The Moderating Role of Corporate Governance in the Nexus between Digital Transformation and Corporate Restructuring: Evidence from Shariah-Compliant Firms of Pakistan

Abida Irum; Rafiullah Sheikh

doi:10.32350/ibfr.122.02

Abida Irum MS Scholar, Riphah International University, Islamabad
Rafiullah Sheikh https://orcid.org/0000-0002-5625-6406

DOI: https://doi.org/10.32350/ibfr.122.02

Keywords: board size, corporate governance, corporate restructuring, digital transformation, Islamic governance, Shariah-compliant firms, knowledge-based view, System GMM, text mining

Abstract

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The current research analyses how digital transformation (DT) influences the outcomes of corporate restructuring (CR) with respect to Shariah-compliant companies emphasizing four dimensions, namely financial (FR), operational (OR), asset (AR), and governance restructuring (GR). It also addresses the moderating effect of corporate governance (CG), especially board size, on such a relationship. The study fills the literature gap regarding the role of digital transformation, as well as governance practices, in restructuring problems in Shariah-compliant firms by examining a sample of 100 such firms listed on the Pakistan Stock Exchange (PSX) between 2018-2023. Using the principles of the Knowledge-Based View (KBV), the study conceptualizes digital capabilities as organizational knowledge assets capable of driving organizational reconfiguration when backed by governance systems that are in line with Islamic ethical principles. The research implements a two-step System GMM estimator to overcome endogeneity as well as the bias of missing variables. It also assesses the effects of digital transformation and board aspects in influencing the form of corporate restructuring outcomes. Notably, it introduces a novel text-mining methodology to quantify digital transformation based on the information extracted from the firms’ annual reports, offering a replicable and innovative approach for future research. - The study uncovers that digital transformation significantly enhances financial restructuring, while its effects on operational, asset, and governance restructuring are not straightforward, rather they are mixed. Board size is found to positively influence asset restructuring but has limited or no effect on other dimensions. Notably, the interaction between digital transformation and corporate governance yields a negative moderation effect in financial and governance restructuring, suggesting that larger boards may inhibit the transformative impact of digital initiatives, potentially due to strategic inertia or insufficient digital literacy. The study significantly contributes to the Knowledge-Based View (KBV) and Islamic governance literature by illustrating the dual role of corporate governance, both as an enabler and a constraint in digital transformation. It also develops a new text-mining formula to measure digital transformation using annual reports, as well as potential introduction of a replicable and innovative mechanism to estimate it in annual reports of upcoming studies.

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