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Article

Determinant Factors of Corporate Governance on Company Performance: Mediating Role of Capital Structure

by
Ria Ria
Economic and Business Faculty, Universitas Nasional, Jakarta 12520, Indonesia
Sustainability 2023, 15(3), 2309; https://0-doi-org.brum.beds.ac.uk/10.3390/su15032309
Submission received: 16 November 2022 / Revised: 15 January 2023 / Accepted: 21 January 2023 / Published: 27 January 2023
Browse Figure
Review Reports Versions Notes

Abstract

:
The purpose of this study is to investigate the role of capital structure as mediating variable in the relationship between corporate governance and company performance. Data for this study was obtained from financial statements and was done in Indonesia’s non-financial sector. From among the companies listed on the Indonesia Stock Exchange between 2017 and 2021, 15 companies were chosen as a sample. Findings show that corporate governance (board independence, board size, and audit committee) were significantly associated with capital structure and company performance, but gender diversity has an insignificant relationship with capital structure and company performance. Moreover, this research found that capital structure is not able to mediate the effect of corporate governance (board independence, board size, audit committee, and gender diversity) on company performance.

1. Introduction

Since the financial crisis of 1998, particularly in Asia, regulations governing corporate governance are crucial to financial decisions. To lessen office clashes, corporate administration now joins oversight—which is viewed as useful and beneficial—bearing and control [1]. The primary objective of corporate governance is to guarantee that the business acts in the best interests of its shareholders [2]. A company’s capital structure, or CS, is the proportion of equity and debt resources used to fund the business [3]. Since a company’s performance is correlated with its capital structure, few ideas suggest that it should be a crucial decision made by directors. Therefore, in addition to affecting the company’s profitability, financial issues caused by capital structure have a significant impact on macroeconomic outcomes. For example, [4] shows corporate governance mechanisms have a positive or negative impact on performance, but also sometimes there is no effect. Information from previous studies on corporate governance has primarily focused on the effects of corporate governance as a factor on performance [1,4]. This is also reinforced by several previous studies which stated that variables of corporate governance such as board size, diversity, and board independence have a relationship to performance [5,6,7,8,9]. Other studies stated that there is a negative relationship [10,11,12], while still others stated that there is no relationship [13]. However, previous studies did not investigate the combined effect of corporate governance and capital structure on a company’s performance [14] and produced contradictory results. As a result, it is necessary to investigate the effect of corporate governance on performance while mediating capital structure.
The numerous scandals that were traced throughout a variety of industries as a result of the 1998 financial crisis led to the development of corporate governance in Indonesia in 1999 [15]. Through a Decree of the Coordinating Minister for Economic Affairs, Finance, and Industry in 1999, the National Committee on Corporate Policy Governance (KNKCG) convened 30 public and private sector representatives to recommend national GCG principles. To include governance of the public sector (public governance), KNKCG was renamed Committee National Governance Policy (KNKG) in 2004. The National Good Corporate Guidelines Governance (GCG National Guidelines) was first published in 1999 by KNKG, and subsequent revisions occurred in 2001 and 2006. In Indonesia, public sector businesses have adopted guidelines that are moving in the right direction. GDP and overall economic expansion have been boosted by improved corporate governance.
Even though [16] stated that the majority of previous studies on corporate governance structure were focused on non-financial firms, the majority of the evidence in Indonesia’s literature review pertains to the impact of corporate governance on manufacturing company performance [17,18]; the Performance of Banks and Corporate Governance [19,20]; the moderating effect of corporate governance on company performance [21]; impact of corporate governance on the financial performance of all companies in the non-financial sector that are listed on the Indonesia Stock Exchange [22]; and Corporate Governance and the performance of State-Owned Enterprises [23,24,25]. As a result, there is no connection between corporate governance, company performance, and capital structure mediation in Indonesia’s non-financial sector as a whole. This study adds to the non-financial literature on the connection between corporate governance and company performance in Indonesia. In the non-financial sector, this study is the first attempt to investigate the mediating role of capital structure in corporate governance and company performance.
For the following reasons, the question of whether capital structure mediates between corporate governance and company performance is significant. First, poor company performance may be directly impacted by corporate governance. Examining the capital structure as a mediator for company performance could elaborate on the mixed results of the effect of corporate governance on company performance if the indirect relationship between corporate governance and performance prevails. Second, we would be able to make a powerful case for how changes in corporate governance can affect a company’s performance if we used the capital structure as a mediator. The non-financial sector of Indonesia is concerned about the study on corporate governance practices’ impact on company performance while mediating the role of capital structure, so this study could significantly impact stability.
The following is the arrangement of the remaining portion of this research investigation: a comprehensive literature review on corporate governance, capital structure, and company performance is elaborated in the second section. Following this, the research methodology, results, discussion, and conclusion are explained in greater detail.

2. Literature Review

The grand theories used in this study are agency theory and stewardship theory by [4] which uses these theories as the bases of a conceptual model. In general, agency theory predicts a relationship between corporate governance and capital structure [26]. Besides that, according to the agency theory, corporations can improve their financial performance by reducing costs. Agency theory further proposes that the positions of CEO and chairperson be separated, while the stewardship theory proposes that both positions be combined. According to the stewardship theory, directors can achieve organizational goals for shareholders by optimizing their utility instead of just self-serving [4]. Further, the relationship between a firms’ performance and capital structure and corporate governance practices is the subject of additional research. The company’s financial proportions are depicted by the capital structure, which distinguishes between owned capital (shareholders equity), which comes from long-term debt (long-term liabilities), and owned capital, which comes from long-term debt (long-term liabilities) [27]. According to several studies, the Debt-to-Equity Ratio (DER), a ratio that describes a company’s capacity to guarantee all of its debt, can be used to measure this capital structure. The following definition of corporate governance is provided by [28]: "a set of processes established and implemented to regulate management choices and actions that may increase firm performance.” The Corporate Administration structure determines the appropriation of the right and obligations among various members in the enterprise, like the board, chiefs, investors, and different partners, and explains the guidelines and strategies for settling on choices on corporate undertakings. As capital providers and decision-makers with varying degrees of authority, various participants in corporate governance are regarded as crucial. According to several studies, corporate governance can be measured or proxied by factors like board independence, board size, audit committee diversity, and gender diversity. Therefore, this study attempted to identify indicators of corporate governance factors that are clearly described as follows:

2.1. Board Independence and Capital Structure

Board independence is essential in both non-financial and financial firms corporate governance [29]. According to a study by [30], there is a significant negative correlation between board independence and capital structure; independent directors emerged to have an important role in ensuring maximum efficiency in Saudi-listed firms to advance a low level of leverage. A study by [31] found that board independence is positively related to leverage. According to the findings of [32], board independence shows an inverse relationship with leverage in France and Germany but is positively related to leverage in the UK. The previous research is also supported by [33] which showed that board independence is positively associated with capital structure. We test the following hypothesis in light of the preceding discussions:
Hypothesis 1. 
Board independence has a positively significant relationship with capital structure.

2.2. Board Size and Capital Structure

According to [34], in Chinese real estate-listed companies, there is a strong correlation between board, firm size, and capital structure. They argued that firms with efficient board sizes must have a superior real estate capital structure. Another exploration [31] expressed that a positive relationship is found between board size and leverage among UK firms. On the other hand, previous research by [35] demonstrated a negative correlation between board size and capital structure in Thai-listed businesses. A study by [36] looked at businesses in three countries with different corporate governance—Japan, France, and Germany—and found a negative correlation between board size and debt financing. Even though some previous research showed a gap in the result, [33], in their research, showed that board size was positively associated with financial leverage. We test the following hypothesis in light of the preceding discussions:
Hypothesis 2. 
Board size has a positively significant relationship with capital structure

2.3. Audit Committee and Capital Structure

Decisions made by audit committees are regarded as crucial to the establishment of a company’s capital structure policy. Even according to [37], an audit committee does not affect the capital structure. But according to research by [38], companies with a large audit committee size have a higher debt-financing ratio in their capital structure. Another study [39] demonstrates that an audit committees’ credibility for capital structure is very high. The debt ratio is increased by the audit committee to improve bank external monitoring and financial regulation. These are also supported by [33] in their research which shows that an audit committee is positively associated with capital structure. We test the following hypothesis in light of the preceding discussions:
Hypothesis 3. 
Audit committee has a positively significant relationship with capital structure.

2.4. Gender diversity and Capital Structure

According to previous studies [40,41], gender diversity in board discussions will have an impact on the board’s capacity to provide better oversight of a firms’ activities and disclosure. However, [40] contends that the unstructured nature of the board’s decisions will be lessened by gender diversity on the boards. Women’s presence, on the other hand, may enforce the disciplining effect of debt in UK businesses, preventing leverage from reaching managers’ desired levels [42]. Then, [43] discovered that female directors are less willing to take risks. According to these studies, having women on the board will lead to low-risk strategies that lower the agency’s debt cost. The previous research was also supported by [44,45]; in their research they showed that gender diversity positively impacts capital structure. We test the following hypothesis in light of the preceding discussions:
Hypothesis 4. 
Gender diversity has a positively significant relationship with capital structure.

2.5. Board Independence and Company Performance

Independent directors on the board were found to be important in corporate governance in literature [46], while [47] stated that a large body of corporate governance literature indicates that having more independent directors on the board improves firm performance. As indicated by [48], board independence is irrelevantly affecting the efficiency of firms in India on all levels of productivity proportion. They argued that consensus-based board decisions can improve company performance. According to the research that was presented by [39], Pakistani-listed companies experienced declining profitability related to return on assets when board members worked independently. A study carried out by [49] indicated that board independence had a beneficial effect on the performance of banks. Then, a study [50] suggested that board independence improves energy-related company performance. This is also supported by research cited in [29] on board independence to enhance bank performance. The previous research was also supported by [33] in their research which showed that board independence is positively associated with company performance. We test the following hypothesis in light of the preceding discussions:
Hypothesis 5. 
Board independence has a positively significant relationship with company performance.

2.6. Board Size and Company Performance

The size of the board is thought to be an important aspect of corporate governance that affects how well a company does. According to [48], larger board sizes have a significant impact on a company’s performance in Asia, Africa, Europe, Latin America, North America, and Oceania. According to research conducted by [50], board size increases profits at all levels of performance—low, moderate, and high—in Indian businesses. In contrast, ref. [51] demonstrates that a larger board size increases expenses related to BOD salaries and personal interests, resulting in a decrease in company performance. A company performance indicator is a result of good governance in the telecommunications sector, as evidenced by [40]. The members of the board come from a variety of industries and backgrounds. Because the company’s policy decisions are influenced by the opinions of every board member, the board’s size forces a diverse group of individuals to work together to arrive at sound decisions. The previous research was also supported by [33] in their research which showed that board size is positively associated with company performance. We test the following hypothesis in light of the preceding discussions.
Hypothesis 6. 
Board size has a positively significant relationship with company performance.

2.7. Audit Committee and Company Performance

According to the research that was carried out by [51], an audit committee had a positive impact on the company’s performance in the form of profitability of Jordanian businesses. They looked at dependency theory and used similar language to say that an audit committee works better if it gets bigger and has a positive effect on the company’s profit. The researcher [52] argued that a firms’ audit committees are compelled to discover unfavorable financing activities by a powerful CEO. Assuming the review panel stringently controls extortion, firm benefit consequently improves, while [53] displayed from his examination that a review audit committee affects a company’s performance as per the scholastic local area. The previous research was also supported by [33] in their research which showed that an audit committee is positively associated with company performance. We test the following hypothesis in light of the preceding discussions:
Hypothesis 7. 
Audit committee has a positively significant relationship with company performance.

2.8. Gender Diversity and Company Performance

According to the findings of a study by [54], female directors perform better than male directors in Dutch businesses. According to [55] research, the presence of women on the boards of directors of UK financial institutions had a positive and significant effect before the financial crisis in 2000–2006. However, following the financial crisis, it demonstrates that the number of women on the board of directors has no significant impact on the performance of the company. According to [56] research, increasing the proportion of women on corporate boards in Europe can indirectly boost both the value of the company and its performance. Ref [57]’s study also demonstrates that by promoting corporate investment on social media, the presence of women on the board of directors positively influences the risk and performance of the business. Even though the numbers are still relatively small, ref. [58] research also demonstrates that gender diversity has a relationship with company performance in Turkey. According to research carried out by [59], gender diversity has an impact on the performance of Turkish companies operating in the financial sector, while the research of [60] showed no significant connection between company performance and gender diversity. Additionally, ref. [61] expresses that the orientation variety variable affects firm execution. We test the following hypothesis in light of the preceding discussions:
Hypothesis 8. 
Gender diversity has a positively significant relationship with company performance.

2.9. Capital Structure and Company Performance

According to research conducted in Tanzania, capital structure has a significant and negative correlation with a company’s performance [62]. A study on Nigerian oil companies found a negative correlation between capital structure and performance, as measured by return on equity (ROE), and it recommended increasing debt financing to protect shareholders’ stakes in the companies [63]. The previous research was also supported by [64,65,66] in their research which showed that capital structure has a statistically significant negative effect on company performance. Even [67] stated that, from previous studies regarding the capital structure, there is a difference in the results obtained, that the capital structure can affect positively, negatively or even have no effect on the firm’s performance. This is supported by agency theory which suggests two contradictory effects of capital structure on a firm’s performance, where the result of several previous research has shown effects of capital structure on company performance to be negative as a result of the agency costs of financial debts among shareholders and creditors. The increase in debt may reduce managers’ willingness to invest, causing them to reject risky investments and increase the cost of outside financing. If the proportion of debt in the capital structure exceeds a certain threshold, the additional cost of debt includes a higher bankruptcy cost, a greater financial distress problem, and more conflict between creditors and shareholders, hence destroying company performance [68]. We test the following hypothesis in light of the preceding discussions:
Hypothesis 9. 
Capital structure has a negatively significant relationship with company performance.

2.10. Capital Structure Mediation between Corporate Governance and Company Performance

Ref [69] investigates how family businesses’ performance is mediated by capital structure in corporate governance. Capital structure significantly reduces performance during economic downturns, according to [70], but it can be controlled by raising the quality of corporate governance. According to another study [71], managers’ opportunistic behavior can be reduced and the impact on corporate governance minimized by increasing debt financing. As a result, debt contracts and capital structure have the potential to improve a firms’ performance. The role of capital structure as a mediator between firm size and the performance of sugar firms in western Kenya is examined and found to be negative [65,72]. Further, ref. [33] in their research showed that capital structure 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. We test the following hypothesis in light of the preceding discussions:
Hypothesis 10. 
Capital structure mediates the effect of corporate governance on company performance.

3. Methodology

3.1. Measurement and Collection of Data

The study’s objective was to determine the influence of corporate governance on a company’s performance and the mediation role of its capital structure. This study used secondary panel data from the firm’s financial statements, while proxy debt to equity ratio (DER) measures capital structure and proxy ROA measures company performance. The reason for choosing Return-on-Assets (ROA) as a performance measure is because ROA is used to measure the ability of company management to gain overall profits. Corporate governance measures: board independence (the ratio of the number of independent directors to the total number of directors), board size (the number of directors on the board, which includes a chairperson and independent directors), audit committee (the number of audit committee members on the board), and gender diversity was measured by a dummy variable: value 1 if the company has female directors or commissioners, a score of dummy = 1 will be given, and a value of 0 for companies that do not have female directors or commissioners in the company will be given a score of dummy = 0.
The non-financial sector of Indonesia is the population of the study. Samples were taken using a purposive sampling technique, based on criteria as follows: (1) non-financial business companies consistently listed on the Indonesia Stock Exchange during the period 2017–2021; (2) Companies that issue a financial report annually that are audited by a public auditor. Fifteen non-financial businesses out of the total population of registered companies on the Indonesia Stock Exchange were chosen for this study. The companies’ information was gathered from 2017 to 2021.

3.2. Research Model

The research model can be seen in Figure 1.
Model 1
To test the relationship of corporate governance (board independence, board size, audit committee, and gender diversity) on the capital structure, we estimate Equation (1) as follows:
CAPST−1 = α0 + β1BIT−1 + β2BST−1 + β3ACT−1 + β4GDT−1 + €
where capital structure (CAPS) is the dependent variable and CG represents (board independence, board size, audit committee, and gender diversity).
Model 2
To test the relationship between corporate governance (board independence, board size, audit committee, and gender diversity) and capital structure on the company’s performance, we estimate Equation (2) as follows
ROAT−1 = α0 + β1BIT−1 + β2BST−1 + β3ACT−1 + β4GDT−1 − β5CAPS1−T + €
where: Return-on-Assets (ROA) is the dependent variable and CG represents (board independence, board size, audit committee, and gender diversity) and capital structure (CAPS).

3.3. Data Analysis Methods

Most of the previous studies about corporate governance used Ordinary Least Square (OLS), Random Effect (RE), or Fixed Effect (FE) estimation methods [73]. However, these estimations are better when the explanatory variables are exogenous. This is supported by some previous research about corporate governance, capital structure, and company performance which, using Panel data, have analyzed their research using Partial Least Square (PLS) [74,75,76]. According to [77], Partial Least Square analysis (PLS) is a multivariate statistical technique that performs comparisons between multiple dependent variables and multiple independent variables. The selection of the PLS method is based on the consideration that, in this study, there is one latent variable that is formed with indicators formative and establishes an intervening effect while the tool used for PLS analysis is SmartPLS. In SmartPLs there are 3 procedures for an estimation which are an inner model (can be seen from VIF, the value of R2 and Predictive Relevance Q2), an outer model (validity and reliability), and path analysis.
The Sobel test, developed by Sobel in 1982, was used to test the mediation effect of capital structure on corporate governance and company performance. The purpose of the Sobel test was to determine the degree to which the mediating variable, M, exerts an indirect influence on the independent variable (X) and the dependent variable (Y). The calculation for the Sobel test, which can be found online at http://quantpsy.org/, accessed on 2 November 2022, is the test tool used to determine the indirect effect. To do so, the original sample and standard error of each independent variable must be entered into the variable dependent, whether there is a mediator or not. This variable is said to be able to mediate between the independent variables and the dependent variable if the Sobel test statistic is 1.96 and the significance level is 5% [78].

4. Results

4.1. Descriptive Statistics

Table 1 shows the descriptive statistics of corporate governance (board independence, board size, audit committee, and gender diversity), capital structure, and financial performance. The company performance (ROA) has a mean value of 0.114. This value shows that, in general, the company earns a net profit after tax of 11.4% of total assets, and capital structure has a mean value of 0.583, which indicates the average sample company on the Stock Exchange has a debt of 58.3% of the total equity that has been invested by shareholders. The board’s independence has a mean value of 0.032 which means the percentage of independent members on the board of commissioners is 3.20%. The board size has a mean value of 5.477 indicating that the average size of the board of directors is five people. The mean value for the audit committee is 3.030, meaning that the average audit committee size is three people. Gender duality has a mean value of 0.069, which indicates that the percentage of female members on the board of directors is 6.9%. The multicollinearity test results (VIF) for all variable constructs are below 10.00. That is, all independent variables have a VIF value < 10.00. So, the conclusion from the results of this test is that there is no multicollinearity between the independent variables.

4.2. Corporate Governance (Board Independence, Board Size, Audit Committee, and Gender Diversity), Capital Structure on Company Performance

To answer the hypothesis, this research presents the empirical results using a statistical tool in the form of SmartPLS and it can be seen that, to find out the significance between variables, it is done by calculating bootstrapping with a significant 5%. With α = 5% then t = 1.96 so it can be said to have significance if t − statistic > 1.96. The results of the inner model Path Coefficient test are as follows:
From the results of the Path Coefficient test for the direct relationship between constructs in Table 2 above, it can be explained that Model 1 analyzes the relationship of corporate governance (board independence, board size, audit committee, and gender diversity) on capital structure, and three dimensions of corporate governance regress with capital structure. Based on Table 2, board independence has a significant and positive impact on capital structure. This is in line with previous research such as [29] that found that board independence is positively related to leverage but has no importance in debt financing decisions. Additionally, [30] stated that board independence is positively related to leverage in the UK but shows an inverse relationship with leverage in France and Germany. Board size has a significant and positive impact on capital structure. Research conducted by [32] has proven the relationship between board size and capital structure. Audit committee has a significant and positive impact on capital structure. This result supported some previous research conducted by [36,37] which has proven the relationship between audit committee size on capital structure at a high level, while gender diversity has an insignificant and positive impact on capital structure. This finding provides empirical acceptance to hypothesis 1–3, its mean board independence, board size, and audit committee are determinant factors of corporate governance that influences capital structure, while gender diversity cannot represent corporate governance to capital structure. In other words, corporate governance (board independence, board size, and audit committee) protects the interests of shareholders and transfers risk from shareholders to debt holders. Further, based on the relationship of corporate governance (board independence, board size, and audit committee) on capital structure shows that the percentage of directors that is appropriate for a company is determined by the company’s ability to make decisions. Then, because independent directors contend that there are alternative sources of funding before the company takes on debt, such as using the company’s retained earnings, the responsibility of independent directors and audit committee affect companies to decrease their usage debt.
Model 2 analyzes the relationship between corporate governance (board independence, board size, audit committee, and gender diversity) and capital structure on company performance. Based on Table 2, board independence has a significant and positive impact on company performance. The result of this research is supported by previous research [43,44] that stated that there is a relationship between board independence and company performance. Board size has a significant and positive impact on company performance. This result is also supported by previous research [42,46,47] that showed a relationship between board size and company performance. Audit committee size has a significant and positive impact on company performance. This is supported by some previous research conducted by [45,46,47] stating that an audit committee affects a company’s performance. Gender diversity has an insignificant and positive impact on company performance. This result supported some previous research [49,54] but not for [51,52]. Then, capital structure has a significant negatively association with company performance. So, the result of this research provides empirical acceptance to hypothesis 5–7, its mean board independence, board size, and audit committee are determinant factors of corporate governance that influence company performance, while gender diversity cannot represent corporate governance to company performance. This finding also supports our 9th hypothesis and previous research that there is a negative relationship between capital structure and company performance. Further, it can be stated that the achievement of company performance (the company’s ability to earn profits) can be determined through the board size or the number of directors owned by the company. The Board of Directors has entered into an agreement or work contract with the owner of the company (principal), so the directors must run the company following the agreement. The responsibility of independent directors in companies is to decrease shareholder conflicts of interest. As a result, the responsibility of independent directors is not just to resolve shareholder conflicts but also to improve company performance. The main audit committee’s responsibility is to supervise the company’s financial reporting process, and the audit committee’s responsibility is to assure the accuracy of the company’s financial statements. Then, the reduction of capital structure will increase company profits because companies that reduce debt can meet the company profit targets. Profits generated by debt reduction show that the company does not need to add debt to make a profit.
Based on Table 2 the inner model evaluation is defined by looking at the value of R2 and predicting relevance Q2. R2 variable capital structure with a value of 0.476 or 47.6% indicates that the corporate governance variables explain capital structure variables’ diversity at 47.6%. Then the Q2 variable capital structure with a value of 0.438 means that the corporate governance variable has a predictive power of 0.438 to the capital structure variable. R2 of the company performance variable with a value of 0.693 or 69.3% indicates that 69.3% of the company performance variable’s variation can be explained by the corporate governance and capital structure variables. Then Q2 for the company performance variable with a value of 0.524 shows that the corporate governance and capital structure variables have a predictive power of 0.524 to the company performance variable.

4.3. Mediation of Capital Structure between Corporate Governance and Company Performance

In this study, a Sobel test was carried out to compare the effect of the relationship between the independent variable and the dependent variable, if there is mediation and without mediation. To find out the effect of each, a separate test will be carried out from the four independent variables. There is a mediating effect on the relationship between the independent variables, and the dependent variable will occur if the Sobel test statistic is ≥1.96.
Based on the results in Table 3 below, it is known that the Sobel test scores are 1.681, 1.694, 1.606, and 1.216, respectively. These results indicate that capital structure is not able to mediate the effect of corporate governance (board independence, board size, audit committee, and gender diversity) and company performance. So, the result of this study is not supported by previous research that has shown the role of capital structure as a mediator [48,49,50,51].

5. Conclusions, Recommendations, and Implication

5.1. Conclusions

Based on the data analysis results, the following conclusions can be drawn: First, the majority of research findings support the agency theory, which is related to corporate governance influences on capital structure and company performance as proxied by board independence, board size, and audit committee. Board independence, board size, and audit committee size all have a significant positive impact on capital structure. Second, board independence, board size, and audit committee size all have a significant positive impact on company performance, whereas capital structure has a significant negative impact. Third, a capital structure cannot mediate the effect of corporate governance on company performance as proxied by board independence, board size, and audit committee size.
Like most other empirical studies, this study has limitations that may affect the generalizability of the reported conclusions. The first obstacle is the limited sample population of IDX-listed non-financial businesses. Compared to larger partners, this type of company has different structural flexibility and resources. Therefore, additional research on large companies is needed. The second limitation of this study is based on the sample period. The sample period was from 2017 to 2021. However, this study does not show the development of the impact of capital structure on firm performance over a longer period.
The third limitation is related to variables that only used 1 ratio/proxy. For example, the capital structure of this research used debt-to-equity ratio (DER) that cannot represent all the capital structure for all companies, then company performance only used ROA as a proxy for company performance; hence there are several proxies in measuring the company performance which can represent the company performance such ROE, EVA (Economic Value Added), etc.

5.2. Recommendation

The research recommends that policymakers encourage Indonesian companies to create their boards with various characteristics in the form of corporate governance implementation and improving company performance. Additionally, to acquire comprehensive knowledge regarding the mediation of capital structure, another financial firm must be included. Because of globalization, information is accessible so examinations should be made with created and emerging nation stock trades. Some expectations of corporate governance were also used. The relationship is established, and the corporate governance index is created. The effects of political uncertainty, government debt, financial deficit, policy uncertainty, and market conditions can also be considered to determine the connection between company performance and corporate governance.

5.3. Policy Implication

The fairness of financial statements improves if the manager implements corporate governance codes. Financial performance is positively enhanced when corporate governance codes are implemented. Internal control mechanisms that enable induced corporate governance codes are required by upper management. The capital structure should also be taken into account by upper management. The benefit of capital structure is a tax break, but the more capital structure causes financial trouble comes at a cost. To continue improving gender parity in top management, regulators may increase women’s representation on boards even further. Indonesian companies should assign a greater number of independent directors, as their role is critical to the successful implementation of these reforms. Then, regulators should initiate appropriate corporate governance initiatives. Rewards in various sectors might also encourage companies to comply with regulations and demonstrate their contributions to the environment and society. Furthermore, Indonesian companies must understand the advantages of implementing good corporate governance strategies and correlating approaches that aid in improving company performance.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

Not applicable.

Conflicts of Interest

The author declares no conflict of interest.

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Sustainability 15 02309 g001 550
Figure 1. Research Model.
Figure 1. Research Model.
Sustainability 15 02309 g001
Table
Table 1. Descriptive statistics of variables and VIF value.
Table 1. Descriptive statistics of variables and VIF value.
VariablesMeanMinMaxStd. Dev.VIF
board independence0.0320.0000.8940.1241.124
board size5.4772.00015.0000.3253.247
audit committee3.0301.0005.0000.1211.121
gender diversity0.0690.0000.9000.2094.096
capital structure0.5830.0000.9970.2632.022
company performance0.114−9.6441.4350.611
Table
Table 2. Result of Path Coefficient and R2 and Q2.
Table 2. Result of Path Coefficient and R2 and Q2.
HypothesisOriginal SampleT Statistics
Model 1
Board independence has a positively significant relationship with capital structure0.0882.430
Board size has a positively significant relationship with capital structure0.0982.469
Audit committee has a positively significant relationship with capital structure0.1312.217
Gender diversity has a positively significant relationship with capital structure0.1681.426
Model 2
Board independence has a positively significant relationship with company performance0.1592.197
Board size has a positively significant relationship with company performance0.1813.128
Audit committee has a positively significant relationship with company performance0.0891.989
Gender diversity has a positively significant relationship with company performance1.0101.555
Capital Structure has a positively significant relationship with company performance−0.864−2.330
The Value of R2 and Predictive Relevance Q2
Variables R2Q2
Capital Structure0.4760.438
Company Performance0.693 0.524
Table
Table 3. Mediation of Capital Structure between Corporate Governance and Company Performance.
Table 3. Mediation of Capital Structure between Corporate Governance and Company Performance.
tatbSobel Test
board independence2.4302.3301.681
board size2.4692.3301.694
audit committee2.2172.3301.606
gender diversity1.4262.3301.216
Note: ta = t-Statistic (original sample) for effect on capital structure, tb = t-Statistic (original sample) for effect capital structure on company performance.
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Ria, R. Determinant Factors of Corporate Governance on Company Performance: Mediating Role of Capital Structure. Sustainability 2023, 15, 2309. https://0-doi-org.brum.beds.ac.uk/10.3390/su15032309

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Ria R. Determinant Factors of Corporate Governance on Company Performance: Mediating Role of Capital Structure. Sustainability. 2023; 15(3):2309. https://0-doi-org.brum.beds.ac.uk/10.3390/su15032309

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Ria, Ria. 2023. "Determinant Factors of Corporate Governance on Company Performance: Mediating Role of Capital Structure" Sustainability 15, no. 3: 2309. https://0-doi-org.brum.beds.ac.uk/10.3390/su15032309

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