Modeling the dynamic nexus among board characteristics, financial leverage, and firm performance

Content Partner: Lincoln University. This research examines the effects of financing choices made by firms on firms’ performance and board characteristics relationship by performing a mediation analysis in which financial leverage acts as a mediator between board characteristics and firm performance association. Data were collected from ten Asia-Pacific countries (Australia, Hong Kong, Japan, New Zealand, Singapore, China, India, Indonesia, Malaysia, and Thailand) from 2005 to 2019, consisting of 52,150 firm-year observations. The study uses pooled ordinary least square (OLS) analysis to investigate the mediating impact of firm leverage on the association between board characteristics and firm performance measures while fixed-effects regression estimation is employed for the robustness test. The study employs return on assets (ROA) as the dependent variable which is replaced with Tobin’s Q ratio on alternate analyses. The findings show that all the board characteristics except board size have a significant negative effect on firm leverage which suggest that an independent and gender diverse board reduces the firm reliance on debt financing. However, CEO duality is negatively associated with the level of debt financing implying that CEO’s presence on corporate boards negatively affect decisions to use debt financing. We also find that all board characteristics except CEO duality are positively associated with firm performance. Lastly, we find that financial leverage does not fully mediate the relationship between board characteristics and firm performance. This study offers insights to authorities, regulators, and policy-makers to develop better corporate governance rules and regulations as well as guidance to firms in the construction and implementation of their internal corporate governance policies.