Gulema, T. F.

This study examined the potential mediating role of innovation capacity of firm measured by innovation investment in between the relationships of corporate governance and firm performance. The study used panel data of 11,634 samples of Chinese listed firms covering from 2010-2018. We operationalized corporate governance into board independence, dual leadership, concentrated ownership, debt finance, and product market competition.  The study found to support the mediation role of innovation investment in between most corporate governance mechanisms and firm performance measured by Tobin’s Q. Specifically, we found that innovation investment has been fully mediated the relationship between concentrated ownership structure and firm performance, Similarly, corporate governance measured by debt financing, and product market competition were partially mediated by innovation investment in Chinese listed firms. The study makes an important contribution to corporate governance practice in emerging economies policymakers and managers by providing comprehensive empirical evidence on how corporate governance practices are related to firm performance through innovation activities. Firms in emerging countries should maintain high ownership concentration, improve the debt financing system and encourage product market competition to improve firm performance through innovation activities.