Financial flexibility as a moderator of corporate governance effects on SME performance and risk: Evidence from the emerging market

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Abstract

This study investigates the relationship between corporate governance and financial flexibility in shaping performance and risk in small and medium-sized enterprises (SMEs) within developing economies. Unlike prior studies that treat governance as a static determinant, this research positions financial flexibility as a moderating factor that strengthens or weakens governance outcomes. Using panel data from 42 SMEs listed on the Indonesia Stock Exchange (IDX) from 2019 to 2023 (210 firm-year observations) and applying fixed- and random-effects regression models, the findings show that board independence improves firm valuation but has a limited influence on profitability in the absence of adequate liquidity. Gender-diverse boards help reduce financial risk when SMEs maintain sufficient reserves, while larger boards tend to increase leverage exposure. These results are consistent with Wen et al. (2023), who find that effective governance enhances firm value through stronger monitoring, and Settembre-Blundo et al. (2021), who highlight the importance of financial flexibility in supporting firms’ resilience to risk. Theoretically, this study advances the governance literature by integrating agency resolution and financial capacity within the constraints of SMEs. Practically, it highlights the role of liquidity in strengthening governance mechanisms, providing valuable insights for investors and policymakers. The study provides a solid basis for reevaluating governance structures in emerging markets.

Keywords: Corporate Governance, Financial Flexibility, SME Performance, Risk Management, Board Independence, Institutional Ownership, Gender Diversity, Emerging Markets

Authors’ individual contribution: Conceptualization — Y.U. and S.L.; Methodology — Y.U. and S.L.; Formal Analysis — Y.U.; Writing — Original Draft — Y.U.; Writing — Review & Editing — Y.U. and D.P.J.; Supervision — S.L. and D.P.J.; Project Administration — Y.U.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G34, G38, L25, L26, M40

Received: 13.07.2025
Revised: 18.11.2025; 29.11.2025; 31.12.2025
Accepted: 06.01.2026
Published online: 09.01.2026

How to cite this paper: Utami, Y., Lestari, S., & Jati, D. P. (2026). Financial flexibility as a moderator of corporate governance effects on SME performance and risk: Evidence from the emerging market. Risk Governance and Control: Financial Markets & Institutions, 16(1), 32–46. https://doi.org/10.22495/rgcv16i1p3