DETERMINANTS OF CAPITAL STRUCTURE AND ITS IMPACT ON CORPORATE GOVERNANCE: AN EMERGING MARKET EMPIRICAL STUDY

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Abstract

This research endeavored to explore two schemes of literature pertains to capital structure i.e. antecedents and consequences of debt borrowing on firm specific and corporate governance factors. This research explores the determinants of capital structure to ascertain whether the financing decisions are optimal or not. Non-financial sector firms accumulated 70% of total firms listed on Pakistan Stock Exchange (PSX). To conclude proposed research, unbalance panel data for 160 non-financial firms listed at PSX from 2007 to 2011 is selected. Results revealed that Return on assets contributes 25% influence on financing decisions regarding debt. Similarly Debt borrowings affect negatively in overall profits. However, its intensity differs within different levels of its determinants. Corporate Governance CG index is negatively associated with debt ratio. Return on assets in terms of size of firm is impacted 29%. Institutional Ownership and debt financing has found a negative association with one and each other. Ownership concentration and debt ratio have strong positive binding between them. Significance of Board Size holds only 2% in debt financing decision making whereas CEO duality holds 68% significance in debt financing decision making. Audit Committee independence and debt ratio are also negatively related. Non-executive directors are found with no influence on capital structure decision making. Board Independence is positively related with leverage and found with no particular implementation of debt financing decisions makings. The outcome of this study can be used to provide managerial information whether their financing decisions are optimal or not and how they should enhance the scope of their financing decisions.

Keywords: Debt Ratio, Current Ratio, Return on Assets, Sale Growth, Tangibility, Institutional Ownership, Ownership Concentration, Ownership Structure, Board Size, Chief Executive Officer Duality, Shareholders Activism, Audit Committee Independence, Board Independence

Received: 06.03.2017

Accepted: 02.06.2017

How to cite this paper: Ahmad, M., Ahmed, B., & Badar, M. (2017). Determinants of capital structure and its impact on corporate governance: An emerging market empirical study. Corporate Governance and Sustainability Review, 1(1), 17-32.https://doi.org/10.22495/cgsrv1i1p2