 3 Sales Growthi ,t + γ 4 Agei , t + μi , t … ..(1)
FSi ,t =γ 0 + γ 1 CGI i ,t + γ 2 FSizei , t + γ 3 Sales Growthi ,t +γ 4 Age i ,t + μ i, t … … … … … … … … … … … … … … … … …
TQ i ,t =γ 0 ++ γ 1 Slack i ,t + γ 2 Age i ,t + γ 3 ¿ ¿ i, t+ γ 4 Sales Growthi ,t + μi ,t … (3)¿
TQ i ,t =γ 0 + γ 1 CGI i , t + γ 2 Slack i ,t + γ 3 Fsizei ,t + γ 4 FAge i , t +γ 5 Sales Growthi ,t + μ i ,t … … … … … … … … … … … …
TQ i ,t = Tobin’s Q (Market-based performance measure)
CG i ,t (CG-Index) = Overall corporate governance
Slack i , t= Financial Slack Resource (Available Slack & Potential Slack)
¿ ¿ i, t ¿ = The size of the firm
Growth = SalesGrowth i, t
Agei ,t = Age of the firm
μi ,t = Scholastic error terms
Model-2: Direct Effect, Indirect Effect, and Total Effect of CGI on FP
ROA i ,t =γ 0 +γ 1 CGI i ,t +γ 2 ¿ ¿ i ,t +γ 3 Sales Growthi ,t + γ 4 Age i ,t + μi , t … … … … .(5)¿
FSi ,t =γ 0 + γ 1 CGI i ,t + γ 2 ¿ ¿i , t + γ 3 Sales Growthi , t + γ 4 Agei ,t + μ i ,t .. … … … … .(6)¿
ROA i ,t =γ 0 ++γ 1 Slack i, t + γ 2 ¿ ¿i , t+ γ 3 Sales Growthi , t + γ 4 Agei ,t + μ i ,t … … .(7)¿
ROA i ,t =γ 0 +γ 1 CGI i ,t +γ 2 Slacki , t + γ 3 ¿ ¿i , t+ γ 4 Sales Growthi ,t + γ 5 Agei ,t + μ i ,t … … … … … … … … … … … …
Where
γ 1 … … … γ 5 are regression coefficients of the regression models
ROA i ,t = Return on Assets (Accounting-based performance measure)
OCGi ,t (CG-Index) = Overall corporate governance
Slack i , t= Financial Slack Resource (Available Slack & Potential Slack)
Model-3: Direct Effect, Indirect Effect, and Total Effect of CGI on FP
ROEi , t=γ 0+ γ 1 CGI i ,t + γ 2 ¿ ¿ i, t+ γ 3 SalesGrowth i ,t + γ 4 Agei , t + μi ,t … … .… (9)¿
FSi ,t =γ 0 + γ 1 CGI i ,t + γ 2 ¿ ¿i , t + γ 3 Sales Growthi , t + γ 4 Agei ,t + μ i ,t … … … … (10)¿
ROEi , t=γ 0++ γ 1 Slack i ,t +γ 2 ¿ ¿ i ,t + γ 3 Sales Growthi ,t + γ 4 Age i ,t + μi , t … ..(11)¿
ROEi , t=γ 0+ γ 1 CGI i ,t + γ 2 Slacki ,t +γ 3 ¿ ¿ i ,t + γ 4 SalesGrowth i, t + γ 5 Age i ,t + μi , t … … … … … … … … … … … …
Where
γ 1 … … … γ 5 are regression coefficients of the regression models

ROEi , t = Return on Equity (performance)
CG i ,t (CG-Index) = Overall corporate governance
Slack i , t= Financial Slack Resource (available slack & potential slack)
Model:4 Estimating the Moderating Effect of Earning Quality (EQ)
A moderating variable talks about how a relationship between an independent and
dependent variable or predictor or an outcome variable changes because of different
groups or when certain things happen under certain conditions. It means that the
relationship between the independent and dependent variables depends upon some of the
third variables. Thus, the association is different across different levels or under particular
conditions. A moderating variable is just a special case of an interaction (Abu-Bader &
Jones, 2021; Hair et al., 2021; Zaho et at., 2010). Moreover, moderation is the process of
eliminating or lessening extremes. It is used to ensure normality throughout the medium
on which it is being conducted (Cohen, 2008). The purpose of moderation is to strengthen
or weaken the relationship between two constructs (Nie et al., 2011; Şanlı, 2021).
In this study, for the measurement of conditional or moderating effect, we used
the following model to capture the conditional effect on earnings quality on firm
performance. It will also investigate the impact of different levels of EQ on FP. The
outcome depends upon the sign of the coefficient of the interaction term. If the signs of
CG and interaction terms are the same, they complement, whereas they behave as a
substitute if the signs are opposite (Gaio & Raposo, 2014; Zaho et al., 2010).
Estimation Models for Measuring the Moderating Effect
Performance i ,t =γ 1+ γ 2 CGI i ,t + γ 3 EQ i ,t + γ 4 ( CGI i , t × EQ i ,t ) +γ 5 FSZ i ,t +¿
γ 6 Sales Growthi ,t γ 7 + γ 8 Age i ,t +u i ,t ……………………………………………. (13)
∂ FP .i , t
Conditional Effect = ¿ γ + γ ( EQ .i ,t ) ……………. ...…............................(14)
∂CGI i , t 2 4
The positive sign of the interacting term ( CG × EQ ) .This concludes that EQ
enhances the effect of CG on the FP relationship and will behave as a complement. The
significant negative sign concluded that CG and FP relation is weaker and will behave as
a substitute. The hypothesis is also tested as if the effect of CG is higher for a higher level
of EQ and low for a lower level of EQ (Gaio & Raposo, 2014; Latif et al., 2017).
Model-1 Interaction effect of CGI and EQ on FP
TQ i ,t =γ 0 + γ 1 CGI i , t + γ 2 EQ i , t +γ 3 ( CGI i , t × Predictability i ,t ) +γ 4 FSZ i , t +γ 5 Sales Growthi ,t + γ 6 Agei ,t +ui ,t … …
ROA i ,t =γ 0 +γ 1 CGI i ,t +γ 2 EQ i ,t +γ 3 ( CGI i , t × Predictability i ,t ) + γ 4 FSZ i ,t +γ 5 SalesGrowth i ,t + γ 6 Agei ,t + ui ,t …
ROEi , t=γ 0+ γ 1 CGI i ,t + γ 2 EQ i ,t + γ 3 ( CGI i ,t × Predictability i , t ) + γ 4 FSZ i ,t + γ 5 Sales Growthi , t + γ 6 Age i ,t +ui , t …
'
Per i ,t = performance=Tobi n Q , Return on assets ( ROA )∧Return on equity ( ROE)
CGI i ,t =Corporate Governance Index for a firm “i” at a time “t.”
TQ i ,t =γ 0 + γ 1 CGI i , t + γ 2 EQ i , t +γ 3 ( CGI i , t × Smoothnessi , t ) + γ 4 FSZ i ,t + γ 5 Sales Growthi , t + γ 6 Age i ,t +ui , t … . …
ROA i ,t =γ 0 +γ 1 CGI i ,t +γ 2 EQ i ,t +γ 3 ( CGI i , t × Smoothnessi , t ) + γ 4 FSZ i , t + γ 5 Sales Growthi ,t +γ 6 Agei , t +ui , t … …
ROEi , t=γ 0+ γ 1 CGI i ,t + γ 2 EQ i ,t + γ 3 ( CGI i ,t × Smoothness i ,t ) +γ 4 FSZ i ,t +γ 5 Sales Growthi ,t + γ 6 Agei ,t +ui ,t … …

TQ i ,t =γ 0 + γ 1 CGI i , t + γ 2 EQ i , t +γ 3 ( CGI i , t ×Conservatism i ,t ) +γ 4 FSZ i , t +γ 5 Sales Growthi ,t + γ 6 Agei ,t +ui ,t … …
ROA i ,t =γ 0 +γ 1 CGI i ,t +γ 2 EQ i ,t +γ 3 ( CGI i , t ×Conservatismi ,t )+ γ 4 FSZ i ,t +γ 6 Sales Growthi ,t + γ 7 Agei ,t +ui ,t …
ROEi , t=γ 0+ γ 1 CGI i ,t + γ 2 EQ i ,t + γ 3 ( CGI i ,t × Conservatismi , t ) + γ 4 FSZ i ,t + γ 5 SalesGrowthi , t + γ 6 Age i ,t +u i ,t …
Operationalization of Variables
Measurement of Firm Performance - Explained Variable
Performance appraisal is receiving more attention; practical difficulties persist in
defining relevant performance indicators and establishing database reduction strategies
with a clear overview of performance evaluation (Nyhan & Marlowe, 1995). The
performance characterizes the entire economic viability and financial stability of the
corporations. It measures the takeover price that investors have to pay to acquire the firm.
Prior investigations have used ROA, ROE, Tobin’s Q, ROS, EPS, profit margin, and
several other performance measures to recognize the profitability and sustainable growth
of the corporations. There is no agreement among research scholars concerning the most
appropriate indicator of financial performance. However, every gauge has inherent
advantages and shortcomings. No single indicator provides the most accurate financial
implication progress (Raza et al., 2020).
Nevertheless, in the current dissertation, we incorporated extensively adopted
performance measures such as market-based performance measures as computed by
(Tobin’s Q) and conventional accounting-based performance measures, for instance,
return on assets (ROA) and return on equity. Now turn to the comprehensive
embellishment of the computation of these variables as given below.

Market-Based Long-Run Performance Measure (Tobin’s Q)
Nobel Laureate James Tobin popularized the Q ratio, created in 1966 by Nicholas
Kaldor. The Q ratio, alternatively referred to as Tobin's Q, indicates how well a firm or
an entire market is substantially over-or under-valued. Tobin's Q was incorporated in the
analysis as the first market-based firm performance measure proxy, specifically to
provide a better perception. Tobin's Q is a measurement of financial performance in the
capital markets. It, therefore, is one of the most often used financial performance
indicators as predictor variables in empirical investigation. This tool determines the
market value of a single asset and accurately depicts the market values of a company
without totally ignoring risk or influencing the results (Al-Matari et al., 2014;
Bhattacharya et al., 2013). The advocate of the CG-performance research studies argues
that the market-based firm valuation method (Tobin’s Q) is comparatively robust than
accounting-based measurement methods, such as ROA and ROE (Kapil & Mishra, 2019).
Additionally, TQ demonstrates how investors valued the firm's assets and resources
based on anticipated revenue and expenditure streams. In the Pakistani context, numerous
researchers have employed Tobin’s Q while determining the firm's valuation (Agrawal &
Knoeber, 1996; Latif et al., 2017; Malik et al., 2021). Researchers have adopted different
measures for Tobin’s Q. Similarly, and this study has incorporated the following
measure.
Tobi n s Q=MVS+ Book Value of ST ∧¿ Debt ¿ ¿ ……..

'
¿¿
………… (24)
Where MVS=Market Value of Stock ie Equity
OR
Tobin’s Q is computed as firm market value divided by total assets. For the market value
of the firm, we use market capitalization. Market capitalization is computed by
multiplying the share price and the number of common shares outstanding (Koji et al.,
2020).
Tobi n' s Q=¿ ¿
If the value of Tobin Q ˃ 1 confirms that market value is larger than the firm value assets
and vice versa (El-Faitouri, 2014; Kalantonis et al., 2021; McKnight & Weir, 2009). The
existing literature argues that a higher value of Q shows better performance in the market
(Tan & Peng, 2003; Weir et al., 2002).
Accounting-Based Short-Run Performance Measures (ROA and ROE)
Return on Assets (ROA)
A firm's return on assets is the first accounting-based valuation proxy. Return on
assets is a financial value that shows how profitable an enterprise appears based on its
economic and financial resources balance sheet. Indeed, it is a rate of return that enables
us to understand how well an organization manages its discretionary assets fully. Are
they financially responsible? We determined the current rate of return on all of the
company's assets by utilizing this type of ROA technique. Additionally, when
considering multiple periods in the past, a few alternative components can assist
organizations in constructing a far more accurate computation.
Return on assets is a conventional accounting-based performance measuring
proxy employed in the study under investigation, following (Mahoney & Roberts, 2007)
and consistent with (Marlin & Geiger, 2015). If the value of ROA of less than 5% usually
means that the firm is stagnant. Beyond that threshold, the organization is most certainly
effectively employing its assets to generate growth. Traditionally, enterprises with a
greater ROA are supposed to be successful (Kyere & Ausloos, 2021). The formula for
capturing performance is as under;
NET INCOME
ROA=
Total Assets
……………………………. (25)
Accounting-Based Performance Measure: Return on Equity
ROE is another important conventional accounting-based measure of financial
performance proxy applied in this study to evaluate firm financial performance, also
called return on net worth (RONW). ROE is a method used to calculate whether a
business performs from the investor's perspective over time. They could then correlate
those statistics with those of other corporations in the market. Based on ROE
information, the funders make strategic and investment decisions for the future. While
measuring return on equity, the investor analyzes two primary sources of dataset: annual
reports of the companies, the statement of income, and the firm's balance sheet. The
shareholder would examine the financial statements to determine the company's financial
performance for that time frame. The term "net income" refers to the cash flow generated
by the company after all expenses have been paid. The supplier of the funds examines the
statement of financial position for the firms’ equity. The phrase "equity" is frequently
referred to as "shareholders' equity." When a business pays off all obligations and
liquidates its economic and financial resources, equity is the residual cash distributed to
owners (Kapil & Mishra, 2019; Koji et al., 2020). Moreover, after considering these two
essential performance measures, investors might determine a company's financial

viability. They might identify the correlation between their investments and potential
competitors.
It is necessary to mention that this approach is particularly beneficial for
businesses possessing real assets. Actual resources are tangible items with a market price.
These assets can include short-term investments such as shares, other financial assets
such as bonds, and long-term investments such as equipment, buildings, or freehold
property. Shareholders’ equity does not include preferential shares (Khatab et al., 2011).
NETINCOME
ROE= …………………. (26)
Shareholde r ' sEquity
High equity earnings suggest higher efficient firm management and, therefore, more
profitability (Ullah et al., 2020).
Independent or Explanatory Variable
The ongoing research investigation has used the corporate governance index as an
explanatory variable. Prior studies have incorporated and analyzed various individual
corporate governance characteristics. However, in this research examination, a wide-
ranging corporate governance index has been taken to capture the composite wreak on
firm performance following (Bhagat & Bolton, 2008; Waheed & Malik, 2019).
Measurement of Corporate Governance Index (CGI)
There is an extensive body of research on the role of good governance on the
firm's financial performance and many other market factors. However, there is no agreed-
upon unanimity on evaluating the corporate governance mechanism(Kyere & Ausloos,
2021; Shahwan, 2015; Thomas et al., 2013). In recent decades, the firm level's good
corporate governance index (OCG) estimation technique has been extensively
incorporated to calibrate internal corporate governance. Nevertheless, most of this

research is carried out in mature markets (Ahunwan, 2021; Al-Malkawi et al., 2014;
Husnain et al., 2021). In line with the prior research studies, (Shah & Butt, 2009)
conducted the first-ever investigation in Pakistan to apply the corporate governance index
to weigh ownership and board structure. Nevertheless, Javed et al. (2006) argued that the
weighting of different corporate governance attributes to establish the score is essential
and subjective. For a reason, constructing the corporate governance index is challenging,
and there is a divergence of opinion on a powerful approach.
In line with this, has constructed a Corporate Governance Index considering some
influential governance attributes following the percentile ranking of 15 CG factors,
further dividing into sub-groups of CG such as; director on the board, audit committees,
committees on the board, risk management procedure, and ownerships types. Conversely,
(Latif et al., 2017) have developed an overall corporate governance index (OCGI) by
considering nine 9 CG attributes by using Principal Component Analysis (PCA) to
celebrate the interplay between CG and firm value in a developing country like Pakistan.
In line with these Indices, (Bhagat & Bolton, 2008) has also established a wide-ranging
Corporate Governance Index to capture governance-performance interlinkage. Therefore,
the ongoing research study has used the OCGI following (Waheed & Malik, 2019) using
ten of the most ascendant corporate governance characteristics consistent with the
previous studies following the Pakistani Codes of Corporate Governance (Ullah, N.,
2018).
Principal Component Analysis (PCA)
PCA is an exceedingly efficient method for finding patterns in data and
articulating it in a way that emphasizes its similarities and dissimilarities. Since patterns
in data can be challenging to access in high-dimensional data without the benefit of visual
analysis, PCA is a potent tool for data analysis. Another critical benefit of PCA is that
once these patterns are identified in the data and compressed, i.e., little information is lost
by reducing the number of dimensions. A primary set of data consisting of n mutually
correlated random variables can be represented by a set of independent hypothetical
variables called principal components using the principal component method. Generally,
the new database comprises reduced variables than the actual data. The fewer principal
components contain nearly as much information as the entire range of primary variables
(Ahunwan, 2021; Barreira et al., 2019; Beekes et al., 2010; Dey, 2008; Husnain et al.,
2021).
Table 1 demonstrates the Corporate Governance Index (CGI) using PCA
following prior literature (Bhagat & Bolton, 2008, 2019). The prime goal of PCA is to
explain the variance of the dataset employing a few linear mixtures of unique data (Joint
Research Centre-European Commission, 2008). PCA has been employed to investigate a
typical CG index (Larcker et al., 2007). PCA describes the critical components after the
decomposition of the Eigenvalue of the correlation matrix. Only those input variables that
have a substantial impact on the deviation of the original dataset are taken into account.
Reliability in primary components and conclusions are both ensured by a valid
correlation matrix. PCA limits the number of variables that need to be asynchronously
identified and provides more minor output variables, expanding and increasingly compact
(Beekes et al., 2010; Latif et al., 2017; Popa et al., 2021).

Operationalization of Corporate Governance Index (CGI)
Table 1
Operationalization of Corporate Governance Index (CGI)
C.G Symbol Operationalization

Managerial/ MSH % of shares held by the firm's board of directors/managers (Latif
Director Ownership et al., 2017; Bhagat, 2008; Bhagat & Bolton, 2019).
Ownership LSH % of shares owned by the top 05 shareholders divided by the
Concertation number of shares for the firm. (Latif et al., 2017)
Foreign Ownership FOR Shares owned by foreign owners divided by total no. of
outstanding- shares (Bhagat & Bolton, 2008)
Institutional INS % of equity held by various organizations
Ownership
Board Size BOSIZE No. of board directors for the firm.
Director/Board BOIND % of outside independent directors on the board (Bhagat &

Independence Bolton, 2008; Latif et al., 2017).
Board Meetings BOMTG No. of board directors meeting for a year (Hashmi & Bhatti, 2019)
Audit Committee ACIND No. of Ind. directors on the audit committee (Bhagat & Bolton,
Independence 2008; Latif et al., 2017).
Audit Committee ACM No. audit committee meetings of the firm (Bhagat & Bolton,
Meetings 2008; Latif et al., 2017).
CEO Duality CDUL Dummy variable: 1, when CEO, the chairman of the board, else 0
(Bhagat & Bolton, 2008; Latif et al., 2017).
Audit Quality AUDQUL “1” if the firm is audited by the Big-4 audit firms (PwC, Deloitte,
Ernst & Young, KPMG) and otherwise take 0.
Brief Description of Variables
Managerial / Director’s Ownership (MSH)
The current study operationalized this proxy managerial or director's ownership
for the construction of CGI. It is computed by the accumulated proportion of shares held
by the managers or board of directors for the firm "i" in time "t" (Bhagat & Bolton, 2008;
Latif et al., 2017).

Ownership Concentration (OWNCON)
In this research study, the most influential variable, for instance, ownership
concentration, is included in the study, and the same has been used for the construction of
OCGI. It is obtained by dividing the percentage of shares owned by the top 5%
shareholders by the total number of shares the firm has (Hashmi & Bhatti, 2019; Singh et
al., 2018; Waheed & Malik, 2019b).
Institutional Ownership (ISH)
Shares held by Institutional owners divided by total no. of shares outstanding The
ratio of outside Independent. Directors in the firm (Bhagat & Bolton, 2008; Latif et al.,
2017).
Foreign Ownership (FOWN)
Shares owned by foreign owners are divided by the total no. of outstanding-
shares (Bhagat & Bolton, 2008).
Board Size (BOSIZE)
In this undertaking research study board of size is included in the overall
corporate governance index (OCGI). Therefore, it is quantified by taking the logarithm of
the proportion of the number of directors on the board for the firm ‘i’ in time t (Kalsie &
Shrivastav, 2016; Waheed & Malik, 2019).
Board Independence (BOIND)
The ongoing research has operationalized the independence of the directors on the
firm's board. This proxy is calibrated by taking the proportion of the number of
independent external directors on the board to the total number of directors on the board
(Singh et al., 2018).

CEO Duality (CDUL)
This study for Chief Executive Duality (CDUL) is included in the CGI. For this
purpose, we include a (binary) dummy variable. For this reason, we assign “1” when the
CEO is also the chairman of the board of directors; otherwise, for absence, we assign “0”
(Arora & Sharma, 2016; Kaur & Singh, 2018; Latif et al., 2017; Waheed & Malik,
2019b)
Audit Committee Independence (ACIND)
For the independence of the audit committee constituted by the board of directors,
This research has included an independent audit committee. It is operationalised by the
number of Ind. directors on the audit committee (Bhagat & Bolton, 2008; Latif et al..,
2017).
Audit Committee Meetings (ACMTG)
In this research, this proxy is used to construct the CG index. It is computed by
the number of audit committee meetings of the firm (Singh et al., 2018; Waheed &
Malik, 2019b).
Board Meetings (BMTG)
The present research uses the number of board meetings as a proxy for
establishing the CG index. This proxy is estimated by the number of board of directors
meeting for the particular year (Hashmi & Bhatti, 2019)
Audit Quality (AUDQUL)
Audit quality is introduced by (Siregar & Utama, 2008; Shah, 2014) and (Alves,
2014),. The ongoing study has used audit quality as a proxy to ensure the reliability of the
audit. To control the impact of the quality of external auditor, a dummy variable for
auditor quality (Big-4), taking the value “1” if a Big-4 auditor audited the firm, otherwise
assign “0”.
Measurement of Financial Slack Resources (FSR) - Mediating Variable
Mediation analysis allows us to assess the effect of one variable via a third
variable which we often call the ladder a mediator or an intervening variable. It can be a
great analysis tool for understanding what is presumed to be a causal relationship
between three different variables. One variable is assumed or theoretically proposed to
influence another one and then is offered to influence still another one. Therefore,
mediation analysis is used to investigate whether one or more than one variable transmits
the effects of a predictor variable on an outcome variable. Mediators explain why and
how often-well-established relationship between two distinct variables exists and are
mostly referred to as intermediate variables seeing as these frequently characterize a
pathway wherein an impact originates (Hayes, 2014). This one is frequently referred to as
an indirect consequence. Baron & Kenny (1986) introduced a 4-step indirect method
procedure for this analysis.
Correspondingly, the newest and little advanced methodology has also been
established called the mediation package (Tingley et al., 2014). However, since the Baron
and Kenny approach is one of the first methods for determining mediation analysis or
indirect effect, it has a limited statistical significance. “Financial Slack is the excess
capacity of unused financial resources. In other words; Financial slack. is a measure
of the level of cash or near cash measured by overall assets (Guo et al., 2020; Hong &
Shin, 2021; Kim et al., 2008).

In the current research, we have used two types of financial slacks to measure
mediating variables: available slacks and potential slacks. To calculate available
slack, we used two proxies, current ratio and working capital ratio, whereas, for
the measurement of potential slack, we used debt to equity ratio as a proxy—the
detail for each of which is mentioned below. Besides, the focus of this research is
to determine the indirect effect of our explanatory variable corporate governance
(CGI) on the response variable (firm performance) via a mediator (financial
slack). Instead of illuminating how an association is found, the mediating
interpretation outruns the independent variable's relationship with the dependent
variable (Hayes & Preacher, 2014). Figure 3 shows the causality among overall
corporate governance, financial slack resources, and performance of the firm of "x" and
"y" paths as "xy." According to Hair et al., 2021 and Hayes & Preacher (2014), all paths
can be quantified using regressions.
Available Slack Resources
The current ratio is used as a proxy to measure available slacks. (Lee, 2012;
Rafailov, 2017). The CR ratio demonstrates an enterprise’s liquidity and capability of
fulfilling debt-holders claims.
Working Capital Slack (WCS)
Available Slack-Working Capital Slack (WCS): Excess investment in working
capital obtained by Current Assets minus current liabilities of the firms (Mishina et al.,
2004; Rafailov, 2017), or working capital is the difference between the total resources
and total necessary payments. Moreover, working capital to sales is known as working
capital slack (WCS). Working capital is typically stable as a percentage of the volume of
sales. Excess liquidity emerges whenever working capital proliferates than sales.
Eventually, an increment of working capital to sales signifies growth (Argilés-Bosch et
al., 2018; Bourgeois III, 1981; Grüner & Raastad, 2018; Mishina et al., 2004; Tan &
Peng, 2003).
Potential Slack Resources-Debt-to-Equity
Debt-to-Equity is used as a proxy to compute potential slack (Chen et al., 2020;
Daniel et al., 2004). Managers have the least access to potential slacks because of their
availability and acquired from outside the corporation (Bromiley, 1991; Shaikh et al.,
2018). Potential-slack resources, for instance, the company's external financing
capability, are the least available for executives because they are available and obtained
from outside the company (Tabassam & Khan, 2021). It is employed to estimate a
company’s financial leverage. Recoverable slack may be taken as inventory and
receivable on total assets adjusted for industry norms (Chu et al., 2021; Lazarides &
Pitoska, 2009: Bradley, et al., 2011).
Figure 2
Indirect Effect
FSR
x y
b
z’
CGI FP
The comprehensive structure of the mediating process is shown in Figure 2. Through the "x" and "y"
channels, the study highlighted the direct, indirect, and total effects of CG on the firm's performance.
According to Hayes and Preacher (2014), all "x," "y," and "z" channels by which CG causes FP
could be analyzed by estimating OLS.

Operationalization of Earnings Quality
Earnings quality is categorized into two main groups as a proxy for financial
reporting quality. 1) meets user requirements, and 2) the preservation of
shareholders/investor's interest. From a user perspective, earnings quality is related to
persistence and value relevance. From the preservation of investor's perspective, the
connotation of earnings quality is concerned with conservatism and accruals quality for
investor preservation. To ponder on the significant role of earnings quality in empirical
investigations, such as the influence on the cost of capital, cost of debt effects on the
market value, this research investigation has endeavoured to capture the conditional role
of earnings quality upon the influence of corporate governance index on the financial
performance of the firm. The EQ is operationalised using 5-year rolling windows
following (Latif et al., 2017; Ma & Ma, 2017: Gaio & Raposo, 2010. The current
research investigation uses the following proxies to compute earning quality.
Predictability (PRED)
Future earning prediction is a feature of current reported earnings (Lipe, 1990;
Penman & Zhang, 2002). (Lipe, 1990) developed the method to determine the
predictability degree of earnings. Greater earning-variance reveals low predictability
(Francis, et al., 2004). This study also uses this model.
Pred j ,t =√ σ 2(ε j ,t ) (27)
Where 𝜎2(𝜀𝑗, 𝑡) represents the error variance in time t for j enterprise, the enormous
value of 𝑃𝑅𝐸𝐷𝑗, 𝑡 indicates that the predictability level of earnings is high and the
earning quality level is low. As predictability is measured of variance of residuals, it

means that high variance leads to high predictability and low earnings quality and vice
versa.
Smoothness (SMTH)
Prior studies Graham et al. (2006) and Rountree et al. (2008) documented that
smoothness is a desirable attribute. The smoothing level is evaluated by the degree of
volatility in earnings. In literature, different proxies are documented to measure the
degree of smoothness. Bowen et al. (2008) have divided the standard deviation of
operating cash flows (non-discretionary accruals) and standard deviation of earnings to
compute the level of smoothness. Nevertheless, (Leuz, Nanda, et al., 2003), (Francis, et
al. 2004; Dechow, 2010) and (McInnis, 2010) used the ratio by scaling both variables by
lagged assets. As there may be a considerable difference in the size of firms, we would
prefer to use the ratio suggested by (Leuz et al., 2003; Francis et al., 2004b; Dechow et
al., 2010; McInnis, 2010).
CFFO i , t NIBE i , t
ISMOOTH i , t=σ ( )/σ ( ) (29)
TASSETSi , t−1 TASSETS i ,t−1
ISMOOTH j ,t =degrees of income smoothness∈time t for j enterprise ,
CFFO j ,t =CFs¿ operation ∈time t for j enterprise
NIBE j , t=net earnings before extra−ordinary items∈timet for j enterprise
TASSETS j ,t −1=total assets of j enterprise∈ year t−1;
σ =Standared Deviation
A larger ratio indicated more smoothness (Francis, et al., 2004). Low level of
earning smoothness ratio refers to the greater degree of earnings desirable by the users of
financial information.
Conservatism (CONSERV)
Managers can do earning management by using two ways. Either through
intentional manipulation in accruals or through influence in actual activities. In the first
method, only accruals are manipulated, and operating activities and cash flows are not
affected. It means that only performed activities are manipulated. However, managers
manipulate a firm’s events that impact earnings in the second method. Such a type of
manipulation has a direct impact on cash flows. The managers and firms give discounts
to enhance sales, which operates overproduction and cuts discretionary expenses to
increase the earnings. The first proxy was designed to detect the timely recognition of
loss (Basu, 1997). Khan and Watts (2009) have adopted this model in their study. This
model assumes that market efficiency reflects in returns when losses are incurred.
NInCOME j ,t
=β 1 + β 2 Dt + β3 SRET t + β 4 Dt X SRET t +ε t (28)
MVEt −1
Where
NInCOME j ,t =Net income∈ t time for j firm
MVEt −1=Equity market value at the start of time t
D t =Dummy variable , one if SRET t <0∧0 otherwise
SRET t=Stock price return∈time t
β 3=is a measure of good news timeliness
timeliness
β 4 is a measure of incrimental effect of bad news news timeliness
good
Higher 𝛽4 reflects the higher level of timely loss recognition, i.e., if bad news is
predictable in a well-timed style than good news, β 4 will be greater than zero β 4 >0 .
Higher timely loss recognition depicts a good level of earning quality.

How Earnings Quality Affects Firm Performance
Furthermore, this has explored the effect of earnings quality on performance at
various levels, such as low, medium, and high levels of earnings quality. The behaviour
of earnings quality is different in different economic environments. Neither performance
nor earning level remains the same in all the firms. To capture the moderating effect of
earnings quality, this study analyzed data from a variety of firms with low earnings
quality to determine how the independent variable, corporate governance, affects the
dependent variable, performance, and similarly, how corporate governance affects
performance at a medium and high level of earnings quality. In an estimation model, we
introduced an interacting term of corporate governance and earnings quality to measure
the effect of CG on performance.
There are different possibilities in this mechanism. First, if the coefficients of both
corporate governance and interaction term remain positive, EQ will enhance the effect of
corporate governance on performance. As EQ increases, the effect of CG on firm
performance will also increase. Conversely, in sporadic cases, which is almost
impossible, if the coefficient of CG and interaction term is negative, then it will enhance
the negative effect of CG on firm performance. Hence, this is the significant contribution
of this study.
Further, when the signs of the independent variable and the interaction term (EQ)
in this study remain the same, this shows that corporate governance and earnings quality
are “Complement.” It will use to enhance the total effect. Conversely, if the signs of
independent variables and interaction term are opposite, i.e., if the sign of corporate
governance is positive and the interaction term is negative, the independent variable CG
and interaction term EQ is “substitute” (Gaio & Raposo, 2014). In this study, we have
confirmed through estimation model whether earnings quality plays its role as a
complement or substitute for corporate governance and its effects on the performance of
the firm while categorizing the firms of different levels of earnings quality, i.e., low level
of earnings quality, medium level and at the high level of earnings quality. It means a
different level of significance is captured, which means how various earnings quality
levels impact corporate governance on the change in firms’ performance whether this
effect remains the same for all three levels of earnings quality or changes (Latif et al.,
2017; Gaio & Raposo, 2014).
1. If CG and EQ have positive signs: They might be a complement.
2. If CG and EQ have opposite signs: They might be a substitute.
Figure 3
Conditional - Interaction Effect
CG-Index Performance
Earnings Quality
Attributes
Conditional Effect on Firm Performance: Moderating Effect of Earnings Quality
The moderating effect of Earnings quality is explicated with the help of the above
diagram. It is shown in the diagram that financial performance (FP) will be positive if the
governance level is low under the conditional effect that is moderating effect of Earnings
quality (EQ). When the governance level is high, the financial performance (FP) falls and
becomes negative under the conditional effect of moderation of Earnings quality (EQ).
Contrarily, if the governance level is moderate, the financial performance may fall and
touch the x-axis and become zero under the conditional effect of moderation Earnings
quality (EQ).
If both the variables’ signs are positive, it plays its role as a complement. If there
is earnings quality in a country, whether the financial institutions and financial markets
are stable and performing smoothly, or there are no erratic movements in the financial
system, for example, if all the financial indicators like Tobin’s Q ROA, ROE are stable.
Furthermore, oppositely, on the institution’s side, when we analyze private credit to GDP
ratio or bank profitability, lending and borrowing everything is customary in such an
environment, the impact of corporate governance on banking performance is undoubtedly
better. In contrast, if a country experiences financial instability, if financial markets and
financial institutions are uncertain, or if erratic stock market movements or fluctuations in
the overall stock market index occur, the magnitude of the impact of corporate
governance on banking performance is likely to be very small, if not insignificant. It
means that corporate governance can only be effective in the corporate sector if a country
has good earnings quality because the corporate sector is heavily dependent on financial
markets. If there is uncertainty in the financial sector, it will translate into the corporate
sector. All the firms’ financial activities like investments, lending, borrowing, savings,
etc. of the firms will be adversely affected.
Consequently, uncertainty in the corporate sector will affect the governance
indicators that are a board of directors, ownership structure, shareholdings, transparency,
and corporate governance disclosure. This adverse effect leads the corporate governance
index to fall. We can say the quality of corporate governance can only be better if there is
earnings quality in the financial markets. Here in this study, we try to capture the
conditional effect of earnings quality. Our argument here is that in a well-developed
financial system and financial markets, the chances of earnings quality are more
significant. In Pakistan, the financial structure is heavily dependent on financial
institutions. In other words, it tends towards financial institutions and the banking sector,
but developed countries are relatively more dependent on financial markets like the USA.
We argue that if the financial system is well-developed, the chances of earnings quality
are more significant, leading to good corporate governance, and when corporate
governance is good, it will enhance the firms’ performance. Indirectly, we can argue that
financial instability may occur in the financial markets due to the low quality of corporate
governance. It means that they are interrelated with each other. That is why in this study,
we analyzed the effect of the interaction of corporate governance and earnings quality on
firm performance rather than the individual effect of corporate governance or earnings
quality.
Firm-Specific- Control Variables
This segment discusses the assessment of controllable variables that may
influence overall reported earnings, Financial slack resources, and firm performance.
However, different variables (firm age, size, leverage, capital intensity, negative earnings,
and growth prospects) have been incorporated to mitigate potential effects upon firm
performance, financial slack, and earning quality.
Size of the Firm (FSZ)

By size of an organization is a measure and can be used to characterize small and
large organizations. Big enterprises generally maintain an enormous size of assets as big
firms are cautious about the preparation of their financial reporting quality. Therefore,
firms remain vigilant while disclosing their financial statements because the general
public and other stakeholders typically notice them. It means that large firms may adopt
costly governance and financial reporting measure. The size of a firm could be
determined either by the assets it owns, the volume of its sales, or market capitalization.
When the value of the assets is substantially grown, the sales are supposed to be of
satisfactory quality.
On the opposite side, if a firm's sales revenues grow, it ensures that it is operating
smoothly (Purnama & Nurdiniah, 2019). Nevertheless, in this study, the firm's size is
employed to control the effect of the firm's size on the firm's performance (García-Ramos
& Díaz, 2020). We measured the size of the company by taking a natural log of the total
assets of the corporation.
¿ the firm=Natural log of Total Assets
So, we use the natural logarithm for the book value of total assets to control the
effect of the size as a proxy for the size (Shah & Shah, 2014; Fan & Wang, 2019).
¿ natural logarithm for thebook value of total assets
The size of the firm can also be computed by taking the natural logarithm of
market capitalization (Koji et al., 2020; Kong et al., 2020; Kyere & Ausloos, 2021;
Waheed & Malik, 2019).
Firm Size=ln (No. of out-standing shares × share price).
Firm Sales Growth (GTH)

Growth in sales is an essential variable that plays a crucial role in determining the
firm's performance. It is considered to mitigate the effects of rapid growth, characterized
as the relative sales increase over the previous year (Abbott et al., 2003; Salehi et al.,
2018; Tabassam & Khan, 2021). It is argued that firms with a high growth rate are likely
to pay or earn a higher return on the invested capital. A speedily growing firm is a higher
value firm in the market than a not proliferating firm. However, while growing firms are
projected to enhance the value of the company and earnings quality, they might be
viewed as riskier corporations that artificially increase income. The percentage of average
growth to overall sales is used to assess growth. Sales growth is likely to impact earnings
quality, particularly the conservatism measure, for various reasons. For starters, growth
impacts accruals items like inventories and receivables, which in turn impacts
conservatism. Second, conservatism is a poor indicator of earnings quality when the
company's sales are steadily decreasing. Higher sales growth will increase current
accruals, which will reduce the level of conservatism, resulting in a negative relationship
between sales growth and accrual-based conservatism. The above model is tested in light
of the grounds that firms reporting quality may manipulate their relevant information to
conceal declining performance. Generally, Firms that manipulate their assets and cash
sales earn lower returns on their assets and cash sales. Companies are likely expected to
increase credit sales to boost sales artificially. Firms that make false statements
frequently expand their capital bases and business operations. A more extensive operation
should increase sales of both cash and credit. Several firms misstate their sales through
transaction management practices, such as encouraging sales to customers with return
provisions that violate the definition of sales (Dechow et al., 2010). Furthermore, to
offset the implications of growth prospects on earnings quality, we have incorporated it
as a control variable (Latif et al., 2017).
Age of the Firm (AGE)
It is the period considered when the firm was once established. It is demonstrated
that more significant aged firms enhance earnings quality positively. As the firms gain
the experience, they minimize the costs and improve earnings quality (Fauziah & Yusoff,
2015). However, few studies contradict the positive association of firm age and earnings
quality instead favour insignificant or sometimes negative association (Gul et al., 2009).
The researchers have employed the firm's age as an indicator of public attention and
understanding (Kong et al., 2017). Besides, to control the heterogeneity across firm age,
following (Peterson & Rajan, 1994), we may use a categorical variable to indicate the
youngest, young, and old firms. Several scholarly types of research have used the firm's
age as a control variable in governance, earnings quality, ownership, and company
association or investigations to control its effect. The firm's age is measured by applying
a logarithm of the year once the firm has incorporated (Arora & Sharma, 2016a; Waheed
& Malik, 2019a). According to the firm's life cycle hypothesis, newer enterprises reinvest
in operating units, but older firms do not (Mueller, 1972).
Research Design
The research investigation on the linkage between corporate governance
characteristics and the firm's financial performance has been a significant debate in the
corporate sector. Most of the earlier research studies have been investigated in developed
countries. From the developing countries' standpoint still, there is a large area for the
effective implementation of corporate governance on the firm performance.

Population and Sampling Procedures
Population
The ongoing research investigation's population is comprised of all (552) non-financial
enterprises quoted on the Pakistan Stock Exchange (PSX). The Securities and Exchange
Commission of Pakistan (SECP) requires all registered corporations in Pakistan to
provide factual information on their issuing shares, annual, semi-annual reports, and
reports on significant moments. SECP has directed all the firms to include important
information about implementing corporate governance codes and board of directors in
their published annual financial reports. So that all the reliable and authentic information
regarding corporate governance characteristics and financial reporting attributes must be
available and accessible extracted from the annual reports.
Sample Selection
Pakistani corporations, mainly, are selected primarily due to the essential
milestones by companies that could symbolize the growing financial market and
competitive landscape. This research sampled a randomly selected sample of 222 non-
financial firms quoted on the Pakistan Stock Exchange (PSX) due to the availability of
the data. Over 15 years (2005-2019), Pakistan's market encompassed approximately all
distinct economic and financial areas. Financial sector companies are omitted initially
from the 552 quoted companies attributable to having distinctive features and operations
in a different regulatory and legal framework. Secondary data were taken from the
Pakistan Stock Exchange, the State Bank of Pakistan, and companies' financial
statements for the sample group. We used five-year rolling window regressions for
deriving earnings quality parameters that substantially impact the primary data collection
and analysis. To estimate earning quality, we have calculated 15 years annual dataset
from 2005 to 2019. Furthermore, the annual dataset for the rest of the variables such as
corporate governance, financial slack resources, and other control variables is extracted
from annual reports. The data range is appropriate and reliable because SECP has made it
mandatory for the companies to compliance corporate governance codes in 2002.
Table 2
Sample Selection
Sample Period From 2005-2019

Population is Total firms listed on Karachi Stock Exchange 552
Less: Commercial Banks, Insurance firms, Investment Banks, (169)

Mutual Funds, Leasing firms, and Modarabas
Less: Firms omitted due to insufficiency of data or delisted (161)
during the sample period
Final Sample for the study 222
Cross-sectional / Longitudinal
The ongoing study is a panel or longitudinal in nature. The research has attempted
to investigate the causality between corporate governance and firm performance. The
research has used the 15 years panel dataset of 222 non-financial firms quoted in the
Pakistan Stock Exchange (PSX).
Data Collection and Sources of Data
Collecting and analysing data is the most substantial segment of the study. While
conducting any research investigation, we focus on data reliability, suitably constructing

and defining variables, estimation modelling applied to analyze the data. The results are
reported for decision-making to investigate the relationship between Corporate
Governance on Firm Performance, through precise channels and conditions, of listed
non-financial firms on Pakistan Stock Exchange (PSX) for the period 2005-2019, of 222
firms. The relevant data of desired firms is extracted and ascertained from the firm’s
respective annual published reports and financial statements. Further, the secondary
dataset has been collected from PSX, SBP, and Business Recorder. Some data would be
re-calculated to find some essential variables using Stata. As the present study is
quantitative and causal, therefore, in this study, firm performance is the dependent
variable, which is measured by Tobin’s Q, ROA, and ROE (Jesuka & Peixoto, 2021; Koji
et al., 2020; Kong et al., 2020; Kyere & Ausloos, 2021; Tabassam & Khan, 2021).
Furthermore, earnings quality (EQ) and financial slack resources are calculated
with the help of formulas as expounded in the coming section. The estimation section has
elaborated a detailed description of the estimation methods. The dissertation intends to
investigate the association among variables and authenticate the hypotheses (Hair et al.,
2014; Hair et al., 2012).
This chapter includes detailed data related to materials and methods used in this
research. Non-financial 222 listed firms in the Pakistani Stock Exchange (PSX) have
been taken as the sample size from the population from the period 2005-2019 with 3300
observations. This section also described the identification of explanatory, mediating,
moderating, and dependent variables. Furthermore, econometric models have been
developed to understand better the relationships between the explanatory and dependent
variables through the precise channel and condition. After that, operationalization of
explanatory and explained variables through the mediating (available and potential slack
resources) and moderating variable (EQ) consisting of three earnings quality attributes
(predictability, smoothness, and conservatism) have been defined, following the prior
research literature. Further controlling variables and their measurement are also described
in this chapter based on the literature and theories. In the last section, various
econometrics models are developed which explain econometrically the impact of
corporate governance (CGI) on accounting and market-based performance measures
(ROA, ROE, TQ) of the organization (FP) through the precise channel (mediating path),
and missing conditions (moderator) has been elaborated.

Chapter 5: Data Analysis
Introduction
This chapter presents the findings and results of the empirical tests conducted
under the design discussed in the preceding chapter. The following are the sections of this
chapter, in the following order: Section -1 contains the descriptive analysis for all of the
variables used for the estimation, for instance, corporate governance index, Tobin’s Q,
return on assets, return on equity, financial-slack resource, and earnings quality attributes
in the models investigated in this research. Section-2 reports the outcomes of this
investigation that are relevant to the specific subject matters addressed in this study. At
the last of this chapter, Section -3 shows the complete results.
Descriptive Statistics
It is compulsory to use descriptive statistics to summarise data characteristics. It
refers to as quantitative data analysis in some circles. The descriptive statistics provide a
high-level summary of the study's overall findings. Univariate and bivariate analysis are
the two types of descriptive statistics used in practice. One parameter is taken into
consideration when doing the univariate analysis. Conversely, Bivariate analysis
considers multiple parameters in the data analysis. The following are the essential
characteristics of descriptive statistics: Mean, standard deviation measures how far
something deviates from the means, median the maximum possible level, and the
minimum level.
Table 3 shows the predicted, predictor, and control variables' core relevant
statistics used in this dissertation. These selected variables include Tobin Q, Return on
Assets (ROA), Return on Equity (ROE), corporate governance index (CGI), financial
slack resource (FSR), (available and working capital slack (WCS) and potential slack,
earning quality attributes (predictability-PRED, smoothness-(SM), conservatism
(CONSER), size of the firm (FSZ), sales growth (GW), and age of the firm. (FA) are
displayed in the following table (see table 1). The table includes the selected variables
and their averages (mean and median), maximum and minimum values, and their
respective standard deviations. The wide range of variations in the selected variables is
highlighted in Table 1. These variations make sure that the sample has been chosen with
precision and accuracy, and therefore there is no possibility of bias. The average value of
TQ is (1.212) lies between the range of maximum (2.450) and minimum (0.651) with a
low standard deviation (0.563), and this mean value of TQ is greater than 1. If the TQ
value is greater than 1, it ensures that the market-based performance is also higher. The
average positive value of ROA (0.042) with a standard deviation (Johnson et al., 2000)
lies between max.(0.160) and min.(-0.077). The summary stat found out that the firms
selected in the sample may have negative ROA under certain conditions. Likewise, the
mean results (0.1112) of the accounting-based performance measure ROE lie between
max. (0.341) and min. (-0.133). The maximum value of ROE is 34%, which shows that
few firms are highly profitable. Thus, the mean values of TQ, ROA, and ROE are
(1.212), (0.04%, and (0.112%), respectively. These findings showed that sampled firms
are low-profit enterprises, consistent with the findings of (Waheed & Malik, 2019a; Ullah
et al., 2017). Throughout the sample period, the accounting profitability of Pakistani non-
financial firms was remained low.
The summary statistics also provided the mean value of CGI (0.001) with a
standard of (1.285). The maximum value of CGI for the sample firms is (3.341), and the
minimum value is (-13.019), showing that there is (0.033% change in CGI. Likewise, the
value of the descriptive statistics for available slack measured by (CR) is the mean value
(1.241), the maximum value is (2.448), the minimum value is (0.408), and the standard
deviation is (0.619). The positive value indicates that the effect of available slack on firm
performance is more likely to be significant—the summary stats reported for working
capital slack are consistent with (Lee, 2011, 2012; Rafailov, 2017). and (Rafailov, 2017).
The average value of working capital slack (WCS) is (0.000), maximum value (0.004),
minimum value (0.000), and a standard deviation is (0.000). These stats show that the
effect of working capital slack on firm performance is less likely to be significant.
Equivalently, the average value of potential slack (D/E), the capacity of the firm to get
external resources is (1.553) along with maximum value (3.957), minimum value (0.197)
along with SD (1.187) as similar to (Tabassam & Khan, 2021).
In line with the descriptive statistics for moderating variables is reported as
follows. The average value of predictability as a measure of EQ is (0.064), the median is
(0.051), the maximum value is (3.957), the minimum value is (0.197), along with
standard deviation ( Ciftci et al., 2019) is (1.187). The significant positive value of
predictability shows that earnings quality positively moderates the impact of CGI on FP.
The average value of smoothness as a measure of EQ is (0.678), the median is (0.519),
the maximum value is (1.752), the minimum value is (0.142), along with standard
deviation (Johnson et al. 2000) is (0.519).
The significant positive value of smoothness shows that earnings quality
positively moderates the impact of CGI on FP. The significant positive value of
smoothness shows that earnings quality positively moderates the impact of CGI on FP.
the maximum value is (1.752), the minimum value is (0.142), along with standard
deviation (Johnson et al.2000) is (0.519). The significant positive value of predictability
shows that earnings quality positively moderates the impact of CGI on FP.
The significant positive value of conservatism shows that earnings quality
positively moderates the impact of CGI on FP. The significant positive value of
conservatism shows that earnings quality positively moderates the impact of CGI on FP.
the maximum value is (4.834), the minimum value is (-4.738), along with standard
deviation ( Ciftci et al., 2019; Waheed & Malik, 2019) is (2.688). The significant positive
value of predictability shows that earnings quality positively moderates the impact of
CGI on FP.
The study incorporated firm-specific control variables besides independent,
dependent, mediating, and moderating variables. For instance, the firm's size (FSZ) is
ascertained by taking the natural log of the firm's total assets. The average value is
(15.355), the median is (15.295), maximum value (17.430), minimum value (13.142),
along SD (1.356). The average value of sales growth is (6.663), the median is (6.644),
the maximum value (7.595), the minimum value (5.689), and the standard deviation is
(0.593). The change in growth sales is positive, which indicates that an increase in sales
growth significantly impacts the firm's performance. Similarly, the descriptive stats for
the age of the firm provided the average mean value is (1.519), the median is (1.505), the
maximum value is (1.771), the minimum value (1.255), and the standard deviation is
(0.174) - the age of the firm ranges from (13.142 to 17.430 for small and large firms).
Table 3
Descriptive Statistics
Variables Mean Median Max Min Std. Dev.

TQ 1.212 1.003 2.450 0.651 0.563
ROA 0.042 0.037 0.160 -0.077 0.072
ROE 0.112 0.109 0.341 -0.133 0.142
CGI 0.001 -0.033 3.341 -13.019 1.285
Available slack 1.241 1.097 2.448 0.408 0.619
Working capital slack 0.000 0.000 0.004 0.000 0.000
Potential slack 1.553 1.216 3.957 0.197 1.187
Predictability 0.064 0.051 0.150 0.014 0.043
Smoothness 0.678 0.519 1.752 0.142 0.513
Conservatism 0.032 0.148 4.834 -4.738 2.688
Firm size 15.355 15.295 17.430 13.142 1.356
Sales growth 6.663 6.644 7.595 5.689 0.593
Firm age 1.519 1.505 1.771 1.255 0.174
Note. The table provides the path analyses of the link between overall corporate
governance (CGI) direct and moderating effect FSR= Financial Slack). Variables
definitions: FP = firm performance as measured by TQ, ROA, ROE, FSR = Financial
Slack Resources, and OCG (CG-Index) = Overall corporate governance
Correlation Matrix
A correlation matrix is a statistical technique used to determine the relationship
between two or variables. It is used to identify the association of two variables at one
time. It has a wide application in business research. Correlation analysis describes the
strength and direction of the linear relationship between two variables. Table 2 below
exhibits the Pearson correlation analysis among the independent variable (CG) for users'
perspectives to capture the issue of multicollinearity. This issue sometimes becomes
seriously problematic during analysis and for the validity of results. Those with asterisk
signs in superscripts exhibit a significant correlation among the variables where p ˂ 0.05
or ˂ 0.01.
Table 4 exhibits the Pearson correlations statistics among variables. The results
found that the direct effect of overall corporate governance is positive and significant on
both market-based (TQ) (0.120) and accounting-based (ROA) (0.130) and ROE) (0.080)
performance measures. The significant direct effect between corporate governance index
and performance has supported hypothesis H1. Therefore, we accept H1 that good
corporate governance enhances the organization's financial efficiency. The correlation
table 2 provided the descriptive statistics of financial slack, performance, and CGI. There
is a positive correlation between available slack, working capital slack, and CGI. The
relations between available slack, performance, and CGI are (0.091), (0.429), (0.171),
and (0.150), respectively. However, the positive correlation between working capital
slack, CGI, and performance is (0.002), (0.057), (0.041), and (0.030). These results
accepted hypotheses H2 and H3. There is a negative correlation between potential slack,
performance (-0.143), (-0.201) and (-0.184), and corporate governance Index (-0.025),
respectively.
The correlation between all three proxies of EQ (predictability, smoothness,
conservatism) and market-based performance (TQ) is positive (0.048), (0.069), and
(0.065). Though, the correlation between EQ measure (predictability) and accounting-
based (ROA) is negative (-0.012). However, a positive correlation exists between
smoothness, conservatism (0.059), (0.027), and performance. The findings supported
hypothesis H5 that earning quality attributes significantly impact performance. Likewise,
there is a positive and significant correlation between EQ attributes (0.041), (0.006), and
(0.021) and performance (ROE). Hypothesis H5 is accepted that earning quality attributes
significantly affect the firm's financial performance. Concerning CGI, all three attributes
of earning quality (predictability, smoothness, and conservatism) are positively correlated
(0.035), (0.014), and (0.053) with overall corporate governance.
In line with other variables discussion, the firm's size (FSZ) correlates positively
with performance, CGI, and available slack. The values are (0.061), (0.156), (0.170),
(0.213) and (0.054) respectively. However, size is negatively correlated with working
capital slack (-0.055) and conservatism ( -0.058). Further, firm size is also positively
correlated with potential slack, predictability, and smoothness (0.055), (0.061), and
(0.058), respectively. Sales growth (0.127), (0.290) and (0.252) positively correlated with
performance. Similarly, sales growth is also positively correlated with CGI (0.225),
available slack (0.135), working capital slack (0.015), potential slack (0.061),
predictability (0.049), and smoothness (0.012), respectively. However, there is a negative
correlation between sales growth and conservatism ( -0.039). Age of the firm (Perotti &
Wagenhofer, 2014) is also positively correlated with performance (0.126), (0.090),
(0.029). CGI (0.013), available slack (0.125), smoothness (0.014), and conservatism
(0.054), whereas negatively correlated with working capital slack (-0.019), potential slack
(-0.055), and predictability (-0.021).

CORPORATE GOVERNANCE AND FIRM PERFORMANCE 153
Table 4
Correlation Matrix
Variables 1 2 3 4 5 6 7 8 9 10 11 12 13
TQ (1) 1.000
ROA (2) 0.364 1.000
ROE (3) 0.436 0.502 1.000
CGI (4) 0.120 0.130 0.080 1.000
Available slack (5) 0.091 0.429 0.171 0.150 1.000
Working capital slack
(6) 0.002 0.057 0.041 0.030 0.026 1.000
Potential slack (7) -0.143 -0.201 -0.184 -0.025 -0.459 -0.024 1.000
Predictability (8) 0.048 -0.012 0.041 0.035 0.005 -0.047 0.011 1.000
Smoothness (9) 0.069 0.059 0.006 0.014 -0.008 -0.039 -0.079 0.476 1.000
Conservatism (10) 0.065 0.027 0.021 0.053 0.026 0.004 -0.022 0.001 0.020 1.000
Firm size (11) 0.061 0.156 0.170 0.213 0.054 -0.055 0.055 0.061 0.058 -0.058 1.000
Sales growth (12) 0.127 0.290 0.252 0.225 0.135 0.015 0.061 0.049 0.012 -0.039 0.578 1.000
Firm age (12) 0.126 0.090 0.029 0.013 0.125 -0.019 -0.055 -0.021 0.014 0.054 0.135 0.158 1.000
Estimation Models - Regression Analysis
The estimation method is discussed and analyzed in the vital section. A panel
dataset is used in this research investigation. The additional benefit of a panel dataset is
that it contains more flexibility, much reliability and variation, more robust and consistent
information, very little collinearity between several variables, and allows control of
unobserved firm individual differences (heterogeneity). Regression testing aims to
discover whether or not there is a significant link between the two or more variables. The
current empirical investigation uses the fixed effect, random effect, and Hausman tests to
estimate panel data (Baltagi, 2008; Baltagi et al., 2005; Wooldridge, 2010).
Estimation of Hausman Test for Choosing Fixed and Random Effect
The Hausman test has been carried out to choose between fixed and random
effects. The selection criterion is P-value. If P-value is < 5%, then reject the null
hypothesis, the possibility of the random effect model is rejected and accept the fixed
effect model. Hypotheses of the Hausman Test are as follows:
Null Hypothesis: H0: Random Effect is appropriate to model for data estimation.
Alternate Hypothesis: H1: Fixed Effect is an appropriate model for data estimation
CG-Index and Performance of the Firm
Tables 1 to 14 reported the findings of estimation models developed elaborated in
the preceding chapter. The results indicated the causality among overall corporate
governance (OCG), financial slack (available slack and potential slack), and financial
performance of the firm, along with three influential control variables (size of the firm,
growth in sales, and age of the enterprises).

Direct and Indirect Performance Impact of overall corporate governance (CGI)
In this section, the direct, indirect, and combined effects of overall corporate
governance (OCG) on the performance through the mediating channel of slack are
documented. A comprehensive description of the findings is reported in the forthcoming
sections. See Tables 5 to 14).
Table 5 exhibits the estimation of mediation using available financial slack in the
relationship between corporate governance index (CG-Index) and performance (FP).
Model-1 inferred that the direct effect of corporate governance on market-based
performance (TQ) is positive and significant as (0.159 at p < 1%). It also validated the
research hypothesis H1 and the positive and significant correlation between corporate
governance and performance. It means that an increase in the quality of corporate
governance enhances the performance consistent with the prior studies (latif et al., 2017).
The results supported hypothesis H1 developed based on prior literature. The size of the
firm is statistically significant and negative at a p <5 % level of significance. Sales
growth and age are positively significant at p < 10 % and < 1% respectively. Model 2
confirms the significant negative impact of CGI on available financial slack as (-0.587, p
< 5% ) level of significance following the wasteful hypothesis (Ashwin et al., 2015; Lee,
2012). The results also supported hypothesis H2 and the argument of Agency Theory
(Jensen, 1986; Jensen & Meckling, 1976) and Behavioural Theory (Cyert & March,
1963). It means that good corporate governance may put the slack resources in some
positive net present value projects and effective for better performance. However, type-I
agency conflicts instigate information asymmetries and raise agency costs due to
opportunistic managerial behaviour—the managers' discretionary nature of organizational

resources. The managers may use such resources for their self-dealing activities.
Therefore, following the agency costs theory, in Pakistan, decisions regarding the
allocation of firm resources are limited in few strong hands due to high ownership
concentration. In Pakistan's volatile developing environment of Pakistan economy due to
corruption and money laundering, resources are expropriated due to corruption. Poor
governance leads to poor projects, which gives a negative return. Sometimes managers
use organizational resources as a political bribe to please the influential shareholders just
for private lavishness (Jensen, 1986; Jensen & Meckling, 1976; Lee, 2012).
According to the PC-1 manual, Pakistan is called the graveyard of projects. The
manual criticized the poor governance in Pakistan that no one project matures well in
time. Size and age are statistically significant and positive at p < 1 %, respectively, while
sales growth is statistically significant and negative at the p-value < 1 %. Model 3
provides the significant and negative effect of available slack on the (TQ) at the (-0.005, p-
value <10 % following agency hypothesis (Jensen, 1986). Due to the managers'
opportunism, cash flows and resources are put into the low return projects, and even in
negative NPV projects. Shaikh et al. (2016b) argued that the role of the outside directors
in combating cash flows (FCF) concerns, such as having invested FCFs into research and
development projects with a negative net present value (NPV), is emphasized by agency
theory. Likewise, the complex tradeoffs that established high-tech firms face when
allocating financial slack to research and innovation are examined by researchers using
an agency framework. Current investigation suggests that a company may benefit from a
board's financial control role in offsetting agency costs. However, managers prioritize
short-term survival in times of crisis, so slack does not prevent the cancellation of high-
tech investment projects. We suggested a more cohesive, prominent role for the board to
avoid the agency costs of corporate governance monitoring inefficiencies in allocation of
slack in investment projects (Shaikh et al., 2016a). We argue that insiders complement
the board in ensuring the persistence of R&D by mutually monitoring the CEO and
mitigating informational asymmetries (Shaikh & Peters, 2014; Shaikh et al., 2016a;
Shaikh, 2013). Moreover, sales growth and age of the firm are positively significant at a
p-value < 5 % and a p-value< 1%, respectively, while the size of the firm is less likely to
be significant (Bromiley, 1991).
Model-4 depicts the total effect (TE), concluding that direct (0.159, p ˂ 0.01) and
indirect effects are significant at (0.099, p-value < 0.001) respectively. The significant
direct and indirect effects confirmed the existence of partial mediation and supported
hypotheses H1, H2, H3 and H4. Since the signs of the coefficients of direct effect (DE) and
indirect effect (IDE) are positive, this type of mediation is called consistent or
complementary partial mediation (Zhao et al., 2010). The same signs of the coefficients
strengthen the magnitude of the governance-performance association. It appears to
indicate that some of the (CGI) effects on performance are mediated through the
mediator. Nevertheless, CGI still accounts for a chunk of FP without the mediating
factor. It means that available slack partially mediates the impact of CGI on performance
(TQ) following (Memon et al., 2020; Tabassam & Khan, 2021; Zhao et al., 2010).
Moreover, sales growth and age are statistically significant at p < 10 % and p < 1%
levels, respectively.
Table 5
Fixed Effect Results Available Slack (CR) as a Mediator (1,2,3 & 4)
Variables TQ CR TQ TQ
CG-Index 0.159** -0.587** 0.099***
(0.053) (0.234) (0.038)
Available Slack -0.005* -0.005*
(0.003) (0.003)
Firm Size -0.028** 0.383*** -0.012 -0.013
(0.012) (0.128) (0.017) (0.018)
Sales Growth 0.041* -1.250*** 0.044** 0.041*
(0.022) (0.363) (0.023) (0.023)
Firm Age 0.54*** 0.446** 0.681*** 0.683***
(0.075) (0.149) (0.096) (0.094)
Firms fixed
effects YES YES YES YES
Year fixed effects YES YES YES YES
R-squared 0.441 0.432 0.361 0.438
Firms included 222 222 222 222
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro -Auto consistent Standard Errors as suggested by Newey and West (1987).
Table 6 illustrates below the findings of the direct, indirect, and joint effect of
overall CGI on ROA of the firm through the channel of available financial slack. Fixed
effects regression estimates are shown in column-4 to column-4. In the above table,
column-I results display that (β 1=0.007 , p<10 %)meaning that the direct effect is
positive and statistically significant. Size is negative and statistically significant at p <
0.1. However, sales growth (0.044) and firm age (0.018) are positive and significant at p
< 0.1. Model-2 column-2 shows that CGI positive and highly significant
β 1=0.225 at p−value< 0.01 .This shows that good governance may increase the level of
available financial slack at the firm level consistent with the behavioural theory (Cyert &
March, 1963; Lee, 2012; Tabassam & Khan, 2021). In this expression, the size of the
firm is significant at < 0.05 while sales growth is significant negatively at p-value <
0.01.and age of the firm is positive and statistically significant at p<0.1. Considering
Model-3 available slack resources impact firm performance significantly (ROA) as
β 1=0.048 , p<0.1. However, growth in sales is statistically significant at value p<0.1 ,
and the age of the firm is significant and negative as p<0.05 . In model-4, we have shown
total effect (TE) to test our hypothesis of whether available slack resources mediate the
relationship between OCG and FP. The findings exhibit that the direct effect (DE) is
significant and positive (0.007, p ¿ 0.001 ¿, and the indirect effect (IDE) are insignificant
and negative, p<5 %. Therefore, it concludes that no mediation exists. The findings are in
agreement with the agency cost theory and (Cardoso et al., 2014). In this scenario, the
outcome indicated the existence of only a direct non-meditating effect in the linkage
between CGI and FP. In this case, the direct effect is more profound, and the
policymakers should concentrate on the robustness of corporate governance to boost the
firm effectiveness (Shrout & Bolger, 2002). Moreover, size is negatively significant
while sales growth and firm age are positive and statistically significant ( p<10 %) .
Table 6
Fixed Effect Results Available Slack (CR) as a Mediator (1,2,3, & 4)
Variables ROA CR ROA ROA

CG-Index 0.007*** 0.225** -0.002
(0.001) (0.096) (0.002)
Available Slack 0.048*** 0.001**
(0.009) (0.000)
Firm Size -0.013*** 0.206* -0.006 -0.018***
(0.001) (0.128) (0.004) (0.003)
Sales 0.044*** -0.843** 0.032*** 0.031***
(0.003) (0.358) (0.005) (0.005)
Frim Age 0.018*** 0.521*** -0.042* 0.101***
(0.007) (0.187) (0.024) (0.025)
Firms fixed effects YES YES YES YES

R-squared 0.321 0.335 0.504 0.493
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro-Auto consistent Standard Errors as suggested by Newey and West (1987).
Tables 7 displays an investigation into how available financial slack influences
performance (ROE) both directly and indirectly. Fixed effects regression estimates are
shown in column-1 to 4. In the above table, column-1 results display that
(γ 1=0.009 , p 0.1) ,meanings that the direct effect is positive and statistically significant.
Size is negative and statistically significant at p < 0.01. However, sales growth (0.032)
and firm age (0.068) are positive and significant as p < 0.1 and p < 0.01 respectively.
Column -2 shows the positive and significant effects of CGI on ROE as 0.225 γ 1=0.225
and p ¿ 0.01 (Ashwin et al., 2015). Though the size is positive and significant, p<0.05 ,
while sales growth is negative and significant at p<0.01 , A ge is positive and statistically
significant at p<0.1. Model-3 shows that available slack is significant at P<0.1. In this
case, size is negative and significant at p<0.01 , and sales growth is positive and
significant at p<0.05 . The last column, model-4, shows that both direct effect (DE) (
0.009 , p <0.001 ¿ and indirect effect (IDE) (−0.009 , p<0.001 ¿ are statistically
significant and confirmed the existence of partial mediation between OCG and
performance (ROE) supported hypothesis H4 consistent with (Zhao, et al., 2010). Since
the sign of the coefficients of DE and IDE are opposite, it indicated that this type of
mediation is competitive. The opposite signs indicate that the behaviour of DE and IDE is
the substitute. The substitute behaviour weakened the CGI-performance association. In
spite of this, the mediating variable (FSR) may enhance the magnitude of CGI on FP.
Table 7
Fixed Effect Results Available Slack (CR) as a Mediator (1,2,3 & 4)
Variables ROE CR ROE ROE

CG-Index 0.009*** 0.225** -0.009***
(0.003) (0.096) (0.003)
Available Slack 0.001*** 0.001***
(0.000) (0.000)
Firm Size -0.014** 0.206* -0.009** -0.015***
(0.004) (0.128) (0.004) (0.004)
Sales Growth 0.032*** -0.843** 0.032*** 0.027***
(0.008) (0.358) (0.006) (0.008)
Frim Age 0.068** 0.521*** 0.014 0.068**
(0.027) (0.187) (0.028) (0.037)

R-squared 0.440 0.338 0.390 0.446
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro Auto consistent Standard Errors as suggested by Newey and West (1987).
Table 8 demonstrates the fixed effect regression output of direct (DE), indirect
(IDE), and joint or total effects (TE) of CGI on the firm financial performance (Tobin's
Q) through the working capital slack. Model 1, fixed effect regression estimates show
that the direct effect of the explanatory variable (overall corporate governance-CG-Index)
has a direct positive and significant impact on the firm performance (Tobin's-Q) at a 5%
level of significance. The positive coefficient ( γ 1=0.159 , p < 0.05, 95% CI) show that an
increase in the quality of corporate governance increases the level of performance. Size
has a statistically negatively significant impact on firm performance (Tobin's Q). For
growth in sales, the coefficient value is positive (0.041) at 1%, while the coefficient of
firm age (0.54) is also positive and statistically significant at a 5% significance level.
Also, estimates of Model-2 provided that the effect of CGI on working capital slack is
negative and statistically significant supported hypothesis H2. The negative coefficient of
size (-0.062) is significant as p-value p < 0.05. However, sales growth (0.192, p < 0.05)
and firm age (0.124, p < 0.05) are positive and statistically significant at p < 5%
respectively. Model -3 displays that the impact of working capital slack on TQ is
significant at 5% supported hypothesis H3. The impact of sales growth is positive and
significant at a p < 0.01 level of significance, while the size and age of the firm are
statistically insignificant. Model-4 exhibits the total effect estimates or combined effect,
i.e., direct and indirect effects. The direct effect (0.0159, p ˂ 0.001) is positive and
statistically significant, while the indirect effect (-0.091, p ˂ 0.01) is statistically
significant at p < 10 %. The findings conclude the confirmation of partial mediation in
the association between CGI and performance indirectly through the channel of financial
slack as a mediator. When the sign of DE and IDE is opposite, mediation is called
competitive partial mediation (Zhao, et al., 2010).
The above results recommend that while a proportion of IV's effect on DV
translated by mediation, IV still accounts for a part of DV explanatory of mediating
variable. Previously, researchers usually concentrated exclusively on complementary
mediation (Zhao, et al., 2010). The complementary partial mediation hypothesis
hypothesizes that the indirect variable strengthened the positive impact of the CGI-FP
association. Notwithstanding, the intermediate variable may amplify the significant
negative impact. In addition, size and sales growth are negative and statistically
significant at a p < 0.01significance level, while firm age is positive and statistically
significant at a p < 0.01 level of significance.

Table 8
Fixed Effect Results Available Slack (WCS) as a Mediator (1,2,3 & 4)
Variables TQ WCS TQ TQ
CG-Index 0.159*** -0.021** 0.091**
(0.053) (0.010) (0.043)
Working Capital
Slack 0.000** -0.109***
(0.000) (0.022)
Firm Size -0.028** -0.062*** 0.014 -0.056***
(0.012) (0.022) (0.046) (0.018)
Sales growth 0.041* 0.192*** 0.154* 0.165***
(0.022) (0.043) (0.091) (0.038)
Firm Age 0.54*** 0.926*** -0.155 0.626***
(0.075) (0.124) (0.260) (0.098)

R-squared 0.394 0.460 0.436 0.395
Hausman Test 0.000 0.000 0.000 0.000
Table 9 embodies CGI's direct, indirect, and combined effects and firm
performance (ROA) using working capital slack as a mediating variable. The regression
results of Model -1 represent that direct impact is positively affecting performance
(ROA) at a 5% level of significance as the coefficient of CGI is positive. It confirms
hypothesis H1. Size is negatively significant, while sales growth and firm age are positive
and significant as the p-value is<5%. Regression results of Model-2 report that the
impact of overall corporate governance OCG on the firm performance is significant and
negatively correlated with working capital slack at a p < 0.01 level of significance
supported hypothesis H2.
Nevertheless, control variables size is negatively significant while sales growth
and firm age are positively correlated with firm performance (ROA) as p-value is <0.05.
Model 3 shows that working capital slack positively impacts firm performance (ROA) at
a 5% significance level supported by hypothesis H3. However, size is negatively
significant, and sales growth is positively significant at a 5% significance level.
Notwithstanding, firm age is insignificant in Model-3. In addition to this, Model-4 reports
the combined effect of CGI and mediating variables. The total effect (TE) illustrates that
only the direct effect (DE) is significant (0.007, p ˂ 0.001), and the indirect effect (IDE)
is insignificant following agency cost theory and also consistent with (Jensen, 1986; Lee,
2012). From the significant direct effect, it is inferred that legislators and policymakers
should focus on the strengthing of corporate governance to accelerate corporate
effectiveness. It means that firm performance completely absorbs the effect of CGI. It
also shows that CGI to firm performance is fully transmitted (Tabassam & Khan, 2021;
Zhao, et al., 2010). Additionally, size is negatively significant at 5% whereas, sales

growth and firm age are positively significant as p < 5% and p < 1% level of
significance, respectively (Rafailov, 2017).

Table 9
Fixed Effect Results Available Slack (WCS) as a Mediator (1,2,3, &4)
Variables ROA WCS ROA ROA

CGI 0.007*** -0.021** -0.001
(0.001) (0.010) (0.002)
Working capital slack 0.019*** 0.039***
(0.003) (0.006)
Firm Size -0.013*** -0.062*** -0.009*** -0.021***
(0.001) (0.022) (0.002) (0.003)
Sales growth 0.044*** 0.192*** 0.049*** 0.057***
(0.003) (0.043) (0.005) (0.008)
Firm Age 0.018*** 0.926*** -0.013 0.036*
(0.007) (0.124) (0.010) (0.019)

R-squared 0.421 0.460 0.431 0.494
Hausman Test 0.000 0.000 0.000 0.000
Table 10 embodies the results of the direct, indirect, and total effects. Model-1
column -1 provided the results of the significant direct effect of CGI on firm performance
as p < 10 % supported hypothesis H1. Control variables such as the company's size are
negative and significantly affected at a 10% significance level, while sales growth and
firm age are significantly positive at 10% and 1% levels of significance, respectively.
Model 2 shows the findings of the significantly negative effect of CGI on working capital
slack at a 1% level of significance, showing that a unit increase in the quality of corporate
governance will reduce the size of surplus funds at the discretion of managers. The
managers will have less likely discretion to divert firms' surplus resources for their
private lavishness (Jensen & Meckling, 1976; Lee, 2012; Tabassam & Khan, 2021). Sales
growth and firm age are significantly positive at 10%, respectively. However, the size of
the firm is significantly negative at a 10% level of significance.
Furthermore, Model-3 reports the results of the significant indirect effect of
working capital slack on firm performance at a 1% level of significance supported
hypothesis H1. These results tested and confirmed hypothesis H3. However, size is
negative and significant at 1%, and the firm age is significantly positive at 5%,
respectively. In model-4 total effect is shown. The findings illustrated that both direct
effect (0.009, p ˂ 0.001) and indirect effect (-0.008, p ˂ 0.001) significantly affects
performance (ROE), respectively. The outcomes are consistent with the behavioural
theory, financial slack theory, and (Grüner & Raastad, 2018; Rafailov, 2017). It shows
that partial mediation exists in this case as both DE and IDE are significant. The opposite
signs of the coefficients represent competitive partial mediation between CGI and FP-
ROE through the mediating channel of working capital slack (Zhao, et al., 2010). Overall
corporate governance (CGI) has a mediated effect on performance, and even though CGI
is still responsible for a significant portion of the performance, that is unaffected by the
availability of slack resources (working capital slack). Since the coefficients' signs are
opposite, the variable's behaviour is a substitute. A central insight of the competitive
partial mediation proposition is the assumption that introducing a mediating variable
would lower the strength of the correlation between dependent and independent variables.
Nevertheless, the mediating variable enhances the correlation between independent and
dependent variables (Zhao, Lynch, et al., 2010). In addition, size is significantly negative
at a 10% level of significance, and sales growth and firm age are positively significant at
10 % and 5% significance levels, respectively consistent with (Latif et al., 2017; Waheed
& Malik, 2019b).

Table 10
Fixed Effect Results Available Slack (WCS) as a Mediator (1,2,3, &4)
Variables ROE WCS ROE ROE

CG-index 0.009*** -0.021** -0.008***
(0.003) (0.010) (0.003)
Working capital slack 0.386** 0.381**
(0.151) (0.153)
Firm size -0.014** -0.062*** -0.188** -0.018***
(0.004) (0.022) (0.092) (0.005)
Sales growth 0.032*** 0.192*** -0.197 0.062***
(0.008) (0.043) (0.247) (0.012)
Firm age 0.068** 0.926*** 0.993* 0.052*
(0.027) (0.124) (0.537) (0.028)

R-squared 0.440 0.460 0.395 0.442
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro - Auto consistent Standard Errors as suggested by Newey and West (1987).
Table 11 embodies fixed effects regression estimates for models (1-4). The output
in model-1 illustrated that OCG has a significant and positive impact on the firm's
performance (Tobin's Q) as β=0.159∧ p<10 % .Likewise, size has a significant negative
impact on performance (TQ) at P<0.01 , and growth in sales and age of the firms are
positive and statistically significant, while firm age has a positive but insignificant
coefficient. Regarding model-2, the findings imply that OCG seems to have a statistically
significant and positive effect on potential slack β=0.092∧p <0.1 . Similarly, the firm's
size has a significant positive impact on potential slack, but sales growth and age are
significant negatives at p<0. 1. Model-3 accounts for the effect of potential slack on TQ.
Potential slack positively impacts TQ as p < 0.1 (Rafailov, 2017). Here, control variables
in model-3, such as the firm's size, are negative and statistically significant; sales growth
and age are positively significant as p<0.01 ,respectively. In model-4, the total effect is
shown. The direct effect (0.159, p ˂ 0.001) and indirect effect (0.154, p ˂ 0.001) are
positive and significant at p<1 % confirmed the existence of partial mediation called
"positive confounding" in the association between OCG and performance (TQ) following
(Carrión et al., 2017; Hayes & Preacher, 2014; Memon et al., 2020; Nitzl et al., 2016;
Zhao, et al., 2010). Therefore, it approves the hypothesis that potential-slack mediates the
association between overall corporate governance (OCG) and the corporations’ financial
performance, following the Behavioural Theory of the firm and Resource-Based Theory
and consistent with (Lee, 2012; Shaikh et al., 2016b. In addition, sales and age are
significant, but size negatively impacts Tobin's Q at p < 10%, respectively.

Table 11
Fixed Effect Results Potential Slack (D/E) as a Mediator (1,2,3&4)
Variables TQ D/E TQ TQ
CGI 0.159*** 0.092*** 0.154***
(0.053) (0.028) (0.052)
Potential slack -0.035*** -0.035***
(0.008) (0.008)
Firm size -0.028** 0.108** -0.051*** -0.051***
(0.012) (0.047) (0.018) (0.018)
Sales growth 0.041* -0.313*** 0.138*** 0.135***
(0.022) (0.093) (0.038) (0.038)
Firm age 0.541*** -2.344*** 0.553*** 0.556***
(0.075) (0.265) (0.100) (0.100)

R-squared 0.34 0.384 0.343 0.345
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro - Auto consistent Standard Errors as suggested by Newey and West (1987).
Table 12 embodies fixed effect regression output (1-4). The findings in model 1
implies that the impact of CGI on ROA is positive and highly significant at
CGI=0.007 , P<0.1 . size of the firm is negative and statistically significant as p ¿ 0.1,
while sales growth is positive and statistically significant at p-value ˂ 0.1 and age
negative and statistically significant at P<0.05 . The reported results in model-2 imply that
OCG seems to have a statistically significant effect on potential slack (0.092) and p-value
˂ 0.05. The size of the firm is positive and statistically significant as p-value ˂ 0.01.
However, sales growth and firm age are negatively significant at p-value ˂ 0.1 consistent
with (Diantimala et al., 2021; Hossain, 2016). Model 3 accounts for the effect of potential
slack on firm performance (ROA). The coefficient of potential slack is negative but
statistically significant (-0.009) at p-value ˂ 0.1, indicating potential slack inversely
influences ROA (Rafailov, 2017). Sales growth is positive and significant at p-value ˂
0.1, and firm age is negative and significant at p-value ˂ 0.05. Model-4 illustrates the
outcomes of the direct and indirect impact of the corporate governance index on
corporate financial performance. It is evident from the findings that the direct impact is
significant as (0.007, p ˂ 0.001), while the indirect effect is insignificant. It demonstrated
that one unit increase in the quality of corporate governance increases the performance
(ROA) of the firm by (0.007) units. It supported hypothesis H1. Thus, it is suggested that
corporations, regulators, policymakers, and management should keenly ponder on
effective corporate governance. As little more than a consequence, it corroborates the
proposition that the direct impact of the corporate governance index (CGI) on financial
performance is more robust and profound than the indirect stream of financial-slack
resources following the wasteful hypothesis and agency theory (Jensen & Meckling,
1976; Kim et al., 2008; Lee, 2012; Shaikh et al., 2016b; Shaikh, 2013).
Furthermore, size is negatively significant while sales growth and age are positively
significant as p ˂ 0.001 for all three control variables.

Table 12
Fixed Effect Results Potential Slack (D/E) as a Mediator (1,2,3 & 4)
Variables ROA D/E ROA ROA

CG-Index 0.007*** 0.092*** -0.002
(0.001) (0.028) (0.003)
Potential Slack -0.009*** -0.007***
(0.002) (0.002)
Firm size -0.013*** 0.108** -0.004 -0.016**
(0.001) (0.047) (0.003) (0.003)
Sales growth 0.044*** -0.313*** 0.037*** 0.032***
(0.003) (0.093) (0.005) (0.005)
Frim age 0.018*** -2.344*** -0.026* 0.039**
(0.007) (0.265) (0.017) (0.019)

R-squared 0.321 0.384 0.365 0.384
Prob(F-statistic) 0.000 0.000 0.000 0.000
Hausman Test 0.000 0.000 0.000 0.000
Table 13 expounds the fixed effect regression estimates of models 1 to 4. The
outcomes of method-1 column 1 show the coefficient of CG-Index (0.009, at p ¿ 10 % ¿ ,
indicating that the direct effect of CGI on FP- return on equity is significant.
Correspondingly, the size of the firm is significant and negative as p ˂ 0.01 significance
level, while sales growth and age of the firm are significant and negatively impact FP at
5% and 1%, respectively. In model-2, the findings showed that OCG seems to have a
statistically significant and positive effect on potential slack (0.092, p ˂ 5%), consistent
with (Ashwin et al., 2015). Correspondingly, size is positive and significantly impacts
potential slack at a 1% significance level, while sales growth and age are significant and
negative at p-value ˂ 0.1. Model-3 is showed the potential slack negatively impacts FP as
(-0.335, p-value ˂ 0.1). Correspondingly, the size of the firm is significantly negative at
p˂ 0.01, while sales and age of the firm are insignificant. In the last column, model-4
describes the fixed effects regression estimates of direct and indirect effects. The
outcomes concluded that the direct effect (0.009, p ˂ 0.01) is statistically significant, and
the indirect effect (IDE) is statistically insignificant following the wasteful hypothesis
documented in agency cost theory and consistent with (Memon et al., 2020; Tabassam &
Khan, 2021; (Zhao, et al., 2010). The findings supported hypothesis H1. It also indicated
that transparent monitoring and controlling principles of corporate governance would
increase the performance of the enterprises. Hence, it is recommended that policymakers
and states concentrate on the quality of good governance to boost the financial strength of
the corporations. The size is negative and significant (p ˂ 0.1); however, growth in sales
and age of the company is significant and positive as p ˂ 0.1 and p ˂ 0.01 respectively.
Table 13
Fixed Effect Results Potential Slack as a Mediator (1,2,3, & 4)
Variables ROE D/E ROE ROE

CG-Index 0.009*** 0.092*** 0.033
(0.003) (0.028) (0.065)
Potential Slack -0.335*** -0.421***
(0.059) (0.064)
Firm Size -0.014** 0.108** -0.179** -0.328***
(0.004) (0.047) (0.086) (0.095)
Sales growth 0.032*** -0.313*** 0.022 -0.023
(0.008) (0.093) (0.154) (0.166)
Frim Age 0.068** -2.344*** 0.294 0.399
(0.027) (0.265) (0.538) (0.599)

R-squared 0.340 0.338 0.342 0.341
Hausman Test 0.000 0.000 0.000 0.000
Note. Hetro -Auto consistent Standard Errors as suggested by (Newey & West, 1987).
Role of Earnings Quality Attributes on CG-Performance Linkage
Table 14 presents the estimated fixed effects regression coefficients for the
interaction between CGI and corporate financial valuation, incorporating earning quality
attributes as a moderator. The table also provides the estimates of earnings quality
attributes as moderating variables, for instance, predictability (PRED) as a measure of
earnings quality, smoothness (SM) of earnings, and conservatism (CONT) of earnings.
The model-1 is analyzed for the testing of hypothesis (H5 & H6. For analysis, the fixed
effect regression with robust standard error option and cluster option has been used in the
study to correct any issue of unobserved heterogeneity and serial correlation. The robust
standard error and cluster technique correct any cross-section and serial correlation
problems in the data (Wooldridge, 2013)
The direct effect of CGI on market-based performance (Tobin's Q) is consistent
and positively significant in all the models as ( β 1=¿0.187, p ˂ 0.01, β 2=¿ 0.178, p ˂
0.05, β 3=0.150 p ˂ 0.05, β 4 =0.190 p ˂ 0.01, β 5=0.143 p ˂ 0.05 and β 6=0.119 p ˂
0.001 respectively, confirming the research hypothesis H1. The positive and significant
coefficients show a positive impact of overall corporate governance on the firm's
performance (TQ) (Istianingsih, 2021; Sakawa & Watanabel, 2021). Moreover, table 12
also depicts the estimates of moderating variables (PRED, SM, CONS). On average, the
interaction term is positive and significant at a 5% level of significance, the coefficient of
predictability is positive and significant at p ˂ 0.05. The coefficient of the interaction
term (CGI*PRED) is negatively significant (-0.481, p ˂ 0.05). These findings illustrated
that predictability as a measure of earning quality negatively moderates the relationship
between corporate governance and market-based performance. As the coefficient of CGI

is positive and the coefficient of the interaction term (CGI*PRED) is negative, it
concludes that the behaviour of earnings quality with CGI is a substitution phenomenon.
These estimates confirm the research hypothesis that earnings quality moderate the
relationship between CGI and TQ. However, the significant negative sign signified that
CG and FP relation is weaker in the case of a substitute.
Equivalently, the smoothness coefficient (SM) is positive and significant as 0.063,
p ˂ 0.01. The coefficient of CGI and the interacting term is positive and significant at
(0.190, p ˂ 0.01) and (0.080, p ˂ 0.05), respectively. These estimates supported the
hypothesis that earning quality (smoothness of earnings) positively enhances the effect of
overall corporate governance on the market-based performance (TQ). Hence, the findings
conclude that EQ's behaviour is a complement phenomenon, as the sign of both the
coefficients, i.e., CGI and interaction term (CGI*SM), is positive and significant. These
findings confirm the hypothesis H5 and H6 that the moderating effect is more substantial
in the relationship between CGI and FP in the case of complement. These findings tested
and supported the positive accounting theory in the Pakistani context that corporate
governance is a valuable tool to enhance the firm performance in the presence of different
levels of earrings quality attributes (Menicucci, 2020a). Finally, to test the hypothesis and
predict the role of earnings quality attributes using conservatism (CON), from the
findings, it is inferred that both direct effect and conditional (interacting) effect are
significant at p=10% and p=1% level of significance. As the coefficients of CGI and
(CGI*CONS) are positive, we argue that earnings quality attributes conservatism further
accelerate the positive and significant effect of OCG on performance. However, the
behaviour of CGI and (CGI*CONS) is a complement at different levels of earnings

quality (Özcan, 2021). Further, it also confirms the research hypothesis that earnings
quality moderates the linkage between OCG and FP following positive accounting
theory(Srivastava & Baag, 2020; Watts & Zimmerman, 1986). The size of the company
and sales growth is statistically insignificant, while the age of the company is positively
significant at p ˂ 0.01.
Table 14
Fixed Effect Results for TQ
Variables TQ TQ TQ TQ TQ TQ
CGI 0.187* 0.178** 0.150** 0.190*** 0.143** 0.119*
(0.114) (0.083) (0.053) (0.063) (0.062) (0.063)
PRED 0.534** 0.322**
(0.126) (0.157)
CGI*PRED -0.481**
(0.061)
0.063**
SMOOTHNESS * 0.062***
(0.018) (0.018)
CGI *SM 0.080**
(0.028)
0.012**
CONT * 0.012***
(0.004) (0.004)
CGI* CONS 0.025**
(0.012)
Firm Size 0.038 -0.010 -0.010 -0.010 -0.011 -0.013
(0.048) (0.015) (0.015) (0.015) (0.012) (0.012)
Sales Growth 0.010 0.019 0.018 0.018 0.058 0.060
(0.052) (0.022) (0.022) (0.022) (0.020) (0.020)
0.963**
Firm Age * 0.502*** 0.465*** 0.464*** 0.246*** 0.247***
(0.186) (0.076) (0.076) (0.076) (0.048) (0.048)
Firms fixed
effects YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
R-squared 0.44 0.41 0.43 0.39 0.41 0.38
Firms included 222 222 222 222 222 222
Hausman Test 0.000 0.001 0.000 0.002 0.000 0.000
Table 15 infers the fixed effects robust regression estimates for the association
between CGI and FP, taking earning quality attributes as a moderator. The table also
illustrates the estimations of accounting and market-based earnings quality measures as
moderators. Accounting-based Eq measures are predictability (PRED) to measure
earnings quality and smoothness (SM). At the same time, conservatism (CONT) is a
market-based measure of earnings quality (Francis et al., 2003; Menicucci, 2020). The
model-1 was analysed for the testing research hypothesis (H5 & H6). For analysis, the
fixed effect regression with robust standard error option and cluster option has been used
in the study to correct any issue of unobserved heterogeneity and serial correlation. The
robust standard error and cluster technique correct any cross-section and serial correlation
problems in the data (Wooldridge, 2013).
The direct effect of CGI on accounting-based performance (ROA) is consistent
and positively significant in all the models as ( β 1=¿0.006, p ˂ 0.001) supported
hypothesis H1. The positive and significant coefficients show a positive impact of overall
corporate governance on the firm's performance (ROA). Furthermore, table 13 also
illustrates the findings of EQ measures as moderators (PRED, SM, CONS). On average,
the interaction term is positively significant at a 1% level of significance, the coefficient
of predictability is positive and significant at p ˂ 0.01. The interaction term coefficient
(CGI*PRED) is positive and significant (0.079, p ˂ 0.05). The results conclude that
predictability as a measure of earning quality positively and significantly moderates the
relationship between corporate governance and accounting-based performance. As both
the coefficients of CGI and interaction term (CGI*PRED) are positive, it concludes that
the behaviour of earnings quality with CGI is more robust and is the complement
(Menicucci, 2020a). It means that the effect is positive and significant at the low level of
EQ. These estimates confirm the research hypothesis H4 and H5 that earnings quality
further enhances the performance impact of corporate governance.
Besides this, the smoothness coefficient (SM) is positive and significant as (0.006,
p ˂ 0.05). Likewise, the coefficient of CGI is positive, and the interacting term is
negative and significant at (0.006, p ˂ 0.05) and (-0.008, p ˂ 0.05), respectively. These
estimates supported the hypothesis that earning quality (smoothness of earnings)
moderates the effect of OCG on the accounting-based performance (ROA). Nevertheless,
due to the opposite signs of the coefficients of CGI and interaction term (CGI*SM) are
substitutes in this case. The significant negative sign concluded that the effect of CG on
FP is weaker in the case of a substitute.
These findings supported the positive accounting theory in a developing economy
of Pakistan that corporate governance is a valuable tool to enhance the firm performance
in the presence of different levels of earrings quality attributes (Gaio, 2010; Menicucci,
2020a). Lastly, to test the hypothesis and predict the role of earnings quality using
market-based earnings quality measure conservatism (CON), from the results, it is
inferred that both direct effect and conditional (interacting) effect are significant at
p=10% and p=1% level of significance. As the coefficients of CGI and (CGI*CONS) are
positive (0.011, p ˂ 0.001) hence, we argue that earnings quality attributes conservatism
further strengthens the positive effect of CG on performance. However, the behaviour of
CGI and (CGI*CONS) is complement at different levels of earnings quality (Ewert &
Wagenhofer, 2011). The results supported the hypotheses H5, H6 that earnings quality
enhances the significant positive effect of CGI on FP.

Further, it also confirms the research hypothesis that earnings quality moderates
the linkage between OCG and FP following positive accounting theory (Latif et al.,2017
& watts & Zimmerman). These findings validated the research findings reported in China
(Menicucci, 2020a) and Korea (Gaio & Raposo, 2014). The size (FSZ) is negatively
significant and consistent at 1%. In Pakistan, the small firms are at infant stages, and they
spend more on R&D and other growing expenditures, so in the short run, their impact on
performance may be negative (Waheed & Malik, 2019; Saftiana et al., 2017). On the
other side, sales growth and age (Fage) are statistically significant and positive as p ˂
0.001.
Following positive accounting theory, (Watts & Zimmerman, 1986)Watts and
Zimmerman (1986) argued that the logic of income smoothing is an approach that aims to
document earnings because management believes that stable payments are more valuable
and reduce the risk of breaching debt and dividend covenants and optimize executive
bonuses. Enterprises engage in this exercise since investors are generally willing to pay a
premium for shares that generate consistent and accurate earnings. Earnings that are
subject to more volatile patterns, on the other hand, can be regarded as riskier
(Rodríguez-Baño et al., 2019; Schipper & Vincent, 2003). According to LaFond and
Watts (2008), conservatism ensures efficient manager monitoring as an aspect of the
corporate governance mechanism, and research findings have looked into the relationship
between conservatism and boards of directors (Ruch & Taylor, 2015).

Table 15
Fixed Effect Results for ROA
Variables ROA ROA ROA ROA ROA ROA

0.006** 0.004** 0.007**
CGI 0.006*** * * 0.007*** 0.004*** *
(0.002) (0.002) (0.001) (0.002) (0.001) (0.002)
0.058**
PRED 0.058*** *
(0.022) (0.022)
CGI*PRED 0.079*
(0.046)
SM 0.006** 0.006**
(0.003) (0.003)
CGI *SM -0.008*
(0.005)
CONT 0.001* 0.001*
(0.000) (0.000)
0.011**
CGI* CONS *
(0.004)
- - - -
Firm Size 0.012*** 0.012*** -0.011*** 0.011*** 0.012*** -0.011***
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Sales 0.023*** 0.023*** 0.023*** 0.023*** 0.023*** 0.023***
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Firm Age 0.042*** 0.042*** 0.045*** 0.045*** 0.041*** 0.040***
(0.012) (0.012) (0.012) (0.012) (0.011) (0.011)
Firms fixed
R-squared 0.44 0.39 0.45 0.51 0.37 0.47
Firms included 222 222 222 222 222 222
Hausman Test 0.000 0.000 0.000 0.001 0.001 0.000
Table 16 deduces regression output for the effect of CGI performance of the firm,
including earning quality as a moderator. The table also explains the impact of the
moderator of accounting and market-based earnings quality determinants. Predictability
(PRED) and smoothness (SM) are accounting-based, while conservatism (CONT) is a
market-based EQ measure of EQ (Dechow et al., 2010; Francis et al., 2003; Gaio, 2010;
Menicucci, 2020b). The analysis also provides fixed-effect regression analysis with
robust standard error to capture heterogeneity across firms (Wooldridge, 2013). The
direct effect of CGI on performance (ROE) is positively significant and consistent in all
the models as ( β 1=0.009 , p ˂ 0.001), supported hypothesis H1. The positive and
significant coefficients show a positive impact of overall corporate governance on the
firm's performance (ROE). Furthermore, Table-14 also illustrates the findings of EQ
measures as moderators (PRED, SM, CONS). On average, the interaction term is
positively significant at a 1% level of significance, the coefficient of predictability is
positive and significant at p ˂ 0.01. The interaction term coefficient (CGI*PRED) is
insignificant, and the only direct effect is positive and significant. (Menicucci, 2020a).
Besides this, the coefficient of smoothness (SM) and its interaction term are statistically
significant at (0.002, p ˂ 10% and -0.035, p ˂ 1%), respectively. Likewise, the
coefficient of CGI is positive, and the interacting term is negative and significant at
(0.027, p ˂ 0.001) and (-0.035, p ˂ 0.001), respectively. These estimates supported the
hypotheses H4, H5, that is, earning quality (smoothness of earnings) moderates the effect
of OCG on accounting-based performance (ROE). However, the opposite signs of the
coefficients of CGI and interaction term (CGI*SM) behave as a substitute in this case.
The significant negative sign concluded that CG and FP relation is weaker and will
behave as a substitute. These findings supported the positive accounting theory in a
developing economy of Pakistan that corporate governance is a valuable phenomenon to
enhance the firm performance in the presence of different levels of earrings quality
attributes (Gaio, 2010; Menicucci, 2020). In the end, the moderating effect of
conservatism (CGI*CONS) is insignificant, and the only direct impact is significant.
Further, it also confirms the research hypothesis that earnings quality moderates
the linkage between OCG and FP following positive accounting theory (Gaio & Raposo,
2010; Nasution et al., 2018). These findings validated the research findings reported in
China (Menicucci, 2020a) and Korea (Gaio & Raposo, 2010). The size is significant and
negative, and consistent throughout at 1%. In Pakistan, the small firms are at infant
stages, and they spend more on R&D and other growing expenditures, so in the short run,
their impact on performance may be negative (Waheed & Malik, 2019). On the other
hand, sales growth is statistically significant and consistent at p ˂ 1%), while the age is
statistically significant as p ˂ 5%) and p ˂ 1% or p ˂ 0.001.

Table 16
Fixed Effect Results for ROE
Variables ROE ROE ROE ROE ROE ROE

CGI 0.009*** 0.011** 0.009*** 0.027*** 0.009*** 0.013***
(0.003) (0.004) (0.003) (0.008) (0.002) (0.004)
PRED 0.090* 0.088*
(0.051) (0.051)
CGI*PRED 0.053
(0.106)
SM 0.002* 0.004*
(0.001) (0.002)
CGI *SM -0.035***
(0.013)
CONT 0.0003* 0.003*
(0.0001) (0.001)
CGI* CONS 0.013
(0.009)
- -
Firm size 0.016*** -0.016*** 0.015*** -0.015*** -0.016*** -0.015***
(0.006) (0.006) (0.005) (0.006) (0.005) (0.006)
Sales growth 0.030*** 0.030*** 0.029*** 0.028*** 0.030*** 0.030***
(0.008) (0.008) (0.009) (0.008) (0.009) (0.008)
Firm age 0.068** 0.068** 0.067*** 0.067** 0.065*** 0.065**
(0.027) (0.027) (0.023) (0.027) (0.023) (0.027)
Firms fixed
R-squared 0.48 0.50 0.51 0.49 0.51 0.39
Firms included 222 222 222 222 222 222
Hausman Test 0.000 0.000 0.000 0.000 0.000 0.000
Note. Hetro -Auto consistent Standard Errors as suggested by Newey and West (1987
Table 17
Hypothesis Summary
Hypothesis Mediations Outcomes

TQ ROA ROE Accepted Rejected
H1: A rigorous corporate governance framework positively and significantly √ √ √ Accepted
enhances organisational effectiveness.
H2: Good corporate governance positively impacts financial slack if all else is √ √ √ Accepted
equal.
H3; Financial slack resources positively impact the performance of the firm. √ √ √ Accepted
H4: Financial slack mediates the relationship between overall corporate √ √ √ Accepted
governance (OCG) and firm performance (FP).
Moderation Outcomes
Hypothesis Complement Substitute Accepted/
TQ ROA ROE TQ ROA ROE Rejected
Panel A: Direct Effect
H5: Earnings quality attributes significantly affect firm performance
Predictability √ √ Accepted
Smoothness √ √ √ Accepted
Conservatism √ √ √ Accepted
√ √ √ Accepted
Panel B: Interaction Effect
H6: Earnings quality positively moderate the relationship between overall
corporate governance and firm performance
Interaction Terms Accepted
CGI*PRED √ √ × Accepted
CGI *SM √ √ √ Accepted
CGI* CONS √ √ × Rejected
(ROE)
Discussion
This dissertation asserts a variety of theoretical paradigms to develop the
correlation between corporate governance and financial performance. The systematic
review on the effect of corporate governance, financial slack, and earnings quality and
reporting quality of financial reports on performance justifies a more in-depth
investigation of Pakistani non-financial firms. To our understanding, the variety of
research on the relationship between corporate governance, organizational resources, and
financial reporting quality is conducted in developed countries beyond the United States.
This study is unique in Pakistan to deeply assess an organization's financial resources and
the reliability and relevance of financial reporting quality. Three earnings quality
characteristics have been used to assess the reliability and relevance of reported earnings:
market-based earnings quality attributes (predictability and smoothness) and accounting-
based measures (conservatism). As hypothesis 05 and 06 is constructed, it is expected
that effective corporate governance improves the quality of financial reporting.
The findings indicate that both direct relationships between the corporate
governance quality and firm performance and an indirect relationship mediated by firms'
financial slack exist, implying that corporate governance quality and financial slack have
a statistically significant impact on performance. However, the weight of evidence in
favour of the direct path is more significant when considering direct effect TQ, ROA, or
ROE; and the weight of evidence in favour of the indirect path is profound when
considering market-based performance measures (Koji et al., 2020; Kong et al., 2017).
For detail of Hypotheses for mediation analysis see table 5.15.

The association between corporate governance compliance and its impact on the
growth and profitability of firms is a burning issue in the contemporary corporate sector.
Firms require a robust corporate governance framework to maintain a high-quality firm’s
transparency and reliable environment. Well-organized and transparent induce external
stakeholders to participate in business affairs. Specifically, highly governed organizations
attract investors to put their resources in the venture for a higher return. The resources
may come either from internal equity or external debt sources. However, these invested
organisational liquid resources ensure enterprises for the sustainable development of the
corporations and economic growth as a whole. In Pakistan's perspective, being a
developing economy, corporate governance concerns have been seriously a debatable
question among interested parties. The recent financial scams reported in Europol’s,
Panama Papers, and Pandora Box, Pakistan, are the main affectees. The corporate sector
in Pakistan is still struggling to achieve expected objectives in the region due to meagre
monitoring, weak governance, political unpredictability, money laundering, and
corruption,
Therefore, this study covered the issue of good governance and corporate
performance in the Pakistani underdeveloped and emerging governance set-up.
Organizational financial liquid resources (available slack resources, working capital slack
resources, and potential slack resources) are considered the backbone of firm success and
growth. Jensen and Meckling (1976) commented that when firms have excess free cash
flow (FCF), and limited growth prospects, managers have incentives to mask the impact
of investments in projects with low growth prospects. Due to the high agency conflicts -
type I and type-II the managers use discretion to invest these financial resources with low
return and even negative NPV projects. They camouflage the performance of an
enterprise, reflecting inflated profits.
Further, dividend payments significantly decrease managerial' power by reducing
the volume of resources available. To prevent resources from leaving the firm, managers
seek to invest them in projects to retain control over them and, as a result, their power
within the company. However, it is essential to promise shareholders multiplied future
returns to maintain these resources, as equity holders will only withhold dividends now if
they prospect long-term gains (Jensen, 1986; Lee, 2012).
Hence, considering the importance of financial slack resources, the study included
three types of financial slack in the dissertation to develop the indirect impact on
performance. They revealed the findings using available financial slack as mediating
variable in the association between CGI and FP. The outcomes showed that CGI's direct
and indirect impact on market-based worth (TQ) is positive and statistically significant
through the precise channel of available slack. As both the coefficients are positive, we
recommend the policymakers focus on the magnitude of the more significant coefficient
as the coefficient of CGI is greater in the DE effect than the coefficient of IDE. The
outcomes are consistent with behavioural, resource-based, and financial slack theories.
These finance theories support these findings that organisational surplus resources may
boost the performance and proficiency of the corporations. These empirical outcomes are
consistent with (Kusumadewi & Wardhani, 2020; Lee, 2012). However, the size of the
firm is negatively significant, and sales growth and age of the firm are positively
significant, consistent with (Tabassam & Khan, 2021; Watts, 2003). Likewise, the direct
and indirect impact of corporate governance on corporate performance showed that the
direct effect of CGI on company value is significant and positive, and the indirect impact
is insignificant and negative. Therefore, we recommend that policymakers ponder on the
direct effect only, that is, the effectiveness of corporate governance in this particular case.
For control variables, similar findings are designated as in the previous studies, such as
negative and significant firm size with significant sales growth and age.
Moreover, the direct effect (DE) as well as indirect impact (IDE) of CGI on
performance (ROE) are significant with equal weights but have different signs. The direct
effect is positive and significant, while the indirect is negative and significant. In this
case, both behavioural and agency theories support the findings as behavioural theory
supports the positive impact of financial slack while the agency theory favours the
opposite results. According to the agency, theory managers are betrothed in self-dealing
and misuse organisational resources due to their opportunism. Therefore, in light of
agency theory, the opportunistic behaviour of managers and high agency costs
performance may be jeopardized. Control variables have similar findings as reported
earlier. The firm age is significant and negative, while sales growth and age are positive
and significant.
Furthermore, the impact of CGI on FP using market-based proxy and through the
precise indirect channel of working capital slack revealed that DE and IDE are
significant. However, the magnitude of the coefficient of CGI is larger than the
magnitude of the coefficient of the IDE. Hence, we propose that policymakers should go
for DE. They should enhance the quality of corporate governance to achieve
organisational core competence and sustainable growth in the long run. Similar results
have been reported for all three control variables as reported in the proceeding sections.
On the other side, equivalent findings have been provided in the case of ROA.
The DE is significant and positive, whereas the indirect effect is insignificant. Similar
interpretations and suggestions are referred to in these scenarios. Again, the same
findings are reported for control variables, as all three variables are significantly
consistent with preceding empirical studies. Lastly, the impact of the corporate
governance index on performance (ROE) through the precise indirect channel of working
capital slack was demonstrated. In this scenario, the DE is significant and positive, and
the IDE is significant and negative. These estimates are compatible with agency theory
and financial slack theory. The findings are also consistent with (Kim et al., 2008; Shaikh
et al., 2018). These authors argue that due to type-II agency conflicts, i.e., the conflicts
between principal to principal between local and foreign investors, the negative impact of
resources on investment and performance may be possible.
Furthermore, the findings of CGI's direct effect on market-based performance are
positive and significant. There indirect effect of CGI through the mediating channel is
also significant. Direct and indirect effects are more critical for the firm in case of
potential slack when performance is weighed using market-based measures (TQ). The
argument is justified by the significant direct and indirect effect that corporate
governance and mediators are essential for corporate efficiency. Nevertheless, the
magnitude of the direct impact is more profound. These findings are consistent with
(Jensen, 1986; Jensen & Meckling, 1976; Lee, 2012; Tabassam & Khan, 2021). The
findings also follow the behavioural theory, slack financial theory, and resource-based
theory. These three theories argue that financial-slack resources (potential slack- the
firm's competence to acquire resources from external sources) play an essential role in the
sustainable growth rate. In line with this, the effect of corporate governance on the
mediator (potential slack) is also significantly consistent with behavioural theory.
Similarly, the effect of potential slack on TQ is positive and significant. This
negative coefficient follows Jensen’s agency theory. In this regard, agency theory argues
that managers act in self-dealing transactions due to the high agency clashes. The
resources remain at the managers' discretion, and this discretionary nature of the resource
may be used for a political bribe to keep the majority shareholders happy. Sometimes
managers put resources in the high-risk negative net present value projects. This
opportunistic behaviour of the managers jeopardizes the firm's performance (Jensen,
1986).
The significant but negative size of the firm indicates that as firms grow, the
management becomes complex and complicated. Firms are unable to manage large-sized
firms with existing expertise. In Pakistan, most businesses are family-owned and
controlled. The owners are willing to run the business affairs with the existing
conservative staff. In this case firms, performance may suffer in the long run. The firms
lose a lion's innovative and competitive market share. (Babalola, 2013; De Meulenaere et
al., 2021; Kartikasari & Merianti, 2016; Kumar & Kaur, 2016) All used the "economies
of scale" model to fully back the association between the company's size and income
(Saftiana et al., 2017). Notwithstanding, the overall findings were ambiguous and
contentious. Several others validate a positive association, though some assert an inverse
relation, suggesting the need for future investigations (Abeyrathna & Priyadarshana,
2019; Andries & Stephan, 2019; Babalola, 2013; Brissimis & Delis, 2008).
The direct effect of sales is significantly positive, agreeing with the empirical
studies. To illuminate the neoclassical "black box," managerial theory emphasizes the
modern firm's complexity. Nevertheless, according to (Baumol, 1967; Hartwig, 2008),
managers maximize sales revenue, not profit. The organizational theory emphasizes the
manager's role as a revenue maximizer. According to the theory, firms should intend to
maximize yield and market share, which will boost sales. Some critics of the
organizational theory argue that it is simply a contemporary version of neoclassical
theory. Similarly, the age of the firm is also significant and positive. It indicates that
Pakistani non-financial firms impact market performance by applying modern techniques,
an efficient workforce, and robust corporate governance. For instance, the findings agree
with the previous studies (Lazarides & Pitoska, 2009; Tabassam & Khan, 2021; Waheed
& Malik, 2019a).
The study's findings revealed the effect of CGI on accounting-based corporate
performance (ROA). The direct impact of CGI on financial performance (ROA) is
positive and significantly consistent with the prior studies and theory. The findings are
consistent with (Koji et al., 2020; Kong et al., 2017; Kyere & Ausloos, 2021). At the
same time, the indirect impact on ROA is insignificant. It is determined that the direct
effect is more profound than indirect. In line with this, the direct impact of CGI on
accounting-based performance measures (ROA) is positive and significant. At the same
time, the indirect effect (IDE) is negative and significant through the channel potential
slack resources.
DE and IDE serve as a substitute under this case. Though, the coefficient of CGI
is positive, while the mediator's value is negative. As a result, policymakers ought to
prioritize best governance practices (OCG) that significantly impact organizational

performance. In a similar fashion, corporate governance has a statistically significant
effect on financial - slack (in this case, potential slack). The findings are consistent with
the firm's decision-making theory (Cyert & March, 1963) and in agreement with
(Lazarides & Pitoska, 2009).
Correspondingly, the impact of potential slack on ROA is significant and
negative. The findings corroborate behavioural, resource-based views and financial-slack
theories. These theories imply that financial - slack resources positively affect a
company's financial performance. The company's size is significant and negative, greeing
with the existing empirical studies. In Pakistan, most businesses are family-owned and
controlled. The owners are willing to run the business affairs with the existing
conservative staff. In this case firms, performance may suffer in the long run. The firms
lose a lion's innovative and competitive market share (Loderer & Waelchli, 2010;
Mallinguh et al., 2020; Pellegrino & Piva, 2020; Sami et al., 2011). Nevertheless, both
sales growth and age are positive and statistically significant, implying that these
variables significantly improve the performance of the companies. (Loderer & Waelchli,
2010). The studies agree with the findings of (Latif et al., 2017).
Furthermore, the direct effect of CGI on FP is significant in this particular case,
and mediation does not play its role when performance is valued by an accounting-based
proxy (ROE). It means that policymakers should focus on quality governance rather than
indirect impact through the channel of potential slack. For a detailed hypothesis, please
see table 5.15. Firm size is negatively significant as consistent with the previous studies.
In Pakistan, family owners remain conservative to hire efficient managers, highly
qualified and skilled workers due to family-controlled ownership. They are induced to
hold the position of CEO in their hands. In this way, firms with increased size in their
operational structure become complex, and existing employees cannot meet the
innovative advantages. As a result, their profitability declined in agreement with the
empirical studies. Similarly, sales growth and firm age significantly and positively impact
performance (ROE) consistent with the previous analytical studies (Gaur & Kesavan,
2015). More experiences add to the operating activities with aged firms, and firm
performance may grow (Gaur & Kesavan, 2015). Besides this, table 5.12 specifics the
effect of corporate governance on financial performance and the conditional-moderating
role of earnings quality. From model-1, the direct impact of CGI on FP is significant and
positive. It means that a unit change in CGI will change performance (TQ) by one unit.
Likewise, on average, the impact of predictability is positive and significant. The
individual impact is consistent with the prior study and theories. The CGI-FP association
is consistent (Kyere & Ausloos, 2021; Latif et al., 2017). However, the predictability is
consistent with positive accounting theory (Gaio & Raposo, 2014).
On the contrary, the interaction term coefficient is significant and negative. It
indicates that the significant DE and conditional effect weakens CGI's impact on FP, and
both the variables behave as a substitute. It confirms hypotheses 05 and 06. (see table
5.15).
Additionally, the individual and interacting effects are significant and positive on
average. It indicates that the direct effect of CGI and the interaction effects jointly
enhance performance at different levels of smoothness as a measure of EQ. Hence, due to
the same signs of the coefficients of CGI and interaction term being positive, the nature
of the relationship is a complement phenomenon. A complement behaviour of CGI and

interaction further strengthens the performance (Gaio & Raposo, 2014). In accordance
with this, the individual effects of conservatism and the interaction effect are, on average,
positive and statistically significant (Zhao et al., 2010). The coefficients of CGI and
interaction terms are favourable and move in the same direction. It ensures that the
earnings quality attribute further enhances the impact of corporate governance on
financial performance owing to the coefficients' (CGI and CGI*EQ) complementary
nature. The estimates of the research are consistent with the positive accounting theory. It
states that due to the efficient market, all the stakeholders are well informed, and there
are symmetries of information and low cost of capital. The findings are also consistent
with (Watts, 2003; Watts & Zimmerman, 1986; Watts & Zimmerman, 1990). So if
controlling for other variables, only the company's age has a positive and significant
effect on the performance of the corporations. (Pellegrino & Piva, 2020; salah Mohamed,
2018).
Furthermore, the role of earnings quality attributes in the relationship between
corporate governance and accounting-based performance proxy (ROA) is posited in table
5.13. The positive and significant DE of CGI on FP indicates that unit change in CGI
brings a unit change in ROA in agreement with the prior studies (Sami et al., 2011). On
average, the individual effect of earnings quality attribute (predictability) and interaction
terms are positive and significant. It shows that EQ's change positively moderates the
corporate governance index and FP (ROA) relationship. In this case, because of the
positive sign of CGI and interaction term variables are acting as a complement, showing
that at a low level, medium level, and at the high level of earnings quality attribute further
strengthen the CGI impact on performance (Schipper & Vincent, 2003).

Likewise, on average, the individual smoothness effect is positive and
significantly affects performance. The interaction terms (CGI*SM) are negative and
significant. Nevertheless, due to the opposite signs of the coefficients of CGI and
interaction terms, the impact is the substitute. CGI and earnings quality attribute to firm
performance due to the substitute nature. However, the significant individual impact of
conservatism and interaction term is significant. The nature of the impact of coefficients
is a complement. It indicates that the overall impact of CGI and interaction terms further
enhances the impact on performance. The positive accounting theory and agency theory
underpins the significant effect on performance.
Regarding firm-specific control variables, the firm's size is negative significant
while the effect of sales growth and age is positive and significant. The results are
consistent with (salah Mohamed, 2018; Tabassam & Khan, 2021). The positive impact of
sales growth indicates that the firm's performance also increases the output, and sales
revenue also increases. Their shareholders frequently force venture-backed organizations
to accelerate their sales growth revenue. Businesses decide to continue to invest the
whole cash flow generated by new buyers (but then some) back into their sales channels.
However, till the stage of maturity, firms are induced by the market to expand their sales
growth. After that maturity stage, the sales start declining and cost increases. Therefore,
in the first phase, sales increase the performance. Correspondingly, the positive impact of
the firm's age on performance indicates that as firm age grows, it adopts new skills,
utilizes its resource to expand its sales, and becomes competitive in the industry. The
firms acquire new technologies and spend more on research and development to boost
profitability.
In the last case, the impact of CGI is measured on accounting-based FP proxy
(ROE). The direct impact of CGI on performance is significant, and the individual effect
is also significantly consistent with the prior empirical studies (Gaio, 2010; Latif et al.,
2017; Saleh, Afifa, et al., 2020). The individual impact of smoothness and its interaction
terms are significant. However, the coefficient sign is negative, and the sign of CGI is
positive. Smoothness as a predictor of earning quality reduces the overall effect of CGI
on performance. Conservatism, on the other side, has an insignificant effect. The findings
demonstrate that conservatism has a significant impact on business performance only
when applied directly and that the interaction effect seems to have an insignificant effect.
To many, the level of earnings is inextricably associated with the extent to which
accounting conservatism is practised.
The moderating or conditional role of earnings quality (conservatism) on the
performance (ROE) is insignificant. The reason may be that the modernized firms do not
follow conservatism practices—the negative impact of conservatism on performance.
Successes introduce volatility into reported earnings, reducing sustainability (Menicucci,
2020a). Moreover, overstated impairment losses (e.g., due to "big bath" charges) increase
subsequent earnings because impaired asset depreciation is abridged when the impaired
assets are replaced—however, earnings decline (Chan et al., 2015). In addition, the firm's
size, sales growth, and age significantly affect performance (ROE). However, the size
coefficient is negative, consistent with the empirical studies (Hamdan, 2020; Saleh et al.,
2020).
The above section considers the different findings of the analytical techniques.
However, several organizations in Pakistan have implemented the guidelines of the 'Code
of Corporate Governance 2002' to continue improving the quality of corporate
governance after the passage of the Surbanx Oxley Act 2002.
First, the findings of mediating or indirect analysis have sown see (Table 3-11). The
direct, indirect, and total effect of OCG demonstrated using slack resources (available,
potential) as a mediator. The findings of the mediating analysis confirmed both partial
and complete mediation in the relationship between OCG and FP.
On the other hand, the EQ stats show that some companies continue to flout the
suggestions. The linkage between corporate governance, earnings quality, and firm value
is estimated panel data fixed effect regression with robust standard error. All in all, the
findings revealed that the EQ attributes positively affect accounting and market-based
financial performance measures (Tables 12-14). The above findings strongly suggest that
higher earnings quality leads to decreased asymmetric information, which lowers the
agency cost and firm's cost of capital and therefore also tends to increase the company's
value. All such results imply that stakeholders' decision-making processes are influenced
by earnings quality. The findings of the multivariate analysis of the relationship among
governance practices and earnings quality characteristics revealed that corporate
governance is an essential tool to improving the reliability and relevance of financial
reporting quality and earnings quality. Such results demonstrated that enhanced company
governance decreases the likelihood of asymmetric information and that it also serves as
a means for monitoring the quality of financial reporting.

Consequently, corporate governance and earnings quality have a significant positive
effect on both financial performance indicators. Many such outcomes propose that both
factors determine a firm's earnings. These findings imply that corporate governance
significantly influences the firm's value and other stakeholders. At the end of the chapter,
the research dissertation summary is tabulated.

Chapter 6: Discussion, Recommendation, and Conclusion
Introduction
The preceding chapter discussed the results of this research and provided
appropriate judgments and findings. A comprehensive analysis of direct, indirect, and
moderating effects has been described in chapter four. The chapter has explained the
study's ramifications. This chapter includes a comprehensive dissertation and
recommendations for good corporate governance practices and enhancements.
Furthermore, this section describes the study's shortcomings and recommended
implications for improvement and further investigation.
Conclusion
The purpose of the research dissertation enumerated above was to visualize and
claiming that a well-governed firm has a high market value while maintaining
profitability is inconsequential. This statement holds across all modelling techniques,
with perhaps the exception of a few distinguishing characteristics. It is broadly
acknowledged that the direct association between corporate governance and the financial
performance of the corporations appears to be much more robust and potent than the
indirect interaction and integration. This claim is especially valid if the findings of a
direct relationship between corporate governance compliances and a company's value are
inconclusive or even less profound in a newly formed governance environment.
Researchers and policymakers are debating whether corporate governance
principles should be swotted in light of recent financial scandals such as the FATF and
Europles, as well as the Pandora Box and Panama Papers. In both developed and
developing economies, government incompetence has become a significant source of

concern. Despite this, due to politically unstable governments, money laundering, and
corruption, the corporate governance system in developing countries has remained weak
and vulnerable. The myth that the governance system is more robust in advanced
industrialised states than in developing countries has also been debunked. Therefore, this
is a prominent place to start the above argument because most financial scams, corporate
failures, and corporate crises have occurred in developed countries. Because of the
scenarios mentioned above, the current study looked into the specific indirect channels
and conditions through which corporate governance can improve its ability to boost and
strengthen the financial efficacy of the corporate sector, especially in a developing
country like Pakistan. According to the current study's findings, putting an appropriate
corporate governance mechanism in place pays off more than not doing so. Following the
discovery of indirect and conditional effects of corporate governance, it was discovered
that the organization's performance could be amplified enhanced through specific
channels and conditions that had previously gone unnoticed in previous studies
conducted in both developed and emerging economies. The study investigated the
indirect impact of corporate governance through the channel-mediator of financial-slack
resources and found that corporate governance significantly improves corporate
efficiency (Tabassam & Khan, 2021). Likewise, the role of earnings quality attributes
also indicated some significant moderating impact on financial performance (Latif et al.,
2017; Menicucci, 2020b).
This research supports the hypothesis that changes in corporate governance
improve the financial efficiency of companies of varying EQ. The low, medium and high
EQ tiers were researched. The 25th percentile, 50th percentile, and 75th percentile were
used for EQ levels. The findings demonstrate that the EQ as a moderator determines the
performance impact of CGI. This is the mystery of this dissertation's investigation on a
developing economy like Pakistan.
Additionally, in a developing country context, it is assumed that companies in
corrupt and tainted geographic areas are more likely to alter earnings through accounting
fraud and deceptive real-world practices such as sales manipulation and overproduction.
According to a current experiment, businesses operating in unscrupulous zones have
lower earnings consistency and are more dependent on favourable abnormal accruals to
meet or beat the general agreement forecasters' earnings estimates (Xu et al., 2019). In
addition, the research findings discovered that companies working chaotically use more
earnings accruals and fewer income-decreasing accruals. Moreover, organisations in
morally bankrupt areas tend to use discretionary accruals to manipulate earnings.
In this respect, we contend that corporations differ in their EQ. It can be low, medium, or
high. The analysis then confirmed the hypotheses. In the case of EQ as a complement,
different levels of EQ amplified the performance impact of CGI. In a substitute role, EQ
has reduced the performance impact of CGI.
The implication of the Study
This study's noticeable and prominent objective is to examine the link between
corporate governance in boosting the quality of financial reporting and the value of firm
estimation in a developing economy where family groups hold the majority of publicly
traded corporations. It is based on an exhaustive set of related corporate governance
initiatives and is then used to thoroughly examine the impact of corporate governance on
financial reporting quality and corporate financial performance. When it comes to

independent non-executive directors, decision-makers will be able to balance the
appropriate organizational business environment, investor protection, and the country's
governance practices climate, among other things.
Implications for Authorities and Regulators
The positive relationship between earnings quality and firm value bolsters the
positive accounting theory, which affirms that earnings quality might ameliorate the
principal-agent problem and boost corporate performance. Growing emphasis on earnings
quality is critical, and incorporating high-quality earnings into Pakistan financial
reporting standards is essential for businesses. The analyses suggest that corporate
governance has a bearing on financial reporting performance, and legislators may
strongly consider the minimally acceptable level of corporate democratic accountability
required. A federal agency, such as SECP, must use the study's research to help
enterprises improve their business performance. The creation of the corporate governance
index is indeed highly crucial. This research addressed the opportunities for sustainable
development of a comprehensive measure of corporate governance. Besides this, this
research will assist companies' top executives in corporate governance and earnings
quality implications into proactive investment choices of resources.
Implications for researchers
The positive association between corporate governance and corporate
performance, the beneficial effect of financial slack on long-run efficiency, and the
noticeable difference of reported earnings on organizational effectiveness confirm the
extreme importance of rigorous monitoring and controlling quality and investors-friendly
financial reporting procedures in Pakistan. Hence, this dissertation should inspire

researchers to pursue research on financial reporting used in emerging market economies
such as Pakistan. Correspondingly, indirect impact and interaction estimation are rare,
occurring only in corporate governance studies. As a result, this study created new
opportunities for economic researchers and academicians alike.
Implications for Theorists
According to positive accounting theory, earnings quality reduces agency
conflicts and thus increases corporate performance. Incorporating earnings performance
indicators into the Pakistani financial reporting framework is worthwhile for the firms.
The findings show that corporate governance affects the quality of financial reporting, so
policymakers should consider the minimum level of corporate governance required. A
statutory body like SECP can use the study findings to improve firm efficiency. Creating
a corporate governance index is also a hot topic today. This study paves the way for an
overall corporate governance metric. This research can also help top management
consider corporate governance and earnings quality in strategic financial decisions.
Correspondingly, there are conflicting views regarding the allocation of
organizational financial resources. Agency theory posits the negative impact of financial
slack and corporate effectiveness owing to the managers' opportunistic behaviour. These
opportunistic managerial attitudes instigate type-I and type-II agency cost glitches.
Another aspect of agency theory regarding slack resources is the conflict between local
and foreign investors due to Pakistan's family-controlled ownership. Conversely,
behavioural, resource-based, and financial-slack theories argued for the slack-
performance impact.
Therefore, Pakistani policymakers should ponder the positive role of behavioural
theorists in eradicating agency conflicts to protect foreign investors and create and
increase new opportunities to attract and invest financial-slack resources. This practice
will enable Pakistan to get a competitive edge in the global financial market.
Limitations of Study
Within the strict boundaries of this entire study purview, a few challenges were
encountered. Among several other factors, broad generalizations study based on the
findings is not mandatory to follow all market segments, as financial services firms were
excluded from the sample due to its unique laws and regularities.
Given the constraints of data availability, the study uses only 10 CG attributes for
the construction of CG-Index. Similarly, we take into account three dimensions of
earnings quality.
In addition, the study only included quantitative attributes of EQ because
qualitative measures use the constructs from a qualitative data which is beyond the scope
of our study.
Further Research
Specific components necessitate immediate study. The main challenges indicate
possible future directions for research:
i. This dissertation determined the precise indirect (mediating) effect of financial
slack and the conditional (moderating) effect of earnings quality attributes on
corporations' financial performance. Attributed to the reason that the regression
model is restricted to variables with a unidirectional relationship (recursive),
structural equation modelling and (Biorn, 2004) estimations for unbalanced panel

data may be more appropriate when a few additional possible factors behave in a
different direction are included (e.g., non-recursive relationship).
ii. As part of the ongoing development of the index, additional elements may be
added to a robust approach to calculating an individual's corporate governance
rating index.
iii. Multiple earnings characteristics could be investigated.
iv. Examining longitudinal impacts may add depth to the findings.
v. The research provided the use of the conventional fixed-effect model for
mediation analysis. It is expected that future studies may require longitudinal and
multi-level mediation investigations through the advanced panel and unbalanced
data, for instance, SUR and SEM.
vi. We did not conduct a random sample of corrupt businesses. Research into
systemic corruption in the future would need more glimpse into the earnings
manipulation of independent enterprises' political corruption.
vii. Qualitative attributes of EQ may be investigated in future.
The ongoing chapter conclude the research with a thorough discussion and
significance of the results borrowed from the analysis section. Furthermore, the chapter
covered the broad spectrum of policy implications, implications for theorists for the
investigations regarding developing countries. Last but not least, the study covered a few
limitations.
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Abstract

This dissertation investigates the impact of corporate governance practices on corporate

exists full mediation between corporate governance and return on equity

smoothness, and conservatism) positively affect corporate performance. Precisely, predictability

financial performance. Furthermore, smoothness positively moderates the association between

governance and financial performance (ROA, and ROE).

benefit shareholders and stakeholders engaged with financial slack.

Keywords: Corporate Governance, Financial Slack, Earnings Quality, Firm

Though meaningful in the contemporary financial sector, business entities

positioning. As little more than a necessary consequence, the top management of

corporations plays an indispensable role in maintaining and promoting a firm's better

American financial breakdowns and a succession of corporate collapses in other

demand for resources is rapidly increasing.

In the prevailing literature on governance-value linkage, most of the studies have

merely focused on the direct effect of corporate governance on corporate performance

emphasize on the direct effect of overall corporate on financial performance of

performance of companies in the Pakistani perspective. The prior investigations on the

CG-value association either have scarcely or partially focused or even entirely

overlooked some influential factors through which corporate governance can

substantially impact the financial performance of the corporations. Consequently, this

dissertation asserts to explore indirect channels and conditions in the governance-

Background of the Study

In developed countries, the governance-performance association of corporations

is a highly contentious and well-researched subject matter. Notwithstanding, recently, in

socio-economic frameworks' performance of every sector are now evaluated by one

and accuracy. A suitable corporate governance mechanism is assumed to help nations

assists enterprises to achieve sustainable corporate performance and financial sector

expansion by improving companies' profitability and strengthening their access to

2019; Vives, 2000).

present-day prevalent, dynamic, challenging, competitive, and globalized environment

serious concerns about implementing corporate governance framework, accuracy, and

Ausloos, 2020; Watts & Zimmarmen 1986, Jensen, 1986).

perspectives, the concept of governance is demonstrated other way around, such as in

China, Pakistan, India, and other growing economies. Corporate governance is an

indispensable and critical framework for corporate effectiveness as it is positively

Conversely, inadequate governance could result in corrupt practices, exchange rate

inappropriate organisational governance mechanisms rapidly compromised the

political structures to enhance corporate governance.

Hence, the notion of corporate governance is defined from a couple of

perspectives. In a narrow sense, corporate governance assumes that shareholders ensure

Nevertheless, in a broader sense, corporate governance is a framework of rights and

So, in a nutshell, corporate scandals in market economies like Enron, WorldCom,

no single structural model impervious to financial catastrophes. Firms with more

independent, impartial boards and higher institutional ownership, it appears, perform

governance is also growing. That is because governance is an essential way of ensuring

According to the (OECD, 2015) recommendations, CG enables corporations to easily

Given the importance of corporate governance, the current research investigates

dimensional implications of corporate governance and firm financial performance in

taken up organisational financial-slack resources – excess or uncommitted financial

resources as a mediating variable to capture the indirect effect of corporate governance

on the performance of the firm. These financial-slack resources positively impact

Additionally, this research has addressed the corporate governance strategies

research considers earnings quality as a moderating variable. On the conditional side,

earnings quality as a moderator or conditional variable in the CG-FP relationship since

corporations, particularly in case of Pakistan.

Motivation Behind the Study

financial resources are fully employed (Sheehan, 2009).

However, corporate governance in Pakistan, where the majority of the businesses

evolving and newly adopted in Pakistan. As it is constantly criticized by various

; 2018). Therefore, it is essential to conduct research on such themes encouraging good

corporate governance in Pakistan because of the increased pressure arising from

globalization and technological advancement in the financial system (Husain, 2018).

Within this context, ample empirical evidence is available on the direct

relationship between corporate governance and the financial proficiency of corporations.