Influence of Corporate Governance Mechanisms on Financial Risk and
Financial Performance: Evidence from Refinitiv ESG Database
ALMUATASIM MUSABAH SAIF AL MUTAIRI
College of Graduate Studies,
Universiti Tenaga Nasional,
Jalan Ikram-Uniten 43000 Kajang, Selangor,
MALAYSIA
SUZAIDA BTE. BAKAR
College of Business Management and Accounting,
Universiti Tenaga Nasional,
Jalan Ikram-Uniten 43000 Kajang, Selangor,
MALAYSIA
Abstract: - The present study investigates the relationship between corporate governance (CG) mechanisms and the
financial risk and performance of the companies enlisted in the Refinitiv ESG Database. The study drew on the
agency theory of CG. It evaluated the effect of board diversity (BD), board independence (BI), CEO duality
(CEOD), and gender diversity (GD) on financial risk (FR), comprising of credit (CR) and liquidity risk (LR) and
financial performance (FP) measured by returns on asset (ROA) while controlling for firm size, age, and tangible
assets. Data is obtained from 2009 to 2019 for panel data regression analysis. The study utilized the Hausman test
for model specification. The findings specify that the size of the board positively and significantly impacts FR and
FP. Gender diversity negatively and significantly affects credit risk and FP. Board independence positively and
significantly influenced FP. The study provides significant implications for scholars and practitioners.
Key-Words: - Agency Theory, Corporate governance, Financial Risk, Financial Performance, Refinitv ESG
Database, Panel Regression
Received: August 25, 2022. Revised: July 27, 2023. Accepted: August 28, 2023. Published: September 21, 2023.
1 Introduction
Corporate governance in recent decades has gained
massive attention due to its effective governance
system and principles. Since the financial crisis of
2008, concerns have been raised by financial and
non-financial institutions regarding financial stress
and unpredictability, [1]. The governance mechanism
and the complexities of corporate governance came
to the surface in the monetary research stream. With
the extension of businesses on a global scale, the
firms have extended shareholders, which requires a
legal working framework and governing principles to
ensure their institutional and financial performance.
The recent financial fluctuations during the pandemic
again raised questions on the effectiveness of
corporate governance and the responses it generates.
However, the collected evidence revealed that
corporate governance is an efficient governing
mechanism for risk management, [2]. The
governance attributes supported by corporate
governance, i.e., ownership concentration,
independent directors, board diversity, and dual roles
of the CEO, proved crucial in obtaining a broader
perspective of governance mechanisms in times of
financial instability. In the context of the recent crisis,
mainstream corporate governance leads the debate
towards corporate law, board composition, policy
process, and governance codes, which impact
companies' financial growth and performance, [3].
The unprecedented financial periods thus brought out
numerous interpretations of the linkage between
corporate governance and financial performance
including financial risk, which direct the ways in the
post-pandemic world.
Recently, corporate governance has become a
popular debate in the governance structure of non-
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Almuatasim Musabah Saif Al Mutairi, Suzaida Bte. Bakar
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financial institutions. Due to its financial benefits in
the respective firms, the corporate governance bodies
proved their potential to boost financial growth, [4].
The monetary policy changes and transmission
channels' unreliability bring forth the corporate
governance that offered a balanced medium for
investors and the public. Concerning government
financial regulations, the potential effectiveness of
corporate governance is marked by corporate
transparency and accountability, which gives
leverage to non-financial companies, [5]. Although
corporate governance reduces the concerns about
compliance and control, the shareholders’ value
rights and financial duties have remained under the
critiques, which require wider perspectives and
solutions. The previous studies dealt with the board
characteristics, the authority concentration, and the
guiding policies corporate governance generates for
the stakeholders to achieve long-term business
objectives, [6], [7]. However, corporate sector
financial performance and risk remained a concern
due to shared assets and financial values. An
abundance of literature is present in the context of
financial institutions. However, non-financial
companies have paid little attention to this
relationship.
In modern business, corporate governance is
perceived as good governance practices strengthened
by strategic financial plans. The failure of corporate
governance is directly associated with financial
disasters, which implies that the presence of policies
barely makes an impact unless they are regulated and
executed by strong directors and executives, [6], [8].
In today’s corporate businesses, non-financial
companies contribute to the country’s economic well-
being. Due to their role in the present-day economic
and business sphere, it is necessary to analyze the
impact of board composition, size, diversity, and
functions in determining financial performance and
risk. The gap is identified in the previous literature,
which motivated the primary concern for the present
study. According to previous surveys and studies, [9],
[10], corporate governance in non-financial institutes
needs further development to ensure financial
advantages in corporate business.
The unpredictability in managing finance raises
concerns about the role of the board and their
management regarding corporate governance and
financial performance. The topic has remained the
central point of many scholarly discussions. Different
opinions were produced regarding the board
formation, size, nature, and functioning in association
with corporate governance. The insights obtained
from these studies revealed the role of board
members in determining the financial success and
failure of the corporate sector. Corporate
transparency and accountability is considered
significant while on the other hand, the board size
and gender diversity remained controversial in term
of their influence on corporate governance and
financial risk management.
Drawing on corporate governance mechanisms
and agency theory, the present study aims to analyze
the impact of corporate governance of non-financial
companies on their financial performance and risk.
For measuring the effectiveness of corporate
governance, the selected factors include the board
characteristics i.e. size, board independence, gender
diversity, and the duality of CEO roles. The
individual impact of each factor is examined in
relation to financial performance and risk. The
financial risk is assessed in terms of liquidity risk and
credit risk. Firm size, age, and tangibility of assets
are selected as control variables. For the study, data is
collected from the Refinitiv ESG database of the
non-financial firms having corporate governance data
from 2009-2019. Through panel data analysis, the
fixed and random effects are compared to
demonstrate the impact of corporate governance on
financial performance. The paper is organized
methodically, with the second section as a theoretical
review followed by research methodology, results,
discussion, conclusion, and implications of the paper.
2 Literature Review
2.1 Theoretical Framework
The debate on corporate governance mechanism in
literature drew attention to the major theoretical lens
that provides a sharp perspective on the governance
structure, impacts, and objectives in relation to the
stakeholders and financial factors. Most of the
theoretical concepts of corporate governance are
embedded in the agency theory, transaction cost
theory, stewardship, and stakeholder theories, [11].
Agency theory has solid theoretical grounds which
propose that corporations are mainly the agents of
stakeholders, [12]. The theory had its roots in the
early 70s when the relationship between owners and
shareholders molded into a proper form. The
theoretical concepts are driven by the theory of the
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firm proposed by, [13], leading the agent debate on
the level of business management and governance.
Therefore, the potential conflict between
stakeholders and management polished the
governance principles and directed a strategic way to
pursue the interest by managing the third agents. To
maximize the business profit, agency theory therefore
provides a balanced way fulfilling interest of the
shared parties. Agency theory implies that the
corporate governance can be a mark of success if it
works on a legal framework that converge the interest
in diverse decision making settings, [14].
2.2 Corporate Governance and Financial
Risk
The existing governance standards posit that the
companies primarily focus on internal control and
financial risk indicators to assess their financial
position. The operational status of risk government
thus reduces the default of non-financial institutions.
The previous literature on the association between
corporate governance and financial risk reveals that
corporate governance is positively related to financial
efficiency. The authors in, [15], identified the impact
of corporate governance on corporate risk disclosure.
The data from the non-financial companies of
Indonesia revealed no association between board size
and financial risk in any way. In, [16], the authors
demonstrated that well-governed non-financial firms
are less exposed to default risk. The narrow board
size and the poor governance increase the
information asymmetries between owners and
shareholders, which puts the company at financial
risk. According to, [17], the authors highlighted the
significance of the company’s and board size in
determining the financial risk. The board's
composition decides the policies and manages the
risk, which either puts the company at a competitive
advantage or brings it to financial collapse.
The previous literature also found a strong
association between the financial crisis and corporate
governance policies in terms of board independence
and subservience to the third actors. As the board
members, their policies and successful execution are
the keys to escaping financial collapse; the inter-
dependence of the corporate board raised a question
on the authority and functionality of the board
members. According to, [18], non-financial
companies with independent boards are less likely to
go financially default status. This implies that
independent boards ensure financial security and
reduce the risk in non-financial firms. The board
characteristics, therefore, determine the success of
the decision and policy-making process that regulates
corporate financial growth. The study, [19],
suggested the corporate governance of non-financial
companies for risk information and disclosure. The
board size and the board gender both influence the
financial risk. With the upsurge in contemporary
gender roles, gender diversity and its relation with
corporate governance and financial risk are
highlighted by numerous contemporary scholars like,
[20], who reported that gender diversity in board
composition is significantly related to financial risk
disclosure in corporate sectors. The gender diversity
in corporate governance thus found significant in
leveraging FRD.
Corporate governance practices entail certain
standards that directly impact corporate performance
and structure. Besides the board characteristics, the
ownership and managerial structure does have an
impact on the financial risks. The study, [21],
highlighted that CEO dual roles in non-financial
companies have a minimum impact on financial risk
perception and financial performance. However, it is
also highlighted that ownership concentration in any
format strengthens the CG structure and positively
impacts financial performance. However, the clash
between the duties can result in disoriented
information, which can signify poor growth and
financial performance. The position of CEO duality
is appreciated in respective of all-inclusive board
composition and functions, [22].
H1: Board Size significantly negatively affects the
financial risk of non-financial companies.
H2: Board Independence has a significant positive
impact on the financial risk of non-financial
companies.
H3: CEO Duality has a significant positive impact on
the financial risk of non-financial companies.
H4: Gender diversity has a significant positive
impact on the financial risk of non-financial
companies.
2.3 Corporate Governance and Financial
Performance
The shared assets and property in corporate
governance drew attention to the ownership and
shareholder coordination working under the same
principles. Previous researchers have developed
numerous interpretations and evidence regarding the
impact of corporate governance and firms’ financial
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performance. In, [23], the authors highlighted the
significance of good corporate governance in
optimizing financial achievement. The international
corporate governance run by board nature and
characteristics influences the shareholders and thus
directs the path for growth for both parties.
According to, [24], corporate governance is
positively related to financial performance in terms
of board size and gender. The study, [25], reported
that the board size and nature determine the
governance quality, indirectly impacting the
companies' financial resilience and growth. The
board features form the higher government index
depicting high-quality governance and improved
financial performance.
The previous literature yielded dual results in
terms of board size and significance in determining
financial performance. The confusion lies within the
nature of firms, their financial status along with other
board composition factors. In, [26], the authors found
that the number of board members has no significant
impact on financial performance. However, the
extended executive members tend to deteriorate
financial growth in the context of external directors'
inclusion. Most of the evidence found in the previous
literature remained neutral with respect to board size;
however, in non-financial firms, the presence of more
than the required members is negatively associated
with financial strength. Board independence,
however, is prioritized in comparison with the board
size. The authors in, [27], concluded that an
independent, autonomous, credible board structure
characterizes the right corporate mechanism. These
members regulate the policies that keep the company
on the financial track. The authors in, [28], also
advocated that board independence and corporate
social responsibility positively impact the firm's
financial performance.
Gender diversity in leadership positions caught
the attention of business analysts and scholars to
analyze the difference that gender diversity makes in
corporate business. Most of the previous literature
supports the inclusion of gender executives in leading
companies because of the financial gains it yields.
The study, [29], provided that diverse gender roles in
financial and non-financial institutions positively
impact the firm’s financial performance. In, [30], the
authors also supported the proposition that including
female leadership in executive roles increases the
probability of financial wins. Board gender diversity
is also related to finance quality, as indicated by, [31],
that board gender diversity is effective in
constraining finance management. In, [32], the
authors further pointed out the factors, i.e., females’
age and education, which mark and impact their
performance as a board member, indirectly relating it
with the firm’s growth and performance.
H5: Board size has a significant and positive impact
on the financial performance of non-financial firms.
H6: Board independence has a significant and
positive impact on the financial performance of non-
financial firms.
H7: CEO duality has a significant and negative
impact on the financial performance of non-financial
firms.
H8: Gender diversity has a significant positive
impact on the financial performance of non-financial
firms.
3 Study Methods
3.1 Sample and Data
The current research uses a deductive methodology
to analyze the influence of corporate governance
(CG) mechanisms on financial risks (FR) and
performance (FP) by adopting a quantitative
approach. The present study relies on secondary data
sources. The Refinitiv ESG database has data for
over 15,000 global companies; therefore, it was
utilized to obtain data for non-financial firms,
excluding financial institutions due to their unique
regulatory requirements. A period of 11 years was
selected from 2009 to 2019, excluding 2020-2022,
due to the atypical influence of the Covid-19
pandemic. The study relies on the Refinitiv ESG
database, and publicly available annual reports, as
accessing reliable financial and corporate governance
data for unlisted and inaccessible firms was
challenging.
3.2 Variables Measurement
3.2.1 Dependent Variable
The study aims to gauge financial risk and financial
performance. For this purpose, financial risk is
assessed using two variables, namely liquidity and
credit risk. Credit risk refers to the ratio of total
liabilities compared to the entire assets. Liquidity
risk, on the other hand, is assessed using the current
assets-to-liabilities ratio, [33]. FP is measured using
return on assets (ROA). ROA is a financial metric
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that evaluates a company’s ability to generate
earnings before taxes are accounted for relative to its
total net assets, [34].
3.2.2 Independent and Control Variables
The CG factors are utilized as independent variables,
as shown in Table 1, to examine their influence on
financial risk and performance. The variables’
operationalization is summarized in Table 1.
Table 1. Description of the Variables
Variable
Type
Credit Risk
CR
Dependent
Liquidity
Risk
LR
Dependent
Return on
Assets
FP
Dependent
Board Size
BS
Independent
Board
Independence
BI
Independent
CEO Duality
CEOD
Independent
Gender
Diversity
GENDER
Independent
Firm size
FS
Control
Firm age
FA
Control
Tangibility of
assets
TAR
Control
3.3 Data Analysis
The research employs panel data regression analysis
as the analytical approach which allows researchers
to account for both cross-sectional and time-series
variations in the data, [35]. The specification test
introduced by Hausman is the most widely
recognized method for choosing the appropriate test
in panel data analysis, [36]. This test compares fixed
and random effect regressions to determine the most
suitable model. The fixed effect model investigates
variations in intercepts among individual groups or
entities while assuming consistent slopes and
constant variance across these groups, [37].
Estimation of the fixed effect model is conducted
through Least Square Dummy Variable (LSDV)
regression, involving ordinary least squares along
with a set of dummy variables, and incorporates fixed
effect within estimates. Conversely, the random
effect model presumes that the error term of an entity
is independent of the predictors, permitting time-
invariant variables to function as explanatory factors,
[38]. The econometric methods employed in the
present study have been utilized in prior studies, [39].
Additionally, the regression equations presented in
Equations 1, 2, and 3 express the relationships
between the dependent and independent variables in
the present study. The coefficients (β) in these
equations represent the estimated effects of the
independent variables on the dependent variable. The
error term (ε) captures the unobservable factors that
contribute to the variability of the dependent
variable. The effect of the CG mechanism on credit
risk is shown in Equation 1, followed by the impact
on liquidity in Equation 2. Equation 3 represents the
influence of the CG mechanism on ROA. The fixed
effect was deemed appropriate for models 1 and 2,
whereas panel data regression using cross-section
weight was utilized for model 3.
CRi,t = βo +β1BSi,t + β2BIi,t+ β3CEODi,t + β4 GENDERi,t
+β5 FSi,t +Β6 FAi,t + β7TARi,t + εi,t (1)
LRi,t = βo +β1BSi,t + β2BIi,t+ β3CEODi,t + β4 GENDERi,t
+β5 FSi,t +Β6 FAi,t + β7TARi,t + εi,t (2)
FPi,t = βo +β1BSi,t + β2BIi,t+ β3CEODi,t + β4 GENDERi,t
+β5 FSi,t +Β6 FAi,t + β7TARi,t + εi,t (3)
Where εi, t represents the error term.
4 Results
To assess the stationarity of the variables in the
current study, a unit root test was carried out. The
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results are displayed in Table 2, where the “Levin-
Lin-Chu” test and the “Augmented Dickey-Fuller”
test are shown. According to the null hypothesis, the
unit root is present, whereas the alternative
hypothesis suggests the stationarity of the data. The
results indicate the non-stationarity of the variables at
the level for both LLC and ADF tests. Similarly, at
the first difference, the results imply the absence of
unit root as the results were significant at 1% and 5%
significance levels.
Table 2. Unit Root Test
LLC
ADF
Level
First
difference
Level
First
difference
CEOD
-
12.8707
-81.8752
1484.22
3926.83
BS
38.3188
-283.089
1.453.6
28573.5
BI
-
7.52063
-14.3286
33.1562
67.4936
GENDER
-
12.8707
-81.8752
1484.22
3926.83
CR
-
0.08529
-1193.07
19573.7
36541.7
LR
0.45105
-1722.71
14116.7
31128.6
FP
0.95480
-29.4643
479.676
860.553
FS
148.907
85.0976
17832.6
30943.8
FA
-
496.855
-458.423
47592.6
82386.0
TAR
0.40480
-236089.
12254.8
27847.7
CEO duality was excluded from the three models
due to its low variance in the model. Removing CEO
duality improved the overall variance of the model.
Table 3 exhibits the random effects model for the
dependent variable, credit risk, where the predictors
explain only 4.4% of the variation in CR.
Table 3. Random Effects Model for Credit Risk
Variable
Coeffic
ient
Std.
Error
t-
Statistic
Prob.
C
13.081
88
3.21137
0
4.07361
3
0.000
0
LOG_BOARD_SIZ
E
2.2169
80
0.25579
4
8.66706
3
0.000
0
GENDER
-
0.0033
79
0.08662
8
-
0.03900
8
0.968
9
IND_BOARD
0.3517
00
7.04052
5
0.04995
4
0.960
2
TANGIBLEASSET
S_RATIO
3.1860
70
0.07735
8
41.1860
3
0.000
0
LOG_FIRM_AGE
-
0.2350
75
0.03968
1
-
5.92417
6
0.000
0
FIRMSIZE
-
6.9171
74
0.13341
6
-
51.8465
7
0.000
0
R-squared
0.0442
50
Adjusted R-squared
0.044
189
Therefore, the researcher utilized the Hausman
test to decide the suitability of the models. The
results presented in Table 4 indicate that the alternate
hypothesis is supported with p < 0.05, suggesting the
absence of random effects (RE) in the dataset for
Model 1. This implies that employing panel
regression with fixed effects (FE) will yield robust
results and is an appropriate model.
Table 4. Hausman Test
Test Summary
Chi-Sq.
Statistic
Chi-Sq.
d.f.
Prob.
Cross-section random
687.4110
99
6
0.0000
Table 5 shows the results of the fixed effect
model for CR, and it can be seen that board size and
gender size significantly impact CR. An increase in
board size increases credit risk, whereas increasing
gender diversity reduces credit risk. Independent
board directors have an insignificant effect on CR,
with a p-value of 0.9. Regarding the control
variables, it can be deduced that tangible assets and
firm size have a significant effect, whereas firm age
is insignificant with a p-value exceeding 0.05.
Furthermore, the findings indicate that the model
accounts for 47% of the variation in CR.
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Table 5. Fixed Effect Model for Credit Risk
Variable
Coeffici
ent
Std.
Error
t-
Statistic
Prob.
C
190.756
1
19.73347
9.666626
0.0000
LOG_BOARD_SIZE
1.66523
0
0.304644
5.466158
0.0000
GENDER
-
38.9442
1
4.286512
-
9.085291
0.0000
IND_BOARD
0.28113
0
7.077198
0.039723
0.9683
TANGIBLEASSETS_
RATIO
3.40431
3
0.094534
36.01146
0.0000
LOG_FIRM_AGE
-
0.04978
1
0.043931
-
1.133154
0.2572
FIRMSIZE
-
7.18784
9
0.154767
-
46.44297
0.0000
R-squared
0.51736
0
Adjusted R-squared
0.4690
65
Table 6 presents the random effects model for the
dependent variable, liquidity risk. The model exhibits
a low R-squared value, indicating that the inputs
explain only 1.96% of the movement in LR.
Table 6. Random Effects Model for Liquidity Risk
Variable
Coeffici
ent
Std.
Error
t-
Statistic
Prob.
C
9.15539
8
2.164679
4.229448
0.0000
LOG_BOARD_SIZE
1.11495
5
0.177628
6.276920
0.0000
GENDER
0.09174
2
0.066736
1.374695
0.1692
IND_BOARD
0.30033
3
4.731783
0.063471
0.9494
TANGIBLEASSETS
_RATIO
-
0.09429
6
0.053955
-
1.747677
0.0805
LOG_FIRM_AGE
-
0.16522
5
0.027241
-
6.065209
0.0000
FIRMSIZE
-
3.89493
1
0.092103
-
42.28889
0.0000
R-squared
0.01961
2
Adjusted R-squared
0.0195
50
The Hausman specification test confirmed that
the RE model is unsuitable for Model 2, and the FE
model has superiority over the RE model with p <
0.05 (Table 7).
Table 7. Hausman Test
Test Summary
Chi-Sq.
Statistic
Chi-Sq.
d.f.
Prob.
Cross-section random
422.127
876
6
0.000
0
Table 8 demonstrates the outcomes of the FE
model for LR. The size of the board significantly and
positively influences LR with a p-value less than
0.05. However, it was found that while gender and
board independence positively affect LR, the results
were insignificant, with a p-value surpassing 0.1.
Firm size and tangible assets have a significant effect
on LR. The R-squared value in the table exhibits that
the model explains 55% of the variability in LR.
Table 8. Fixed Effect Model for Liquidity Risk
Variable
Coeffi
cient
Std.
Error
t-
Statistic
Prob.
C
-
4.2267
66
13.2459
1
-
0.31910
0
0.749
7
LOG_BOARD_SI
ZE
0.4757
47
0.20448
9
2.32651
6
0.020
0
GENDER
2.9418
33
2.87728
1
1.02243
5
0.306
6
IND_BOARD
0.3315
90
4.75050
3
0.06980
1
0.944
4
TANGIBLEASSE
TS_RATIO
-
0.1954
32
0.06345
5
-
3.07984
1
0.002
1
LOG_FIRM_AGE
-
0.0315
66
0.02948
8
-
1.07045
4
0.284
4
FIRMSIZE
-
3.4808
40
0.10388
6
-
33.5063
3
0.000
0
Effects
Specification
R-squared
0.5911
58
Adjusted R-squared
0.550
248
For the third model, panel data regression with
cross-section weights is performed as the random
effects model did not yield significant results. The
results confirmed that a positive and significant
association exists between board size and FP. Gender
diversity negatively affects FP, and the result is
significant at a 1% significance level. Board
independence positively impacts FP, and the result is
supported at a 1% significance level. Similarly, it can
be seen that the control variables, tangible assets,
firm age, and size, have a significant effect on the
explained variable, FP. The results indicate that credit
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risk is negatively but significantly associated with FP,
whereas liquidity risk was insignificantly related to
FP. Table 9 results show that the model accounts for
67.8% of the movement in FP.
Table 9. Panel Regression with Cross-Section
Weights for Financial Performance
Variable
Coeffici
ent
Std.
Error
t-Statistic
Prob.
LOG_BOARD_
SIZE
0.18445
5
0.019
046
9.684671
0.0000
GENDER
-
0.17692
4
0.005
478
-32.29584
0.0000
IND_BOARD
1.05914
2
0.067
760
15.63073
0.0000
TANGIBLEASS
ETS_RATIO
0.13525
0
0.007
074
19.11889
0.0000
LOG_FIRM_A
GE
0.00929
5
0.001
695
5.483305
0.0000
FIRMSIZE
0.28219
3
0.013
194
21.38847
0.0000
CREDIT_RISK
-
0.00322
0
0.000
339
-9.493908
0.0000
LIQUIDITY_RI
SK
-4.65E-
06
0.000
586
-0.007932
0.9937
Weighted
Statistics
R-squared
0.67923
2
Mean dependent
var
2.286428
Adjusted R-
squared
0.67835
2
S.D. dependent var
4.227238
S.E. of
regression
0.24243
4
Sum squared resid
149.9922
Durbin-Watson
stat
0.14437
1
5 Discussion
The present study draws on the agency theory to
examine the influence of CG mechanisms on
financial risk and performance. Using credit and
liquidity risks as financial risk indicators, the
research evaluated the effect of board size,
independence of board, CEO duality, and gender
diversity in non-financial companies. The findings
showed that board size significantly but positively
influenced credit and liquidity risks; therefore, the
first hypothesis was not supported. The positive
association of the size of the board with financial risk
aligns with a previous study where board size
positively influenced credit risk in Indonesian banks,
[40], however, other studies have found that a large
board is related to improved credit assessment, [36].
The second hypothesis of the present study presumed
that board independence positively and significantly
impacts financial risk; however, the results yielded an
insignificant effect. Contrary to the finding, previous
research has stated that independent directors are
associated with reduced risks and encourage stability,
[41]. Moreover, it also enhances responsibility and
accountability which is essential in taking innovative
steps and managing bold business operations. While
the third hypothesis proposed the positive impact of
CEO duality, the variable was excluded from the
three models due to low variance. As per the fourth
hypothesis, gender diversity was said to impact
financial risk positively and significantly. The
findings revealed that gender diversity negatively and
significantly impacted credit risk. The result aligns
with previous studies, as it has been revealed that
credit risks are significantly reduced with increasing
the number of women on the board, [42]. It implies
that gender diversity in the boardroom is positively
associated with lower credit risk. The presence of
women on board not only reduces the credit risk but
also impacts financial regulation and risk
management.
Conversely, the influence of gender diversity on
liquidity risk was positive but insignificant. A study
found that board gender diversity was associated with
lower liquidity risk, indicating that women directors
were more inclined toward rigorous monitoring, [43].
In addition, the findings demonstrated that firm size
and tangible assets which were included as control
variables, have a significant influence on financial
risk in non-financial firms while firm age yielded an
insignificant influence on CR and LR.
The current study assessed whether corporate
governance mechanisms affect financial
performance, and the fifth hypothesis assumed that
board size significantly impacts the financial
performance of the firms. Using returns-on-assets as
the proxy, the finding supported the hypothesis with a
positive relationship between board size and ROA.
The outcome aligns with previous studies, as a
positive relationship is reported between board size
and financial performance, which may be accounted
for by increased monitoring and more experience,
[44]. The small board size does not hold the capacity
to manage the financial risk. The board composition
in association with its size is significant in
determining the chances of risk and management.
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The sixth hypothesis presumed that board
independence and financial performance have a
significant association. The results validated the
hypothesis and revealed a positive association
between the two. In, [45], the authors revealed that
board independence positively influences corporate
performance. The ability of the board to exercise
their duties without external constraints allows them
to progress in a direct way. On the other hand, the
unchecked independence of the board members
negatively impacts corporate performance. It is
evident by the previous studies as, [46], observed that
board independence insignificantly influences ROA,
while board size was a significant predictor of ROA.
Prior studies have contradictory findings on the effect
of CEO duality, where some studies have found a
negative influence on firm performance, [47], [48].
In contrast, others have not found a significant
association between the two, [49]. The present study
excluded CEO duality due to low variance.
Regarding the last hypothesis, it was anticipated
gender diversity positively influences financial
performance. However, the findings showed a
significant but negative effect of gender diversity on
ROA. In contrast to the finding, prior studies have
reported that gender diversity has a positive impact
on financial performance, where increasing the
number of female directors on board improves return
on assets, [32]. These results project another
perception that gender diversity without specified
gender roles is insignificant in improving financial
management and performance. Concerning the
control variables, the present research revealed that
tangible assets, firm size, and age significantly affect
financial performance, as previously shown in
studies, [50].
In conclusion, this research study intended to
evaluate the impact of CG mechanisms on financial
risk and financial performance of non-financial firms
and obtained data from secondary sources to analyze
the proposed associations using fixed effects and
panel data regressions. The present findings
contributed significantly to understanding the
association between CG mechanism, financial risk,
and financial performance. The research extended
previous knowledge and provided practical
implications, benefiting regulators, stakeholders, and
scholars, as discussed below.
5.1 Theoretical Contributions
Firstly, this research offers a comprehensive
understanding of the importance of corporate
governance mechanisms. Secondly, the theoretical
contribution of the present study is that it extends and
supports the agency theory, which advocates that
board characteristics and corporate governance play a
crucial role in safeguarding shareholders’ interests. In
addition, the study builds on previous findings by
providing further empirical evidence linking
corporate governance mechanisms to financial risk
and financial performance.
5.2 Practical Implications
The outcomes and results of the current research
provide practical implications for various
stakeholders on how CG mechanisms can support
financial performance and risk handling. The results
of the analysis presented that the size of the board is
positively linked to financial performance; therefore,
board directors, leaders, and decision-makers in non-
financial firms must focus on appropriate board sizes
to capitalize on the expertise and experience of the
board members. Secondly, the study highlighted the
importance of board independence for improving
financial performance. Policymakers and regulators
can utilize the findings to emphasize the inclusion of
independent non-executive board directors for
enhancing monitoring and improving returns on
assets. A fair selection of independent board
members must be considered. While gender diversity
was found to impact financial performance
negatively, it was found to affect credit risk as well
negatively. Hence, gender diversity must be assessed
as per the firm characteristics, and the study provides
practical contribution for regulators and scholars to
further build on the association to capitalize on board
gender diversity. Hence, important implications can
be drawn for practitioners, scholars, and
policymakers to consider the various board
characteristics for increasing financial stability and
performance.
5.3 Limitations and Future Research
Although this research adds to the existing research
body on the association between corporate
governance and financial risks and performance, it is
important to acknowledge its limitations. Firstly, the
study focused on non-financial firms only, so the
findings cannot be generalized to other companies.
The study was limited to four variables: board size,
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independence, CEO duality, and gender diversity.
Hence, some key variables, such as CEO and board
tenure, CEO and board compensation, and board
process, such as the number of meetings, were not
included in this study. Future research should strive
to incorporate these variables to provide a more
thorough examination of the association between CG
mechanism and firm performance.
Additionally, the present study relied solely on
agency theory. Therefore, in future research, scholars
can delve into alternative theories such as stakeholder
theory and shareholder theory. Additional variables
such as board diligence or CEO tenure can be
introduced and considered by incorporating these
theories. This broader approach would enable a more
comprehensive understanding of the complex
dynamics between CG mechanisms that influence
financial performance.
5.4 Conclusion
The examination thoroughly studied the effect of
corporate governance mechanisms on performance in
non-financial firms and financial risk. The results
showed both anticipated and unanticipated outcomes.
A negative association was presumed between board
size and financial risk; however, the link of board
size to liquidity risks and credit showed a positive
relationship. Board independence’s assumed positive
effect on financial risk was not held up. The impact
of gender diversity on performance and financial risk
was significant where the effect on financial
performance showed a negative trend while the effect
on risk was insignificant.
The methodological approach of the study made
the analysis of the CG mechanism’s effect more
thorough. A more detailed examination of both time-
series and cross-sectional variations was allowed by
leveraging the panel data regression. The accuracy of
the results was enhanced by Hausman’s specification
test as it ensured the appropriateness of the selected
model. To cater to the pressing need to assess the
financial risk and performance within firms, the
entity-specific intercept variations of fixed effect
models were applied. Hence, the chosen approach
for the study offered advantages in investigating the
relationships under inspection. The regression of the
panel data allowed for an in-depth assessment of how
CG mechanisms impact performance and financial
risk over a period, apprehending systematic
variations as well as variations specific to the firms.
Fixed effect models minimized potential bias from
unobserved variables while keeping the slopes
constant and accounting for entity-specific intercept
selection. To improve the accuracy of the analysis,
Hausman’s specification test made sure that model
selection was appropriate. To further enhance the
reliability of the findings, cross-section weights in
regression addressed heteroskedasticity.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflict of interest to declare.
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