Abstract
The paper investigates the impact of managers' and investors' perceptions on financial leverage decisions in Bangladesh. To fulfill the purpose of the paper, the final structure of the questionnaire was made by adopting pre-testing and assessment of outer factor loadings and measures the internal consistency of all items in the test or scale using Cranach's Alpha. The composite reliability (CR) was tested by calculating the composite alpha and average variance extracted (AVE). The study employs partial least square structural equation modeling (PLS-SEM) to investigate the structured relationship between the observed and latent variables and extends the path analysis to test the hypotheses. The study reveals that corporate governance significantly and positively influences the leverage structure decision. The result intends to establish that if firms serve corporate governance, it will make the firms to manage more debt into the leverage structure decision. Results also reveal a negative and significant association between the determinants and financial leverage structure decision, and this relation signifies that when determinants tend to upturn, outside borrowing will fall into the financial leverage structure decision. The policy implications advanced from this study include the transformation of ownership structure, corporate governance, and financial policy to facilitate proper leverage structure decisions.
Highlights
Research on leverage structure decision had been vigorously emphasized, especially after the establishment of the first theoretical framework by Modigliani and Miller (1958, 1963) to address the topic from the firm's perspective
According to the trade-off theory, a firm can extend its creditworthiness for external borrowing by exhibiting corporate governance attributes in the financial market (Cheng et al, 2010), while an agency problem is visible from weak corporate governance and will mitigate a firm's ability to include debt in its leverage structure
The study reveals that corporate governance and determinants are the principal significant factors for assessing financial leverage decisions
Summary
Research on leverage structure decision had been vigorously emphasized, especially after the establishment of the first theoretical framework by Modigliani and Miller (1958, 1963) to address the topic from the firm's perspective. The leverage remains one of the controversial issues of modern corporate finance. An ongoing debate regarding a firm's optimal leverage decision presently exists. “How do firms select their leverage structure decision?” A three-decade old question of Myers (1984) remains unanswered. Multiple leverage structure theories have resulted in different hypotheses on leverage decisions. The Modigliani and Miller Theorem (1958) predicted that financial leverage structure decision is unrelated to firm value, while the trade-off theory explains that firm value is maximized by utilizing the optimum mix of financing (Myers, 1984). An optimal debt policy includes the least risk associated with cost of financing, by deriving the tax benefits aided to maximize the firm value
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