Do sustainability ethics explain the impact of country-level corporate governance on financial stability in developing economies?

ABSTRACT

The study presents an empirical evidence on how sustainability ethics affect the relationship between country-level corporate governance and financial stability in developing countries. Employing the dynamic system Generalized Method of Moments on a panel dataset of 137 developing countries over the period, 2006–2019, the study found that the positive effect of country-level corporate governance framework on financial stability is not instantaneous. We find that internal and external corporate governance frameworks have a strong positive synergistic effect on financial stability. We confirm that corporate governance measures substitute sustainability ethics to yield a desirable outcome of financial stability. Finally, the study finds evidence to support that sustainability ethics reduce the negative impact of country-level corporate governance on financial stability. The study recommends that the build-up of quality sustainability ethics can help tame the reductive effect of the country-level corporate governance framework on financial stability in developing countries.

KEYWORDS:

• Country-level corporate governance framework
• sustainability ethics
• financial stability

JEL CODES:

• G2
• G3
• G34
• G38
• M4
• M48
• Q1
• Q56

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 “The relationship between individual measures of corporate governance and financial stability are presented in Figure 2. Additionally, the average values of corporate governance measures and financial stability for countries with companies using sustainability reporting standard relative to those that do not use, are reported. Financial stability is measured using z-score, which indicates the distance a firm is away from financial distress. With regards to corporate governance measures like governance characteristics index, and country-level governance indicators (ease of shareholder suit index, extent of corporate transparency, extent of director liability index, and strength of investor protection) are obtained from Enterprise Survey and Doing Business database, respectively. These were employed following prior studies (Appiah-Kubi et al. 2020; Hillier et al. 2011). All the country-level corporate governance indices are scaled over 10. Also, the average corporate governance characteristics at country level is reported and computed as the year average of six internal characteristics of corporate governance indicators.”