Corporate Governance, Capital Structure, and Financial Performance: Investigating the Moderating Role of Financial Risk in Pakistan’s Pharmaceutical Industry

Abstract

The relation between corporate governance and capital structure with financial performance in the pharmaceutical industry of Pakistan is explored in a quantitative manner and whether financial risk acts as moderating variable. The design is structured and synthesizes published panel evidence for the Pakistan Stock Exchange firms, with sector studies as the key benchmark, and expanded non-financial panels as necessary given the small size of samples of pharmaceutical firms. In terms of performance, the assets are used by return on assets and the equity is used by return on equity. Governance is understood when measured by independence, size of the board, quality of the audit committee, ownership concentration and compliance with the corporate code. Read capital structure via total debt, long term debt, debt to equity. Financial risk is interpreted as leverage pressure, interest burden and instability of earnings. The hypotheses are organized into three sets: agency theory, trade off theory and pecking order theory. Governance performance is positively associated with published performances in one pharmaceutical panel, and the total debt association is negative, while the long term debt association is positive, and the relationship between governance and the total debt association weakens as the total debt increases. The following 10 recommendations are made to boards, creditors and regulators. The article is not a substitute for a new firm level estimate. It offers the published coefficients' support, qualification, or leaving open for each hypothesis.