Corporate governance and firm value: product market competition as a moderator in a developing market

Purpose This study aims to examine the moderating role of product market competition (PMC) in the relationship between corporate governance (CG) and firm value from the perspective of agency theory in Pakistan. Design/methodology/approach This study applied a fixed-effect model, instrumental variable two-stage least squares estimator and the system generalized method of moments to analyze panel data, collected from 369 firms listed on the Pakistan Stock Exchange between 2010 and 2023. Findings The findings indicate that CG increases firm value only in highly competitive industries through a complementary effect, whereas it diminishes firm value in less competitive industries through a substitutive effect. The results further demonstrate that this impact is more pronounced in state-owned enterprises (SOEs) than in non-SOEs. The robustness of the findings is confirmed through consistent results across alternative sample divisions, variable measurements, governance structures and regression estimations. Research limitations/implications Policymakers and regulatory authorities in developing countries like Pakistan should consider diversifying CG structures based on varying levels of competition to improve firm value. Given the strong complementarity between PMC and CG in SOEs, regulatory reforms should prioritize aligning governance practices in SOEs with the best practices observed in non-SOEs to maximize performance outcomes. Originality/value This study grasps critical research gaps in the literature, theory and methodology by investigating how external governance (i.e. PMC) shapes the relationship between internal CG and firm value through the lens of agency theory. Besides, it offers insights into how the CG structures of SOEs and non-SOEs respond to competitive pressures within the unique institutional context of Pakistan. Moreover, the findings support the view that the moderating role of PMC in the nexus of CG with firm value or performance diverges from patterns observed in other institutional settings.