Effect of Corporate Governance on Capital Structure: Case of the Srilankan Listed Manufacturing Companies

Abstract

ABSTRACTThe issue of corporate governance has been a growing area of management research especially among large and listed firms. Companies need financial resources to promote their objectives. Therefore, factors may affect the capital structure of companies should be considered carefully. The purpose of the present is to investigate whether there is any relationship between some specific features of corporate governance and capital structure of listed manufacturing firms in Colombo stock exchange. To do so 28 manufacturing companies were selected from those which were listed in Colombo stock exchange during the period of 2009 until 2011 as the sample of the study. The independent variables of the study included 'board size', 'board structure' 'board meeting 'and 'proportion of independent non executive directors' while the dependent variable was decided to be 'debt ratio' (as a criterion for capital structure). The variables were empirically tested by multiple regression analysis. This found that corporate governance practices have 34% impact on capital structure and among the corporate governance variables board committee has a significant effect on firms' capital structure.Keywords: Corporate Governance, Capital Structure, Colombo Stock Exchange, Multiple Liner Regression.INTRODUCTION:Key mechanisms that protect the interests of the shareholders are known as Corporate Governance.The need for strong governance is evidenced by the various reforms and standards developed by both national and international level(e.g: Code Of Best Practice On Corporate Governance In Srilanka, the Organization For Economic Development [OEDC] Code and etc). In general, corporate governance is considered as having significant implications for the growth prospects of an economy, because proper corporate governance practices reduce risk for investors, attract investment capital and improve performance of companies (Spanos 2005).Modigliani and Miller (1958) had developed a theory of capital structure. Although many Experts in the field have extended their capital structure theory, very few examined the relationship between corporate governance and capital structure. Since Modigliani and Miller (1958) capital structure irrelevance propositions, academic researchers have advanced a number of capital structure theories. These theories are extensive and can be classified into two groups: tax-based theories and non-tax based theories. Tax-based theories include both bankruptcy and trade-offtheories; while non-tax based theories include agency, signalling, pecking order and transaction cost theories (Khaled Hussainey and Khaled Aljifri). The present paper reviews relevant capital structure theories and attempts to relate the different theoretical attributes to the Srilankan business environment in order to formulate our research hypotheses.The issues of corporate governance have usually been associated with large and listed firms.During recent years there has been an increasing awareness of corporate governance in Sri Lanka. As a result of that, it is now mandatory for companies to comply with the corporate governance rules that formed part of the listing rules of the CSE, which took effect from the April 2008. Sri Lanka's code of best practice on corporate governance (2008) recommended boards include at least two non-executive directors or that nonexecutive directors make up a one third of the board.Good corporate governance is the rules and practices that govern the relationship within the managers and shareholders of corporations, as well as stakeholders such as employees and creditors, which contribute to growth and financial stability by underpinning market confidence, financial market integrity and economic efficiency (OECD 2004). The present study focuses on the link between corporate governance and capital structure of listed manufacturing companies in srilankaLITERATURE REVIEW:Capital structure decision is the vital one since the profitability of an enterprise is directly affected by such decision. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 53 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.