Key drivers of corporate governance influencing firm performance: capital structure's mediating role

Abstract

This study explores whether capital structure mediates the relationship between corporate governance and firm performance in Indonesia’s non-financial sector. The primary question is: How does capital structure influence the link between corporate governance mechanisms and company performance? Following the 1998 Asian financial crisis, corporate governance became critical for ensuring financial stability and shareholder interests, with capital structure—debt and equity mix—playing a pivotal role in firm outcomes. The research fills a gap by examining this mediation effect, using data from 15 non-financial companies listed on the Indonesia Stock Exchange from 2017 to 2021, sourced from financial statements. Findings indicate that corporate governance factors—board independence, board size, and audit committee—significantly influence both capital structure and firm performance, measured by return on assets (ROA). However, gender diversity shows no significant impact on either. Notably, capital structure does not mediate the relationship between corporate governance and performance, suggesting direct governance effects dominate. The article discusses these results through agency and stewardship theories, analyzing regression models via Partial Least Squares (PLS) and Sobel tests. Key findings highlight the importance of board independence, size, and audit committees in enhancing performance, while capital structure’s negative association with performance underscores debt-related risks. This study contributes to understanding governance dynamics in emerging markets, offering insights for policymakers to strengthen corporate governance practices without relying on capital structure adjustments.