The effect of the board of directors on financial performance and the existence of risk management as an intervening variable

Abstract

Purpose This study aims to analyze the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management after the issuance of the Palestinian Code on Corporate Governance in Palestine. Design/methodology/approach This study uses a panel data of 31 Palestinian listed companies from 2010 to 2016. It also uses structural equation modeling (SEM) model. Findings The results of the SEM model show a significant positive relationship of the existence of risk management and the tenure-chief executive officer (CEO) with financial performance. However, CEO duality has a significant negative relationship with financial performance. The results also show a significant positive relationship of CEO duality and board size with financial performance through the existence of risk management. Research limitations/implications This study adds to the existing literature by analyzing the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management in Palestine, one of the youngest stock exchanges in the region, which assists in testing the validity of agency theory in a young and small emerging Islamic market context. Practical implications The results of this paper are significant for shareholders and managers of companies to make proper choices to secure the interests of stakeholders and increase the flow of capital and foreign investment. Originality/value To the best of the author’s knowledge, it is one of the first papers to investigate the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management in Palestine.