This document summarizes a study that examines the relationship between corporate governance mechanisms and financing decisions of listed firms in Pakistan. Specifically, it looks at how ownership concentration, board size and composition, and CEO duality relate to capital structure, measured by debt ratio. The study uses data from 24 listed banks in Pakistan from 2008-2012. It finds that ownership concentration and board size are positively correlated with debt ratio, but finds no significant relationship between board composition, CEO duality and capital structure. The document provides context on prior literature regarding how corporate governance factors like board characteristics and leadership structure have been found to impact capital structure decisions. It outlines the research methodology used in the study.
This study attempts to investigate the role of Corporate Governance in mitigating agency cost. For
this purpose a sample of 100 firms selected on the basis of 100 INDEX of Karachi Stock Exchange during the
period 2007 to 2011. To do so, alternative proxies for agency costs are employing: the ratio of total sales to total
assets (asset turnover) and the ratio of selling, general & administrative expenses (SG&A) to total sales.
Multivariate fixed effect regression is used to analyze the data. The explanatory variables include director
ownership, institutional ownership, ownership Concentration, board size, CEO/Chair duality, Non Executive
Directors, Debt Ratio, remuneration structure and board independence. The analysis is controlled for the
influence of company size. The results show that higher director and institutional ownership reduces the level of
agency cost. Smaller sized boards also results in lowering agency cost. Board independence has positive
association with asset utilization ratio. The separation of the post of CEO and chairperson and higher
remuneration lower agency cost. Bank debt constitutes one of the most important Corporate Governance devices
for Pakistani Listed Companies. Also, managerial ownership, managerial compensation and ownership
concentration seem to play an important role in mitigating agency costs
Effects Of Corporate Governance On Capital Structure: Empirical Evidence From...Arfan Afzal
Effects Of Corporate Governance On Capital Structure: Empirical Evidence From Pakistan, The aim of this empirical study is to investigate whether corporate governance attributes such as board size, outside directors, ownership concentration, managerial ownership, director remuneration, and CEO duality affect capital structure choices of Pakistani firms.
Impact of Firm Specific Factors on Capital Structure Decision: An Empirical S...Waqas Tariq
Abstract This study attempts to explore the impact of firm specific factors on capital structure decision for a sample of 39-firm listed on Dhaka Stock Exchange (DSE) during 2003-2007. To achieve the objectives, this study tests a null hypothesis that none of the firm’s specific factors namely profitability, tangibility, non-debt tax shield, growth opportunities, liquidity, earnings volatility, size, dividend payment, managerial ownership, and industry classification has significant impact on leverage using estimate of fixed effect model under Ordinary Least Square (OLS) regression. Checking multicollinearity and estimating regression analysis through Pearson correlation and autoregressive mode respectively this study found that profitability, tangibility, liquidity, and managerial ownership have significant and negative impact on leverage. Positive and significant impact of growth opportunity and non-debt tax shield on leverage has been found in this study. On the other hand size, earnings volatility, and dividend payment were not found to be significant explanatory variables of leverage. Results also reveal that total debt to total assets ratios are significantly different across Bangladeshi industries. Keywords: Capital structure, Leverage, Firm’s specific factors, Dhaka Stock Exchange Bangladesh.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
This study attempts to investigate the role of Corporate Governance in mitigating agency cost. For
this purpose a sample of 100 firms selected on the basis of 100 INDEX of Karachi Stock Exchange during the
period 2007 to 2011. To do so, alternative proxies for agency costs are employing: the ratio of total sales to total
assets (asset turnover) and the ratio of selling, general & administrative expenses (SG&A) to total sales.
Multivariate fixed effect regression is used to analyze the data. The explanatory variables include director
ownership, institutional ownership, ownership Concentration, board size, CEO/Chair duality, Non Executive
Directors, Debt Ratio, remuneration structure and board independence. The analysis is controlled for the
influence of company size. The results show that higher director and institutional ownership reduces the level of
agency cost. Smaller sized boards also results in lowering agency cost. Board independence has positive
association with asset utilization ratio. The separation of the post of CEO and chairperson and higher
remuneration lower agency cost. Bank debt constitutes one of the most important Corporate Governance devices
for Pakistani Listed Companies. Also, managerial ownership, managerial compensation and ownership
concentration seem to play an important role in mitigating agency costs
Effects Of Corporate Governance On Capital Structure: Empirical Evidence From...Arfan Afzal
Effects Of Corporate Governance On Capital Structure: Empirical Evidence From Pakistan, The aim of this empirical study is to investigate whether corporate governance attributes such as board size, outside directors, ownership concentration, managerial ownership, director remuneration, and CEO duality affect capital structure choices of Pakistani firms.
Impact of Firm Specific Factors on Capital Structure Decision: An Empirical S...Waqas Tariq
Abstract This study attempts to explore the impact of firm specific factors on capital structure decision for a sample of 39-firm listed on Dhaka Stock Exchange (DSE) during 2003-2007. To achieve the objectives, this study tests a null hypothesis that none of the firm’s specific factors namely profitability, tangibility, non-debt tax shield, growth opportunities, liquidity, earnings volatility, size, dividend payment, managerial ownership, and industry classification has significant impact on leverage using estimate of fixed effect model under Ordinary Least Square (OLS) regression. Checking multicollinearity and estimating regression analysis through Pearson correlation and autoregressive mode respectively this study found that profitability, tangibility, liquidity, and managerial ownership have significant and negative impact on leverage. Positive and significant impact of growth opportunity and non-debt tax shield on leverage has been found in this study. On the other hand size, earnings volatility, and dividend payment were not found to be significant explanatory variables of leverage. Results also reveal that total debt to total assets ratios are significantly different across Bangladeshi industries. Keywords: Capital structure, Leverage, Firm’s specific factors, Dhaka Stock Exchange Bangladesh.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
The Journal will bring together leading researchers, engineers and scientists in the domain of interest from around the world. Topics of interest for submission include, but are not limited to
Brennan, Niamh and McDermott, Michael [2004] Alternative Perspectives on Inde...Prof Niamh M. Brennan
This paper examines the issue of independence of boards of directors and non-executive direc¬tors of companies listed on the Irish Stock Exchange. Based on information published in annual reports, the study found that most Irish listed companies were complying with the Combined Code’s recommendations for a balanced board structure, albeit with only 60 per cent having majority-independent boards. The study found a lack of consistency in inter-preting the definition of “independence”, a lack of disclosure of information and, by apply¬ing criteria generally regarded as prerequisite to independence of non-executive directors, certain situations which imposed upon their independence.
Impact of Corporate Governance on Organizational PerformanceJenıstön Delımä
Citation: Delima, V. J., & Ragel, V. R. (2017). Impact of corporate governance on organizational performance. International Journal of Engineering Research and General Science, 5(5).
Abstract- This study examined whether corporate governance has impact on organizational performance in Financial Institutions as research problem. This research was carried out with objective to measure association between Corporate Governance and Financial Institution’s Performance in Batticaloa district. Conceptual framework has been developed to measure linkages between Corporate Governance and Financial Institution’s Performance. Board Size, Corporate Governance Mechanism, Communication Strategies, and Code of Conduct are considered as the measurement variables of Corporate Governance which was derived from Changezi & Saeed (2013) and Customer Satisfaction, Employee Commitment and Corporate Reputation are considered as the measurement variable of Organizational Performance which was derived from Bayoud (2012) and Carton (2004). Questionnaires were used to collect data for this study. 115 Management Respondents and 115 Customers from whole Financial Institutions in Batticaloa district have been selected for this study. Data were analyzed and evaluated by Univariate and Bivariate techniques. In Univariate analysis, Descriptive statistic has been used for the analysis. In Bivariate analysis, Correlation and multiple regressions have been used for the analysis. Findings have shown the Corporate Governance and Organizational Performance are at high level. Moreover, it also found that there is a strong positive relationship between Corporate Governance and Organizational Performance. Corporate Governance significantly impacts Organizational Performance of Financial Institutions. These findings would be useful to consider more on Corporate Governance practices to avoid the Corporate Collapses and to achieve successful Organizational Performance
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
The Journal will bring together leading researchers, engineers and scientists in the domain of interest from around the world. Topics of interest for submission include, but are not limited to
Brennan, Niamh and McDermott, Michael [2004] Alternative Perspectives on Inde...Prof Niamh M. Brennan
This paper examines the issue of independence of boards of directors and non-executive direc¬tors of companies listed on the Irish Stock Exchange. Based on information published in annual reports, the study found that most Irish listed companies were complying with the Combined Code’s recommendations for a balanced board structure, albeit with only 60 per cent having majority-independent boards. The study found a lack of consistency in inter-preting the definition of “independence”, a lack of disclosure of information and, by apply¬ing criteria generally regarded as prerequisite to independence of non-executive directors, certain situations which imposed upon their independence.
Impact of Corporate Governance on Organizational PerformanceJenıstön Delımä
Citation: Delima, V. J., & Ragel, V. R. (2017). Impact of corporate governance on organizational performance. International Journal of Engineering Research and General Science, 5(5).
Abstract- This study examined whether corporate governance has impact on organizational performance in Financial Institutions as research problem. This research was carried out with objective to measure association between Corporate Governance and Financial Institution’s Performance in Batticaloa district. Conceptual framework has been developed to measure linkages between Corporate Governance and Financial Institution’s Performance. Board Size, Corporate Governance Mechanism, Communication Strategies, and Code of Conduct are considered as the measurement variables of Corporate Governance which was derived from Changezi & Saeed (2013) and Customer Satisfaction, Employee Commitment and Corporate Reputation are considered as the measurement variable of Organizational Performance which was derived from Bayoud (2012) and Carton (2004). Questionnaires were used to collect data for this study. 115 Management Respondents and 115 Customers from whole Financial Institutions in Batticaloa district have been selected for this study. Data were analyzed and evaluated by Univariate and Bivariate techniques. In Univariate analysis, Descriptive statistic has been used for the analysis. In Bivariate analysis, Correlation and multiple regressions have been used for the analysis. Findings have shown the Corporate Governance and Organizational Performance are at high level. Moreover, it also found that there is a strong positive relationship between Corporate Governance and Organizational Performance. Corporate Governance significantly impacts Organizational Performance of Financial Institutions. These findings would be useful to consider more on Corporate Governance practices to avoid the Corporate Collapses and to achieve successful Organizational Performance
Investigating Corporate Governance And Its Effect on Firm Performance with As...QUESTJOURNAL
ABSTRACT: Corporate governance and its effect on firm performance are investigated in this research. Research independent variables include non-bound members of board of directors, board of directors’ independence, institutional shareholders, and dependent variable includes assets return which is the index of firm’s performance. Accordingly, data of 125 accepted firms in Tehran securities exchange during 2009 to 2013 was extracted and panel data regression model was applied to test the hypotheses. Results indicate an inverse significant relationship between non-bound members of board of directors and assets return and a positive significant relationship between board of directors’ independence and firm’s performance. Also, there is a positive relationship between institutional shareholders and firm’s performance. In general, results showed that appropriate corporate governance improves firms’ performance.
The Effect of Capital Structure on Profitability of Energy American Firms:inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Article: Influence of Corporate Board Characteristics on Firm Performance of ...McRey Banderlipe II
Using disclosure information from 29 listed property companies in the Philippines, the results revealed that managerial ownership positively influences firm performance. Moreover, firm size, leverage, and age influence the accounting-based measures of performance to a great extent than the market-based measures. Further research should focus on the overall impact of corporate governance using different measures of performance to better assist the decision making of the company’s stakeholders.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Corporate Governance and Firm Performance: The Role of Transparency & Disclos...Muhammad Arslan
Purpose: This purpose of this paper is to empirically examine the relationship between transparency and disclosure and firm performance. Highlighting the importance of corporate governance in banking sector, the paper has focused in depth over its role, level and its impact on performance in banking industry of Pakistan. Design/methodology/approach: The paper access this purpose by constructing transparency and disclosure index for the past five year 2007-2011, using proxies for three sub-categories which are board and management structure disclosure, ownership structure disclosure and financial transparency disclosure. The paper also investigated structural changes of T&D Index and its effect on bank financial performance over the sample of 30 banks operating in Pakistan. Findings: Empirical analysis results by using ordinary least square regression model, reveals that financial performance is positively related to the transparency and disclosure and their sub levels except ownership structure disclosure which has negative relation with both ROA and ROE. Furthermore the average T&D level in Pakistani banking sector is above average. Practical implications: The current research paper aims for important policy implementation to reduce information asymmetry and improve corporate governance and firm performance in banking sector of Pakistan.
Corporate governance and bank performance: Empirical evidence from Nepalese f...Rajesh Gupta
This paper examines the effects of corporate governance on bank performance in the context of Nepal. Return on assets (ROA) and return on equity (ROE) are dependent variables for bank performance, and board size, female board members, financial institutions, CEO duality, independent directors, firm size, firm age, earnings per share, and the capital adequacy ratio are independent variables for corporate governance.
Corporate Governance and Corporate Profitability Empirical Study of Listed La...ijtsrd
Corporate governance is concerned with ways in which all parties interested in the well- being of the organization attempt to ensure that mangers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders.. The purpose of the study is to find out the impact of corporate governance on profitability of listed Land and Property companies in Sri Lanka. Return of Assets is used as dependent variable. To measure the corporate governance, Board size, Board composition and independent directors of Remuneration committee. number of auditors are considered in this study. Firm size was considered as control variable in this study. The data were collected from firms annual financial reports and Data Stream over the period of 2011to 2016, from the CSE website. Descriptive statistics, correlation analysis, multiple linear regression analysis were used to analyse the data and examine the hypotheses by using the E-views 10 version, in this study. The findings revealed that there is a positive and significant relationship between ROA with auditors, board composition. Independent directors of Remuneration committee and board size are insignificantly correlated with ROA. Furthermore, it was found that the control variable firm size was insignificant in influencing firm performance ROA ..This study provides useful information for policy makers, regulators in improving the corporate governance policies in the future and also helps in increasing and understanding the relationship between corporate governance and firms performance. S. Anandasayanan | H. Thavarasasingam "Corporate Governance and Corporate Profitability: Empirical Study of Listed Land and Property Companies in Sri Lanka" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-3 | Issue-2 , February 2019, URL: https://www.ijtsrd.com/papers/ijtsrd20309.pdf
Paper URL: https://www.ijtsrd.com/management/accounting-and-finance/20309/corporate-governance-and-corporate-profitability-empirical-study-of-listed-land-and-property-companies-in-sri-lanka/s-anandasayanan
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Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
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1. Elemental Economics - Introduction to mining.pdfNeal Brewster
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BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
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Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
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Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
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There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
Scope Of Macroeconomics introduction and basic theories
Corporate governance and financing dicisions of listed firms in pakistan
1. European Journal of Business and Management
www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.5, No.23, 2013
Corporate Governance and Financing Dicisions of Listed Firms in
Pakistan
Sajid Gul
Faculty of Administrative Sciences Air University Islamabad
Email: Sajidali10@hotmail.com
Fakhra Malik
Lecturer Department of Business Administration Air University Islamabad
E-mail: Fakhra.malik@mail.au.edu.pk
Muhammad Faisal Siddiqui
Assistant Professor Department of Business Administration Air University Islamabad
E-mail: faisal@mail.au.edu.pk
Nasir Razzaq
PhD Scholar SZABIST Islamabad
E-mail: master_nasir18@yahoo.com
Abstract
The purpose of the study is to explore the link between corporate governance mechanisms and firms financing
decisions. We have selected 24 banks which were listed on the “Karachi Stock Exchange”, during the period of
2008-2012. The Ownership Concentration, composition and size of the board, and role duality were considered
as independent corporate governance variables while firm specific control variables were size, liquidity,
profitability and tangibility of assets. Debt ratio is taken as a dependent variable representing firm’s financing
decision (capital structure). The results indicate that Ownership Concentration, Size of the board, and leverage
are positively correlated. However no significant relationship was found between Board composition, CEO
duality and capital structure. We use panal least square regression to determine the affect of corporate
governance and firm level characteristics on capital structure.
Keywords: Banking Sector, Capital Structure, Corporate Governance
GEL Classifications: G30, G32
1. Introduction
Corporate governance (CG) has gained a lot of attention in the last decade from different interested parties such
as regulators, professional bodies and academics. However, despite this fact, no specific definition has won
general agreement among these parties Solomon (2007). Therefore, the traditional literature on corporate
governance approaches the subject from various angles and reveals a number of definitions based on different
business environments and corporate systems. In its narrowest sense, (Shahid, 2001, p. 3) defined CG as "the set
of rules and incentives by which the management of a company is directed and controlled in order to maximize
the profitability and long term value of the firm for shareholders". This definition tends to accord with the
agency theory, in which companies should act in favour of shareholders by maximizing their profits Shahid
(2001). In a broader sense OECD (2004, p. 1) describes CG as a set of relationship between a firms management
its board its directors and other stakeholders.
Capital structure is basically a mix of company’s leverage and equity that a firm uses to finance its assets Gul et
al, (2012). By issuing bonds or long-term notes payable firms can generate debt, while equity consists of
common stock and preferred stock. The proportion of debt in capital structure is measured by leverages. The
capital structure decision has played a very pivotal role in the establishment and growth of firms for many years.
Capital structure decisions provide opportunities that help in increasing the wealth of the shareholders. The
article tries to explore the link between corporate governance mechanisms and capital structure for a sample of
24 listed banks in the “Karachi Stock Exchange (KSE)” during the period 2008-2012. The reminder of the paper
is as follow. Section 2 highlights the prior literature on corporate governance and capital structure. Section 3
addresses the methodology and measurement of variables and sections 4 discuss analysis of results and
conclusion.
2. Literature Review
It has been found in prior literature that capital structure decisions are affected by corporate governance
mechanisms for example Berger et al, (1997); Wen et al, (2003) and Abor (2007). Main corporate governance
74
2. European Journal of Business and Management
www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.5, No.23, 2013
mechanisms identified in the literature are size and composition of the board, CEO/Chair duality, tenure of the
CEO and CEO compensation etc. Size of the board and capital structure was found to be positively correlated in
previous studies such as Wen et al (2002) and Abor (2007). They argue that in order to increase firm
performance firms with larger board’s uses higher leverage in their capital structure because larger boards are
more entrenched and are more closely monitored by regulatory authorities. However an inverse association was
found in a study by Berger et al (1997) between size of the board and firms leverage. Furthermore significant
association was found between board size and leverage in studies by Pfeffer and Salancick (1978) and Lipton
and Llorsch (1992). Large size boards are associated with higher agency problems which weakens corporate
governance due to which leverage increases, however low leverage firms have fewer numbers of outside
directors Jensen (1986). Duality is another variable which is extensively investigated in prior literature to have
an effect on leverage; duality means that same person acts as CEO and chairman of the firm. Fama and Jensen
(1983) argue that in order to reduce agency problem the roles must be performed by different persons. If dual
roles are performed by same individual it will be difficult for management to perform its key objective which is
to evaluate manager’s performance. Thus Fama and Jensen suggest splitting the monitoring of decisions from
implementation of decisions to reduce agency problems. It was found in a study by Fosberg (2004) that firms
with split roles uses higher amount of leverage, but this relation was statistically insignificant. On the other hand
Positive association was found by Abor and Biekpe (2007) between duality and firms leverage. Non executive
directors is an important corporate governance mechanism which increases a firms capability because outside
investors have more confidence on firms with more non executives in board decision making Pfeffer and
Salancick (1978). Jensen (1986) argues that companies with increased leverage have fewer non executive
directors. In a study by Abor and Biekpe (2007) in the context of Ghana found that non executive directors and
CEO duality have positive correlation with firm’s capital structure.
Jasir ilyas (2008) during the period 2000-2005 in Pakistani listed non financial firms show that most of the firm
tends toward the internal financing instead of the debt. In Pakistan debt or long term financing is not considered
as prior to internal equity financing because the bond market in Pakistan is not yet so developed. Titman &
Wessels (1988), using data from US industrial companies found that variable tangibility has insignificant affect
on leverage. However leverage and profitability were found to have negative correlation. In a comparative study
Rajan & Zingales (1995) use profitability, size, tangibility and growth and found that profitability, tangibility
and growth are negatively related to debt ratio. Whereas size and debt ratio were insignificantly correlated.
Fitim-Deari and Media-Deari (2009) in his investigation into Macedonian companies during the period 20052007 argue that in Macedonia financial market is poor and bondholders are absent thus, they don’t prefer to issue
bonds to borrow money. They found that their sample firms use internally generated funds to finance assets.
Tariq, Majed and Zia-ur-rehman (2011) done his work on data taken from Pakistani listed sugar and allied
industry firms and provide mix results. They found that profitability is negatively correlated with leverage,
whereas tangibility and leverage have strong positive correlation, while the remaining variables were statistically
insignificant.
3. Research Methodology
The sample for the study consisted of companies in the banking sectors that were listed in the “Karachi Stock
Exchange” during the period 2008 to 2012. Companies that were not listed in the “Karachi Stock Exchange”, for
the duration of the five year period were left out. Companies that did not have a full set of data on variables
mention in the study were also left out. Statistical analysis techniques were used to provide descriptive statistics
to determine the mean, median, standard deviation of each construct variable. Panal regression analysis was used
in the study.
The general form of our model is:
n
DR it=α+∑ βi X εit…………………………………………………………………. (1)
i
DR it = firms i debt ratio at time t,
α = the intercept
βi= the change co-efficient for Xit variables
X it = firm’s i independent variable at time t
3.1 Variables of the Study
3.1.1 Dependent Variable
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3.1.1.1 Debt Ratio
Following Rajan & Zingales (1995), Booth et al, (2001) and Beven & Danbolt (2002) we define debt ratio
(financial leverage) as:
Debt ratio (DR it) =total debt/total assets
3.1.1.2 Board size
In this study size of the board is taken as an independent variable, because of its importance in the strategic
decisions of a company like capital structure. We have taken the proxy of natural log of total board members to
measure size of the board.
3.1.1.3 Board composition
This variable is measured by the number of non executive directors divided by total directors on the board.
Outside investors prefer a firm with more non-executive directors because it is a signal that the firm is monitored
efficiently. Therefore such firms can obtain funds from the capital market on better terms.
3.1.1.4 CEO/Chair Duality
A dummy variable duality is used in the study which takes the value of 1 if CEO is chairman; otherwise 0. Fama
and Jensen (1983) argue that a corporation needs to have different persons as CEO and chairman in order to
reduce agency conflicts. In light of entrenchment hypothesis if both the roles are performed by same individual
then it will lead to managerial opportunistic behavior and can lead to lower leverage.
3.1.1.5 Ownership Concentration (OC)
Ownership concentration is measured by the amount of stock owned by individual investors and large-block
shareholders divided by total share
3.1.1.6 Firm Size
There are mix results about the relationship of size and debt ratio. Researchers such as Titman and Wessels
(1988), justify the positive relationship between size and debt ratio. Large firms are more diversified and have
less chances of bankruptcy thus lenders prefer larger firms. According to Um (2001) firm size may proxy for the
debt agency costs (monitoring cost) which arise from the conflict between managers and investors. Size is
proxied by total assets.
3.1.1.7 Liquidity
Current ratio is used to represent liquidity which is equal to current assets divided by current liabilities. We
expect that debt ratio is negatively correlated with liquidity of the firm simply because the firm that use more
debt will use more current liabilities and by paying their short term obligations they will have less amount of
current assets.
3.1.1.8 Tangibility of Assets
Tangible assets are collateralizable because they are acceptable to creditors as a security for issuing the debt,
therefore if the company then default on the debt, the assets must be seized, but the company may be in a
position to avoid bankruptcy. In an uncertain world, with asymmetric information, tangible assets are most
widely accepted source for bank borrowing and raising secured debt. The interest rate for those firms who have
more fixed assets will be lower because they can use this large amount of fixed assets as a security to creditors.
On the other hand, a firm with little collateralizable assets faces the difficulty to raise funds via debt financing
because of high cost of debt. Tangibility is measured by fixed assets divided by total assets.
3.1.1.9 Profitability
According to Myer and Majluf (1984) firms will go for internal finance over external finance, and firms who
have a large amount of retained earnings (profitability) will first finance their investments with retained earnings.
Moreover, according to Jensen and Meckling (1976, 1986) managers of profitable firms will use internal funds
for their self interest rather than shareholders interests. Profitability is proxied by net income before taxes
divided by total assets.
3.2 Hypothesis
H1: Concentrated ownership and firms leverage has significant correlation
H2: Composition of the board and firms leverage has significant correlation
H3: Size of the board and firms leverage has significant correlation
H4: CEO/Chair duality and firms leverage has significant correlation
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H5: Tangibility and firms leverage has significant correlation
H6: Profitability and firms leverage has significant correlation
H7: Liquidity and firms leverage has significant correlation
H8: Firm size and firms leverage has significant correlation
4. Discussion of Results
Table 1 presents the descriptive statistics for dependent and independent variables discussed above. Descriptive
statistics include the mean, median, standard deviation, minimum and maximum, values for the period 20082012. The data contains 24 banks listed in the, “Karachi Stock Exchange”.
Table 1: Descriptive statistics
Mean
Median
DR
0.8378
0.8124
OC
0.63524
0.69245
BC
0.55247
BS
Min
Max
0.4924
Std. Deviation
1.1547
0.1142
0.0000
1.0000
0.19523
0.61247
0.0000
1.0000
0.21457
4.2541
5.3245
3.0000
7.0000
0.39524
CEO
0.06825
0.0000
0.0000
1.0000
0.21547
PROF
0.0549
0.0199
-0.1120
0.2841
0.0499
TANG
0.0587
0.0251
0.0039
0.5449
0.1014
LIQ
1.3321
1.0452
0.5120
2.5421
0.2429
SIZE
10.2457
11.1900
6.41002
77
13.7612
1.1452
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Table 2: Result of Regression Output
Variables
Coefficient
Std. Error
t-Statistic
Prob.
OC
0.11254
0.019524
3.25414*
0.0000
BC
0.000241
0.004524
0.04524
0.6524
BS
0.049575
0.02451
2.1368**
Duality
0.005624
0.004578
0.67854
0.0328
0.49524
Profitability
-0.327480
0.075326
-4.347495*
0.0000
Tangibility
0.077511
0.045258
1.712626***
0.0878
Liquidity
-0.055972
0.024483
Size
0.067685
0.002625
Intercept
0.255100
0.048527
2.28613**
0.0229
25.78178*
0.0000
5.256818*
0.0000
R-squared
0.574214
Mean dependent var
0.653214
Adjusted R-squared
0.564572
S.D. dependent var
0.235475
S.E. of regression
0.124810
Akaike info criterion
-1.785324
Sum squared resid
4.635471
Schwarz criterion
-1.452142
Log likelihood
231.4523
F-statistic
49.23142
Durbin-Watson stat
1.624457
Prob (F-statistic)
0.000000
*significant at 1% level, **significant at 5% level, ***significant at 10% level.
In this study R-square value is 57%. Profitability is found to be negatively correlated with firm’s debt ratio. It
means that profitable firms in Pakistani banking sector maintain low debt ratios. The results show that ownership
concentration and dependent variable capital structure are significantly positively correlated. The association
between firms leverage and explanatory variable board composition is positive but this relation is insignificant
thus our hypothesis which predicts significant link between board composition and leverage is not supported.
Further it was found that leverage increases as size of the board increases and this relationship is statistically
significant thus our hypotheses cannot be rejected. As shown in Table, the coefficient of CEO is not statistically
significant; this indicates that CEO duality has no significant effect on capital structure; thus our hypothesis is
not supported. Tangibility, with positive coefficient is significantly related to debt. The finding is in conformity
with the prediction of Jenson and Meckling (1976) and Myer’s (1977). The advantage of debt investment is that
creditors receive uninterruptible stream of income due to debt investment except in case of bankruptcy.
Creditors have no tension about the interest payment by firm on their debt, if the firm is performing well. But it
well be difficult for them to continuously monitor the operations and performance of the firm, therefore they can
overcome this trouble by asking the security of fixed assets like land, building, machinery etc. Thus creditors
will be willing to give loans to those firms who provide there fixed assets as a security against debt. Therefore
firms with less fixed assets cannot borrow large amount of debt because of high cost of debt, but on the other
hand firms with higher amount of fixed assets in total assets can borrow more due to lower interest rate.
Similarly, the results between liquidity of the firms and its debt ratio show significant negative relationship in
banking sector. Companies with high liquidity tend to use less amount of debt, simply because it provides an
indication that firms generally finance their activities by internal funds. The relationship between size and
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dependent variable debt ratio is positive and statistically significant. This means that larger firms have high debt
ratio. Considering the fact that large firms are more diversified, bear less risk and have more consistent cash
flows, therefore they can afford higher levels of debt.
5. Conclusion
The purpose of the present study is to investigate whether there is any relationship between some specific
features of corporate governance and capital structure of listed banks in the “Karachi Stock Exchange (KSE)”.
We have selected 24 banks which were listed on the KSE during the period of 2008-2012. The Ownership
Concentration, Board composition, Board Size, and CEO duality were considered as independent corporate
governance variables while firm specific control variables were size, liquidity, profitability and tangibility of
assets. Debt ratio is taken as a dependent variable representing firm’s financing decision (capital structure). The
results indicate a positive relationship between Ownership Concentration, Board Size, and capital structure.
However no significant relationship was found between Board composition, CEO duality and capital structure.
We use panal least square regression to determine the affect of corporate governance and firm level
characteristics on capital structure.
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