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.

1. Effects Of Corporate Governance
On Capital Structure: Empirical
Evidence From Pakistan

2. PURPOSE:
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.
PRACTICLE IMPLICATIONS:
The results of this study provide support to corporate managers in
establishing an optimal capital structure.
To regulatory authorities for enacting laws and developing institutional support to
make corporate governance mechanisms work more effectively in the country.

3. GAP:
A great deal of research to analyze the influence of corporate governance on
capital structure has been carried out in developed countries little is known about the
developing countries that have different institutional structures.
Introduction:
Corporate governance is concerned with the ways by which suppliers of capital to firms
assure themselves of getting returns on their investment Sound corporate governance
practices are essential for :
 Sustainable development and growth of an economy
 Experienced a vigorous growth of corporate sector
 Maximize the shareholder’s wealth and reducing the cost of funds.

4. Capital
Structure
Board size
Outside
Directors
Ownership
concentration
Managerial
Ownership
Director’s
Remuneration
CEO Duality
Frame Work

5. Background of corporate governance in Pakistan:
Pakistani companies still have weak internal and external corporate governance
mechanisms compared to companies in developed countries.
The government of Pakistan has taken various steps to improve the corporate
governance for this they opened the secondary market in 1991.
The most important initiative is the establishment of the Securities and Exchange
Commission of Pakistan (SECP)
SECP has started its operations on January 1, 1999 and introduced the Code of
Corporate Governance (CCG) on March 28, 2002 in order to establish a system whereby
a company is directed and controlled by its directors.

6. Researcher Independent
Variable
Dependent
Variable
Results Effects
An additional board member is
associated with about a 10
basis point lower
cost of debt financing.
Anderson et al.
(2004)
Board Size Cost of Debt negative
relationship
Abor (2007)
Bokpin and
Arko (2009)
Wen et al.
(2002)
Board Size Leverage Significant
and positive
relationship
Commercials banks feel
confident while extending
loans to firm with large board
size.
Literature Review

7. Researcher Independent
Variable
Dependent
Variable
Results Effects
Wen et al. (2002)
Abor (2007)
Bokpin and Arko
(2009)
Outside Directors Leverage Positive and
significant
It improve effective monitoring ,
credibility and also provide tax
shield benefit
Mehran (1992)
Friend and Lang
(1988) Brailsford et
al.(2002)
Ownership
Concentration
Leverage Positive They may demand higher debt
levels due to low cost compared
to new equity issue.
Berger et al. (1997)
Mehran (1992)
Kim and Sorensen
(1986) Bokpin and
Arko (2009)
Managerial
Ownership
Leverage Positive and
significant
Managers financial incentives
align with the shareholders and
they try to improve the firm’s
value.
Abdullah
(2006) John
and John
(1993) Wen et
al. (2002)
Pay performance
for Directors
Leverage Negatively
significant
As performance increase profit
also increase so use inner
resources and take nodebt.

8. Researcher Independent
Variable
Dependent
Variable
Results Effects
Fosberg (2004)
Abor (2007)
Bokpin and
Arko (2009)
CEO Duality Leverage Positively
significant
The stewardship and
resource dependence theory
suggests that CEO duality
would facilitate effective
action by the CEO, and
therefore lead to
high performance.
Kyereboah-
Coleman and
Biekpe (2006)
CEO Duality Leverage Negatively
significant
When CEO also serves as
chairperson of the board,
agency cost rise and this
factor
discourage the lenders to
invest in such entities.

9. Research Methodology
This study investigates the significant corporate governance attributes that may affect
the capital structure of non-financial firms listed on the Karachi Stock Exchange Pakistan
during 2004-2008.
Data was obtained from yearly annual reports of companies in sample.
Initially all 436 non-financial firms were included in the sample.
Thus, final sample set consists of 775 observations for 155 firms over a period of five
years

10. Table I MEASUREMENTS
Variables Definition
“Dependent Variables ”
Total debt ratio (TDRit) Ratio of total debt to total assets. Total debt is the sum of short-
term debt and long-term debt
Long-term debt ratio (LTDRit) Ratio of long-term debt to total assets
“Explanatory Variables ”
Board size (BSit) Logarithm of number of board members
Outside directors (ODit) Ratio of outside directors to total board members
Ownership concentration (OCit) Ratio of shares held by five largest shareholders to total
outstanding shares
Managerial ownership (MOWNit) Ratio of shares held by CEOs, directors, to total outstanding
shares
Director remuneration (DREMit) Logarithm of director remuneration
CEO duality (CDit) A dummy variable, 1 if CEO is the Chairman, 0 otherwise
“Control Variables ”
Profitability (PROFit) Ratio net profit after taxes to total assets
Size (SIZEit) Natural logarithm of total assets
Liquidity (LIQit) Ratio of current assets to current liabilities
Asset tangibility (ATit) Ratio of net fixed assets to total assets

11. Table II Descriptive Statistics For Variables Used In Model
VARIABLE OBS. MEAN STD. DEV MINIMUM MAXIMUM
TDRit 775 0.59624 0.19151 0.04541 0.99394
LTDRit 775 0.22231 0.16743 0.00000 0.87651
BSit 775 0.89424 0.06900 0.84509 1.14612
Odit 775 0.06837 0.10364 0.00000 0.60000
OCit 775 0.58362 0.18160 0.06200 0.97342
MOWNit 775 0.29658 0.24681 5.35e-09 0.96595
DREMit 775 6.61306 0.54402 3.99246 7.90469
CDit 775 0.24903 0.43273 0.00000 1.00000
PROFit 775 0.06600 0.10699 -0.31727 0.79671
SIZEit 775 21.4830 1.38317 17.91891 2 5.5683
LIQit 775 1.41727 1.06995 0.126257 11.7963
ATit 775 0.54661 0.19533 0.026127 0.95639

12. Table III Yearly Mean Value Of Shareholding Pattern
Percentage of shares held by 2004 2005 2006 2007 2008 Mean N=5
a. CEOs 2.67 3.00 4.08 4.09 4.82 3.73
b. Directors 7.18 7.97 8.46 8.76 8.55 8.18
c. Directors’ family members 1.34 1.58 1.38 1.36 1.20 1.37
d. Total (a-c) 11.19 12.55 13.92 14.21 14.57 13.28(4)
e. Banks 9.27 7.84 6.60 6.77 8.60 7.82
f. Insurance companies 1.90 2.01 2.06 1.96 1.85 1.96
g. Modaraba companies 1.05 0.80 1.17 1.15 1.25 1.08
h. Investment companies 3.70 4.60 3.94 3.75 3.50 3.90
i. Total (e-h) 15.92 15.25 13.77 13.63 15.20 14.76(3)
j. Other companies 42.47 42.90 42.51 43.21 42.85 42.79 (1)
k. General public 30.42 29.30 29.80 28.95 27.38 29.17 (2)
l. Grand total 100 100 100 100 100 100

13. Correlation Analysis

14. Table V Regression Estimates Using Total Debt Ratio (Tdrit) As Dependent Variable
Variable Coefficient Std. error t-statistic Prob.
C 0.857060 0.092100 9.31 0.000
BSit 0.193356 0.072663 2.66 0.008
Odi t 0.110904 +ve 0.044569 2.49 0.013 Sig
OCit 0.054968 0.025892 2.12 0.034
MOWNit -0.027881 0.020906 -1.33 0.183 In-sig
DREMit -0.065178 -ve 0.009992 -6.52 0.000 sig
CDit -0.004538 –ve 0.010879 -0.42 0.677 H- In-sig
PROFit -0.584529 0.051772 -11.29 0.000
SIZEit 0.011384 0.004118 2.76 0.006
LIQit -0.100180 0.004957 -20.21 0.000
ATit -0.177427 0.025982 -6.83 0.000
R Square= 0.5761

15. Table VI Regression Estimates Using Long-term Debt Ratio (Ltdrit) As
Dependent Variable
Variable Coefficient Std. error t-statistic Prob.
C -0.037374 0.083846 -0.45 0.656
BSit 0.233208 0.066151 3.53 0.000 sig
Odit 0.073574 +ve 0.040575 1.81 0.070
Ocit 0.040435 0.023572 1.72 0.087 sig @10% level
MOWNit -0.039714 0.019032 -2.09 0.037 sig
DREMit -0.055951 -ve 0.009097 -6.15 0.000 sig
CDit -0.009483 -ve 0.009904 -0.96 0.339 H-in.sig
PROFit -0.163532 0.047132 -3.47 0.001
SIZEit 0.006486 0.003749 1.73 0.084
LIQit -0.010136 0.003749 -2.25 0.025
ATit 0.535059 0.023654 22.62 0.000
R Square= 0.5404.
F- statistics= 89.82