INNOVATION, GOVERNANCE, AND FINANCIAL PERFORMANCE: OUTPUT MEDIATION AND SIZE EFFECTS IN EMERGING MARKETS

Abstract

The study discusses the connections between the R&D intensity, corporate governance quality, firm shopping experience, and innovation output, and the firm financial performance in the context of Pakistan Stock Exchange (PSX)-listed firms. The study is based on the resource-based perspectives and the agency theory to derive and empirically evaluate a composite model where innovation output is a mediating variable and firm size is a moderating boundary condition. The results, using SmartPLS-based partial least squares structural equation modeling (PLS-SEM) on a sample of 300 PSX-listed firms, show that the R&D intensity, corporate governance quality, and firm shopping experience have a significant positive impact on the innovation output, which in turn has a significant positive impact on the financial performance of firms. All three paths of antecedent-outcome are fully mediated. Moreover, the relationship between innovation output and firm performance is moderated by the firm size with increased positive impact of innovation output on the larger firms. The findings are relevant to the innovation-performance and governance literatures of explaining the boundary conditions and channels through which strategic investments can lead to financial performance in an emerging-market setting.