Does Institutional Quality Matter in the Interplay Between Corporate Governance and Firm Performance? Lessons from South African Financial Firms

The study investigates the effect of institutional quality on the corporate governance–firm performance nexus across 39 listed financial firms in South Africa via annual data from 2015 to 2022. We apply Driscoll and Kraay’s (1998) robust standard error and generalised method of moment estimation techniques to correct for cross-sectional dependence, serial correlation and endogeneity issues in this study. The study reveals a substantial positive correlation between firm performance and corporate governance metrics, including gender diversity, ethnic diversity, board size and board independence. This implies that having a large, independent, gender-based and ethnically diverse board improves company performance. In addition, all the indicators of institutional quality are found to enhance firm performance, while the relationship between corporate governance and firm performance in the industry is found to be strongly and negatively moderated by institutional quality. This suggests that corporate governance has a favourable impact on financial performance, but poor institutional quality weakens the beneficial and enhancing effects of corporate governance on firm performance. This research offers new insights into the importance of institutional frameworks and national governance mechanisms on the nexus between corporate governance and financial performance in the financial industry in South Africa.