Effect of Governance Quality on Credit Ratings of Pakistani Firms: Moderating Role of Liquidity and Innovation

Abstract

The present study identifies the moderating role of liquidity and innovation to determine the credit ratings of non-financial firms in Pakistan integrated with corporate governance. In Pakistan, non-financial firms are facing increasing challenges to maintain favorable credit ratings, which are essential for financial stability and financing access from external resources. Certain characteristics like weak governance practices, low innovation levels and limited liquidity often hinders the firms from achieving strong credit profits. In the previous studies, in the context of Pakistan limited evidence exists on how governance quality interacts with liquidity and innovation as the determinants of credit ratings. In the present study panel, data regression analysis is used to analyze data from 50 non-financial firms listed on the Pakistan Stock Exchange (PSX) from 2015 to 2019, based on purposive sampling technique. In the present study, credit rating serve as the dependent variable, governance quality as the independent variable, whereas liquidity and innovation as moderating variables. The findings show that governance quality has a positive effect on firms’ credit ratings, while on the other hand, both liquidity and innovation improved this relationship as significant moderators. Among the control variables, only a few showed statistical significance indicating that the internal firm factors are the primary determinants of credit outcomes. It is concluded that strong governance integrated with sufficient liquidity and innovation results in improved credit ratings. The study suggests that managers should focus on improving governance structures and practices, fostering innovation and enforcing financial stability to strengthen firms’ creditworthiness and long-term financial adaptability.