Does Capital Structure mediate the relationship between Corporate Governance and Firm Value? Evidence from Kenyan Listed Firms

Abstract

Whereas capital structure decisions are critical for a firm's financial well-being, enhancing corporate governance practices could more directly influence the value and performance of the firm. Thus, this study investigated the impact of capital structure on the relationship between corporate governance and firm value using longitudinal data from 30 Nairobi Securities Exchange-listed firms. A census survey in Kenya from 2012-2021, involving 30 firms, found a random effects model most suitable for investigating nonfinancial firms, with panel specification tests confirming this. The hypothesis testing revealed that capital structure significantly influences FV, but the four-step mediation analysis revealed that capital structure does not mediate the relationship. The absence of capital structure as a mediator suggests that governance effects are not influenced by how companies fund investments and operations. Thus, corporate governance's effect on firm value is neither impacted nor determined by a company's capital structure. It is apparent that good corporate governance standards and judicious leverage separately play crucial roles in establishing a firm's value.

Keywords: Corporate governance, capital structure, firm value, panel random effects model