THE EFFECT OF CORPORATE GOVERNANCE ON THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FIRM PERFORMANCE

During the last decades, Corporate Governance (CG) has been a growing area of interest for researchers, managers and policymakers. CG is defined as the practices by which organizations are directed and controlled (Cadbury, 1992). CG is the system and structure used to manage and control the business affair of the firm to improve business prosperity, corporate accountability and transparency with the focusing objective of understanding shareholder long-term value while keeping in mind the interest of other stakeholders (Keasey, Thompson, & Wright, 1997; Shleifer & Vishny, 1997; OECD, 1999). Literature highlights that agency problem, arising from the separation between management and shareholders of the firm, is the main cause of CG (Jensen & Meckling, 1976). Good CG mechanisms should lead to align the interest of manager and shareholders in order to reduce agency costs (Shleifer & Vishny, 1997) and then to improve firm performance (FP) and value creation (Esposito De Falco, 2014). Recent literature review on CG highlights that empirical research has been mostly focused on the analysis of the direct effect of CG on FP (Claessens & Fan, 2002). However, deeper knowledge about the role of CG and the way through which it may affect firm's performance can derive from the consideration that CG choices first influence orientations and behaviours within the company and, only subsequently they are translated in financial performance results. Indeed, CG practices may affect strategic decisions of the firm, such as investments, risk orientation and financial decisions. In particular, the modern financial theories stress the relevance of agency costs in determining the capital structure (CS) choices and the role of financial leverage as a tool for the discipline of management's opportunistic behaviour (Jensen, 1986). Also, the empirical researches show the existence of a relationship between CG, CS and firm's performance (FP) based on the influence of the agency conflicts between shareholders and managers (Okiro, Aduda, & Omoro, 2015). However, there is no consensus on whether the association between them is direct or indirect; research well establishes that CG and CS influence FP (Shleifer & Vishny, 1997; Boone, Field, Karpoff, & Raheja, 2007; Bhagat & Bolton, 2008). Based on our previous argumentations, our proposed research question is: “Do CG mechanisms affect the relationship between CS and FP in Italian context”? Specifically, our research aim is to discover the existence of a moderating and/or mediating effect of GC mechanisms on the relationship between CS and performance in Italian listed non-financial firms. This study may offer several contributions to the existing literature. First, in the field of GC literature, our study could improve the existing knowledge extending the empirical research to a context not yet explored. Indeed, Italy is an interesting empirical context to investigate the relationship between CG, CS and FP. In Italy, due to the process of privatization and EU integration, the problems concerned to CG in public firms have increased their significance among policymakers and scholars (Bianco & Casavola, 1996; Melis, 2000). Second, the study provides a more comprehensive and fine-grained understanding of the role of CG in influencing a firm's performance. Indeed, most of the existing studies have analysed the direct effect of the CG on the firm's performances. In our study, we consider CG variables as a mediator and/or moderator in explaining the relationship between CS and FP. This approach can help to better understand the different way through which the CG can influence FP and which governance mechanisms can inhibit or favour the effect of CS on FP. Third, in the general field of CS literature, our study contributes to better understand under which CG conditions the CS may exert a strong or weak effect on FP.