Abstract
This paper explores the relationship between corporate governance and capital structure of listed companies in an emerging equity market, Pakistan. The study covers the period 2002 to 2005 for which firm level data for 58 randomly selected non-financial listed companies from Karachi Stock Exchange has been examined by using multivariate regression analysis under fixed effect model approach. Measures of corporate governance employed are board size, board composition, and CEO/Chair duality. Impact of shareholding on financing decisions has also been examined by using managerial shareholding and institutional shareholding. Similarly influence of controlled variables like firm size and profitability on firms’ financing mechanism is also investigated. Results reveal that board size and managerial shareholding is significantly negatively correlated with debt to equity ratio. However corporate’s financing behavior is not found significantly influenced by CEO/Chair duality and the presence of non-executive directors on the board. However, control variables firm size and return on assets are found to have a significant effect on capital structure. No temporal effects are observed. Therefore results suggest that corporate governance variables like size and ownership structure and managerial shareholding play important role in determination of financial mix of the firms.
Highlights
This paper explores the relationship between corporate governance and capital structure of listed companies in an emerging equity market, Pakistan
Results reveal that: x Multivariate regression analysis provides that an increase of 1% in Profitability leads to 4.95% decrease in leverage and this relationship is significant at D = 0.05
This paper empirically examines the relationship between corporate governance, ownership structure and capital structure for Pakistani non-financial listed companies for the period 2002-2005 by using multivariate regression analysis
Summary
Jensen and Meckling (1976) argue that managerial shareholding reduces managerial incentives to consume perquisites and expropriate shareholders’ wealth and results in alignment of the interests of management and shareholders. Irwin and Lang (1988) discuss role of managerial self-interest in making capital structure decisions They find that there exist negative relationship between leverage ratio and management’s shareholding. A critical examination of changes in leverage levels reveals that gearing levels moves upward when steps to reduce entrenchment are taken These steps may include threats to managerial security through involuntary CEO replacements and the replacement in the board of directors. Brailsford (2002) finds that the managerial ownership and leverage may be related in nonlinear fashion He provides evidence about the presence of negative relationship among managerial equity holding and gearing levels. He discovers that low level ownership by managers leads to low level of agency conflicts and results in higher level of debt. On the other hand higher levels managerial ownership results in managerial opportunism and leads to lower debt levels
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