The Relationship between Corporate Governance Quality and Firm Performance: The Moderating Role of Capital Structure

Round 1

Reviewer 1 Report

My recommendation is to update the bibliographical references in the literature review.

Important citations are missing from papers on corporate governance and also on current non-financial information developers in Europe.

The journal Sustainability has published studies in this field. In addition, there is research that relates the reports of non-financial information and financial performance.

I recommend the authors review the research;  

“Disclosure of environmental, social, and corporate governance information by Spanish companies: compliance analysis".

https://doi.org/10.3390/su14063254

 

Author Response

Comments and Suggestions for Authors

My recommendation is to update the bibliographical references in the literature review.

Important citations are missing from papers on corporate governance and also on current non-financial information developers in Europe.

The journal Sustainability has published studies in this field. In addition, there is research that relates the reports of non-financial information and financial performance.

I recommend the authors review the research;  

“Disclosure of environmental, social, and corporate governance information by Spanish companies: compliance analysis".

https://doi.org/10.3390/su14063254

Response:

Thank you for your comment, the mentioned study and several research contributions from the Sustainability Journal have also been benefited from and cited.

Reviewer 2 Report

The paper under title “Corporate Governance Quality and Firm Performance: The Missing Role of Capital Structure” examines how capital structure moderates the association between corporate governance and financial performance. The study utilizes a sample of listed firms from the Amman stock exchange over the period 2014-2019. The paper could be of interest to researchers focusing within developing markets, but the paper has several weaknesses in terms of theoretical background, research design and contribution to existing literature. The paper requires a revision before reaching its publishable form, so I urge authors to consider the following comments and revise-resubmit the paper.

1.      Firstly, the term “missing role” on the title referring to the moderating impact of capital structure is somehow inappropriate. Missing in what terms? Please consider revising it.

2.      Also, in the abstract lines 10-12 there seems to be a repletion on the study’s findings. Please revise the repeated text.

3.      In the introduction (line 30) authors refer to a crisis. Which crisis they are pointing to? Please specify.

4.      Please check the consistency and completeness of the reference list. For example, the citation of Al-Najjar and Clark (2017) (introduction line 31) is missing from the reference list.

5.      Another important issue that is not addressed on the introduction is the theoretical connection (or moderation) of capital structure to corporate governance and financial performance. Why is this moderating impact justified? Under which terms? A sound theoretical framework is necessary in the introduction of the study.

6.      Also, the motivation of the study is not adequately justified. Why authors select Jordan as the main focus market? On line 85 it is mentioned that Jordan has a unique institutional environment, but no further explanation is provided. This renders the motivation and contribution of the study to existing literature.

7.      On the literature review section, authors need to elaborate more on the stakeholder theory which is a competent theoretical framework on this matter. The discussion on this section is mainly covering findings from previous studies yet it is not sufficient the theoretical discussion on the matter. The following studies (which are fairly indicative) could potentially help authors towards this direction.

-Dimitropoulos, P. and Tsagkanos, A. (2012), “Financial performance and corporate governance in the European football industry”, International Journal of Sport Finance, Vol. 7, No. 4, pp. 280-308.

-Acero, I., Serrano, R. and Dimitropoulos, P. (2017), “Ownership structure and financial performance in European football”, Corporate Governance, Vol. 17, No. 3, pp. 511-523.

- Scafarto, V. and Dimitropoulos, P. (2018), “Human capital and financial performance in professional football: the role of governance mechanisms”, Corporate Governance: The International Journal of Business in Society, Vol. 18, No. 2, pp. 289-316.

8.      The section “capital structure as a moderator” does not provide a clear theoretical connection between CS and governance-performance relation. The fact that CS is not considered before by the literature does not mean that is a valid reason for this variable to be considered as a moderator. Also, the positive impact of CS on the examined relation (on H2) is not supported by the discussion on that section. The studies by Muhammad et al. (2021) and Dimitropoulos (2014) could help on that part of the text.

-Dimitropoulos, P. (2014), “Capital structure and governance of soccer clubs: European evidence”, Management Research Review, Vol. 37, No. 2, pp. 658-678.

-Muhammad, H., Migliori, S., Mohsni, S. Capital structure and firm performance: The role of corporate governance (2021) International Journal of Business Governance and Ethics, 15 (4), pp. 436-458. DOI: 10.1504/IJBGE.2021.118595

9.      There are several discrepancies on the text. On line 445, authors mean “correlation” instead of “CGI” results. Also, on line 479 author use two performance indicators and not three as mentioned on the text. On line 490, the term “INTERACTION” is not mentioned on model (2) as mentioned on the text. Please use consistent terminology as to the variables names in order not to confuse the reader.

10.   Another issue related to the sample selection is what is mentioned in lines 469-470 where authors refer to the winsorization of the 5^th and 95^th percentiles of extreme values. This detail is not included in table 1. Please verify that the 570 firm-year observations are after the final deletion of extreme values.

11.   Authors on the model’s section have to express their expectations regarding the variables and make a connection with the research hypotheses.

12.   Moreover, another important issue is that as the interaction between CS and CGI is done on the second model, is very difficult to interpret the moderating impact of CS. The opposite could also be inferred as if someone wanted to examine the moderating impact of CGI on the capital structure-financial performance relation. For this reason, it would be useful to run model 2 separately between groups of firms with high and low CS and see the difference on the sign and significance of coefficients. Alternatively, authors can create a dummy receiving 1 for the high CS group and interact it with CGI and then you can judge the moderating impact of CS.   

13.   Furthermore, following the previous comment, authors need to explain the negative coefficient of the CS variable on tables 6 to 8, and even justify theoretically the interaction term.

14.   On lines 601-602 is mentioned “the interaction term offers greater control over management that reduces managerial opportunistic behaviour and consequently minimizes agency costs”. Authors have not examined managers opportunistic behavior on their results, so they cannot infer any such argument. Please revise the text.

15.   On line 645, author mentioned that they have used the Zhang et al. hierarchical regression. Why this type of regression is necessary for the specific research design?

16.   Have authors controlled for endogeneity on the results using a 2SLS or GMM estimation? See the studies by Acero et al. (2017) and Dimitropoulos (2014) for more details.

17.   Authors need to check the numbering of the variables on table 5.

Author Response

Comments and Suggestions for Authors

 

The paper under title “Corporate Governance Quality and Firm Performance: The Missing Role of Capital Structure” examines how capital structure moderates the association between corporate governance and financial performance. The study utilizes a sample of listed firms from the Amman stock exchange over the period 2014-2019. The paper could be of interest to researchers focusing within developing markets, but the paper has several weaknesses in terms of theoretical background, research design and contribution to existing literature. The paper requires a revision before reaching its publishable form, so I urge authors to consider the following comments and revise-resubmit the paper.

1. Firstly, the term “missing role” on the title referring to the moderating impact of capital structure is somehow inappropriate. Missing in what terms? Please consider revising it.

Response:

Thank you for the comment and we have addressed the comment by including the title to "The Relationship between the Corporate Governance Quality and Firm Performance: The Moderating role of Capital Structure". Also, further discussion on the moderating role of capital structure was added.

2. Also, in the abstract lines 10-12 there seems to be a repletion on the study’s findings. Please revise the repeated text.

Response:

Thank you for the comments, we reviewed the that statements have correct them accordingly.

3. In the introduction (line 30) authors refer to a crisis. Which crisis they are pointing to? Please specify.

Response:

Thank you for your comment. The requirement was clarified as the global financial crisis 2008.

4. Please check the consistency and completeness of the reference list. For example, the citation of Al-Najjar and Clark (2017) (introduction line 31) is missing from the reference list.

         Response:

         The reference list has been checked and the missing references have been added

5. Another important issue that is not addressed on the introduction is the theoretical connection (or moderation) of capital structure to corporate governance and financial performance. Why is this moderating impact justified? Under which terms? A sound theoretical framework is necessary in the introduction of the study.

Response:

Thank you for your comment. Significant modification was don to the theoretical background and the moderation role of the capital structure. To address this comment. We have included the following sentence, Please refer to the changes in the introduction section as well as Page 2+3 (Red color).

6. Also, the motivation of the study is not adequately justified. Why authors select Jordan as the main focus market? On line 85 it is mentioned that Jordan has a unique institutional environment, but no further explanation is provided. This renders the motivation and contribution of the study to existing literature.

      Response:

      Thank you for the comments, we have addressed accordingly. Please refer page  4+5 (red color).

7. On the literature review section, authors need to elaborate more on the stakeholder theory which is a competent theoretical framework on this matter. The discussion on this section is mainly covering findings from previous studies yet it is not sufficient the theoretical discussion on the matter. The following studies (which are fairly indicative) could potentially help authors towards this direction.

-Dimitropoulos, P. and Tsagkanos, A. (2012), “Financial performance and corporate governance in the European football industry”, International Journal of Sport Finance, Vol. 7, No. 4, pp. 280-308.

-Acero, I., Serrano, R. and Dimitropoulos, P. (2017), “Ownership structure and financial performance in European football”, Corporate Governance, Vol. 17, No. 3, pp. 511-523.

- Scafarto, V. and Dimitropoulos, P. (2018), “Human capital and financial performance in professional football: the role of governance mechanisms”, Corporate Governance: The International Journal of Business in Society, Vol. 18, No. 2, pp. 289-316.

Response:

Done as suggested. Please refer page  4+5 (red color).

8. The section “capital structure as a moderator” does not provide a clear theoretical connection between CS and governance-performance relation. The fact that CS is not considered before by the literature does not mean that is a valid reason for this variable to be considered as a moderator. Also, the positive impact of CS on the examined relation (on H2) is not supported by the discussion on that section. The studies by Muhammad et al. (2021) and Dimitropoulos (2014) could help on that part of the text.

-Dimitropoulos, P. (2014), “Capital structure and governance of soccer clubs: European evidence”, Management Research Review, Vol. 37, No. 2, pp. 658-678.

-Muhammad, H., Migliori, S., Mohsni, S. Capital structure and firm performance: The role of corporate governance (2021) International Journal of Business Governance and Ethics, 15 (4), pp. 436-458. DOI: 10.1504/IJBGE.2021.118595

Response:

Thank you for your comment, the suggested references were used to support the arguments about (Capital Structure as a Moderator). Also, additional justification for the role of capital structure was added and this section was subject to significant modification.

 

9. There are several discrepancies on the text. On line 445, authors mean “correlation” instead of “CGI” results. Also, on line 479 author use two performance indicators and not three as mentioned on the text. On line 490, the term “INTERACTION” is not mentioned on model (2) as mentioned on the text. Please use consistent terminology as to the variables names in order not to confuse the reader.

      Thank you for the comments, we have addressed accordingly.

 

10. Another issue related to the sample selection is what is mentioned in lines 469-470 where authors refer to the winsorization of the 5^thand 95^th percentiles of extreme values. This detail is not included in table 1. Please verify that the 570 firm-year observations are after the final deletion of extreme values.

      Response:

In the field of statistics, it is well known that the mean is quite sensitive to extreme values and, consequently, the sample mean is not a robust estimator of the population mean. So, the mean value may not be very representative in data where outliers may occur. Thus, the two of the most popular are the trimmed means and the Winsorized means. In the trimmed means, the lowest and the highest values are removed before calculating the mean whereas in the Winsorized means they are replaced with the less extreme adjacent values (Llamazares, 2019).

11. Authors on the model’s section have to express their expectations regarding the variables and make a connection with the research hypotheses.

Thank you for your comment. Based on the research hypothesis and theories applied, the expected association between variables was stressed in this section as follows; “This study considered two accounting-based performance indicators for non-financial firms: ROA and ROE (Tshipa et al., 2018; Wahyudin & Solikhah, 2017; Zhang et al., 2014), which are expected to be enhanced by higher governance and monitoring quality. Also, in order to capture CG quality, this study depended on the CGI constructed by Mansour et al. (2020) as the main explanatory variable of interest, while CS is the moderator variable which expected to exert a positive interaction effect on the governance/performance association.”

12. Moreover, another important issue is that as the interaction between CS and CGI is done on the second model, is very difficult to interpret the moderating impact of CS. The opposite could also be inferred as if someone wanted to examine the moderating impact of CGI on the capital structure-financial performance relation. For this reason, it would be useful to run model 2 separately between groups of firms with high and low CS and see the difference on the sign and significance of coefficients. Alternatively, authors can create a dummy receiving 1 for the high CS group and interact it with CGI and then you can judge the moderating impact of CS.   

      Response:

     Thanks for the suggestion, we appreciate it.

 

13. Furthermore, following the previous comment, authors need to explain the negative coefficient of the CS variable on tables 6 to 8, and even justify theoretically the interaction term.

      Response:

     Thank you for the comments, we have addressed accordingly. Please refer Page 22+23 (Red color).

 

14. On lines 601-602 is mentioned “the interaction term offers greater control over management that reduces managerial opportunistic behaviour and consequently minimizes agency costs”. Authors have not examined managers opportunistic behavior on their results, so they cannot infer any such argument. Please revise the text.

      Response:

     Thank you for your comment, the statement related to the managerial opportunistic behaviour was removed as suggested.

    

15. On line 645, author mentioned that they have used the Zhang et al. hierarchical regression. Why this type of regression is necessary for the specific research design?

     Response:

    Thank you for your comment, this point has been clarified as follows:

“…Third, following Zhang et al. (2014), a hierarchical regression analysis was conducted to confirm the results obtained from the multivariate regression analysis regarding the moderation effects. Previous literature such as Amrah et al. (2015), Baron and Kenny (1986) and Ilhan Nas and Kalaycioglu (2016) proposed that hierarchical regression analysis is a frequently used technique in investigating moderating effects. According to Baron and Kenny (1986), the statisticians and academic scholars primarily have stimulated the use of hierarchical regression analysis over the practice of comparing correlations between groups when the group variable is naturally categorical because different correlations between groups may reflect differential variances between groups rather than true moderator effects, which means that examination of moderating effect of CS needs to inspect the unique influence of the interaction term (CGI*CS) by sequentially excluding the explanation for the variation in the firm performance (ROA and ROE) from the independent variable of CGI and the moderator of CS.…”

16. Have authors controlled for endogeneity on the results using a 2SLS or GMM estimation? See the studies by Acero et al. (2017) and Dimitropoulos (2014) for more details.

       Response:

       Thank you for your comment, this point has been clarified as follows:

“…In addition, to infer correctly, we re-examine the main analysis (direct relationship between CGI and performance) using a well-developed dynamic generalized method of moments (GMM) estimator to overcome possible endogeneity concerns. Moreover, many scholars (e.g., Brown et al., 2011; Muhammad et al., 2021) argue that the governance-performance nexus may be biased as they fail to control for potential endogeneity concerns. In this regard, an area of CG and corporate performance has been explored in-depth, yet very few papers have used GMM estimators to alleviate endogeneity concerns (Akbar et al., 2016; Muhammad et al., 2021).

Second, thus, there may be a chance of reverse causality in the results due to which changes in the internal features of firms can be accountable for the CG quality and corporate performance relationship. In order to address these endogeneity problems and to infer correctly, this present study used two-step system GMM (Second-order transformation) as an additional analysis to achieve robustness and generalizability of main outcomes reported in Table 6. In order to acquire estimates of two-step System GMM we run xtabond2 in Stata 14 (Roodman, 2009).  The two-step system GMM models are vigorous to heteroscedasticity, autocorrelation and can take care dynamic nature of endogeneity than those generated by fixed-effect model (Akbar et al., 2016; Al-ahdal et al., 2020; Muhammad et al., 2021).   

[Insert Table 8 here]

In brief, the GMM estimator controlled for different kinds of endogeneity by including past dependent variable (lagged value) as an explanatory variable in the model for ROA, and these lagged values are hired as instruments variable to tackle endogeneity problems (Akbar et al., 2016; Muhammad et al., 2021).

As table 8 shows, this study applies standard diagnostic tests (Hansen tests and Arellano-Bond test for first-order and second-order correlation) to determine that GMM estimator can be an appropriate econometric model to apply or not (Muhammad et al., 2021). As reported in table 8, results of these tests implies that instruments involved in the GMM estimator are exogenous, and no auto-correlation (or no serial correlation) in model, which indicates that GMM estimator is valid to use. Table 8 shows that GMM estimator produces the same outcomes that were shaped by fixed-effects regression, except FAGE and MTBA. Thus, we show that our outcomes are unlikely confounded by endogeneity problems. Therefore, tend to be less vulnerable to endogeneity. As the results, the relationship between CGI and corporate performance is not spurious due to endogeneity in Jordanian context.…”

17. Authors need to check the numbering of the variables on table 5.

     Response:

     Thank you for the comments, we have addressed accordingly.

 

 

Round 2

Reviewer 2 Report

I would like to thank the authors for exerting significant effort to incorporate all comments raised by the reviewers. The paper has improved materially relative to its initial draft. I believe it has reached its publishable form.

I urge authors to make a final check for any syntax or editing mistakes and the consistency and completeness of the reference list.