Does Financial Leverage Mediates Corporate Governance and Firm Performance?

This research aims to explore the impact of corporate governance on firm performance while considering financial leverage as a mediating variable. This study was conducted in the non-financial sector of Pakistan, and data was collected from financial statements. A sample of 150 firms was selected from those registered on the Pakistan Stock Exchange during the period of 2011–2021. Results show that corporate governance is associated with firm performance. Board size has a positive relationship with firm performance; as board size increases, the performance of the firm also increases. Board independence is positively and significantly associated with firm performance. Audit committee size is also positively associated with firm performance. Female directors on the board are also associated with positive firm performance. Board independence, board size, audit committee, and female directorship were positively associated with financial leverage. Corporate governance protects the interest of shareholders and transfers risk from shareholders to debt holders. Results show that corporate governance enhances the financial distress cost by enhancing the debt ratio in the financial leverage. Financial leverage partially mediates the board size and board independence with firm performance, while audit committee size and female directorship relationship with firm performance are fully mediated.