Board Governance Mechanisms and Capital Structure of Saudi Non-Financial Listed Firms: A Dynamic Panel Analysis

Ayman Hassan Bazhair

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Corporate Finance and Governance Financial Analysis and Corporate Governance Gender Diversity and Inequality

Abstract

The dynamic trade-off model emphasizes that random shocks and other constraints may force firms to deviate from their optimum debt ratio. In addition, firms must incur adjustment costs for them to revert to their target level due to market frictions. However, prior literature in Saudi does not consider the effect of adjustment costs in determining how board governance mechanisms influence capital structure. By exploiting the generalized method of moments framework (GMM), this study analyzed the balanced panel of 100 Saudi non-financial listed firms covering the period from 2010 to 2019. The research found that Saudi firms observed a dynamic adjustment to attain their target leverage at 30.46% annually. Besides that, findings from the present study equally indicate strongly that board size and CEO tenure are negatively associated with leverage. There is also strong evidence that Saudi firms with a substantial number of independent directors pursue a more levered capital structure. Gender diversity appears insignificant in predicting the firms’ target debt ratio. Consequently, the Saudi board of directors and firms’ managers should consider the adjustment costs and other market frictions when designing the optimum debt-equity ratio.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1998Initial conditions and moment restrictions in dynamic panel data models 1995Another look at the instrumental variable estimation of error-components models 1983Separation of Ownership and Control 1984Corporate financing and investment decisions when firms have information that investors do not have 2019American Economic Review 1980Agency Problems and the Theory of the Firm

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