Effects of corporate governance on capital structure: empirical evidence from Pakistan

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. Design/methodology/approach - Multiple regression analysis is used to estimate the relationship between corporate governance measures and capital structure of non-financial firms listed on the Karachi Stock Exchange, Pakistan, during 2004-2008. Findings - The results suggest that board size, outside directors, and ownership concentration are positively related to the total debt ratio and the long-term debt ratio, whereas director remuneration is negatively related. Managerial ownership is negatively related to the long-term debt ratio. CEO duality is found to be highly insignificant in all regressions. Control variables such as profitability and liquidity are negatively related to the total debt ratio and the long- term debt ratio, whereas firm size is positively related. Asset tangibility is positively related to the long- term debt ratio and negatively related to the total debt ratio. Although Pakistani firms have weak internal and external corporate governance mechanisms compared to firms in developed countries, the empirical findings suggest that corporate governance attributes in part explicate the financing behavior of Pakistani firms. Practical implications - The empirical results of this study provide support to corporate managers in establishing an optimal capital structure, and to regulatory authorities for enacting laws and developing institutional support to make corporate governance mechanisms work more effectively in the country. Originality/value - This research contributes to the literature by illuminating the significant links between some corporate governance measures and capital structure choices of firms in Pakistan.