Abstract
This study examines the relationship between corporate governance and capital structure employing data from the Athens Stock Exchange for the period 2005-2014. This period encompasses the sovereign debt crisis erupted in Greece at the end of 2009 and still continues to hit households and businesses alike. The results from the panel regression analysis signify the role of corporate governance structures in determining the capital structure of the Greek listed firms. In particular, the empirical results reveal a negative impact of board size on debt levels, which is weakened during the debt crisis period. In contrast, the presence of outside directors provides the appropriate certification to use more debt. Finally, growth opportunities and profitability are the two firm-specific factors which effect was weakened during the financially-constraint period.
Highlights
Since the seminal study of Modigliani and Miller (1958) who asserted that the valuation of a company is independent from its capital structure, several studies have been conducted across the world
The effect of corporate governance on capital structure is measured by four variables: (i) Board size measured by the logarithm of board members, (ii) Outside directors, that is the proportion of independent and non-executive directors in board, (iii) Duality taking the value of one when the positions of CEO and chairman are held by the same person and zero otherwise and (iv) Auditor which takes the value of one for firms being audited by Big 4s and zero otherwise
These are: (i) Firm size measured by the logarithm of total assets, (ii) Tangibility which is the ratio of fixed assets to total assets, (iii) Profitability measured by the return on assets (ROA), that is, the earnings before interest and taxes scaled by total assets, (iv) Growth proxied by Tobin’s Q which is the market value of equity divided by the book value of assets, (v) Age measured by the logarithm of the number of years of firms’ operation and (vi) Non-debt tax shields (NDTS) which is the ratio of annual depreciation to total assets
Summary
The authors attribute this positive relationship to the large size of some companies and their ability to diversify their operations and assets compared to small firms This diversification leads to lower earnings volatility and indirect bankruptcy costs, allowing firms to utilize more debt (Degryse et al, 2012). Rajan and Zingales (1995) asserted that large firms are generally well-established with good performance This helps them in reducing their reliance on debt and, a negative relationship between firm size and leverage is expected. Asset tangibility as measured by the proportion of fixed assets to total assets is another factor that has been found to affect capital structure Both the POT and TOT conjecture a positive relationship between asset tangibility and leverage. There is no clear indication regarding the sign of the relationship between leverage and NDTS
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