Yes, sure. Weak corporate governance would allow managers to do what they prefer to, which could be at the expense of equity holders, eg: excessive debts, etc.
CG deals with how companies are managed (decission making) and structured (ie: Board/shareholders) . The Company Capital Structure is deceded upon throgh CG mechanisms. That is, in my view the relationship between both
When there is good corporate governance and capital structure, there will be better and efficient practice in the management of corporations.
Corporate governance variable consists of ownership structure, board size, no. of independent directors and so on. You can make a governance index comprising the variables to check the relation between corporate governance and capital structure. There are a number of articles available on the topic. There is a paper exploring relation between capital structure and ownership structure in vol 30, part 1 of 'Studies in Economics and Finance' (Emerald)
The theoretical relationship finds its root in Jensen(1986). He laid the disciplinary hypothesis of debt. A new approach of the problem is now in the conflict between the controlling shareholder and outside invetors. How debt and leverage may affect the setting of an implicit contract of control? So the question is the relationship between debt, pribvate benefits and control shareholding.See my paper in www.ssrn.com
Please check this article for a recent work in the area: Morellec, Erwan and Nikolov, Boris and Schürhoff, Norman, Corporate Governance and Capital Structure Dynamics (September 1, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1106164 or http://dx.doi.org/10.2139/ssrn.1106164
Yes, I believe, corporate governance has an impact on capital structure. Good corporate governance means the standard of best practices in the business. Good corporate governance is a prerequisite for attracting capital required to ensure continued, long-term, economic growth and furthermore it can also lead to better relations with workers, creditors and other stakeholders. It increases the creditworthiness and reputation of the firm. As a result, the firm with good governance can collect their required capital with lower cost and easily than the firm that do not practices good governance. Therefore, the weighted average cost of capital of good governance firm is much lower than the firm that do not maintain good governance.
The capital structure is an internal mechanism of corporate governance (c.g.). C.G. could be defined as the system by which companies are directed, controlled and evaluated. The capital structure would be a way to align the incentives of managers with directors' ones and a signal to convey information in capital markets.
Good Corporate Governance should reduce the risk (specific and systematic), realigns the two utility functions (owner-manager), reducing the size of the control premium and, therefore, the extraction of private benefits.
I find interesting, and symbolic, the following definition: “Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” (Shleifer, A., and Vishny, R.W. (1997). The Journal of Finance, 52 (2), p. 737).
On theoretical grounds, Harris and Raviv (1990), Zhang (1998), Filatotchev et al. (2001), and Almeida and Wolfenzon (2005) have addressed the problem of debt levels within the context of the controlling-outside shareholders’ conflict and information asymmetry. The optimal claim design has been analyzed in the agency contracting literature. For instance, Gale and Hellwig (1985) have introduced implicit incentive contracts and have outlined the importance of debt contracts to meet asymmetry of information problems. Bolton and Scharfein (1990) have analyzed one-period risky cash flows that can be partly diverted by the managers. DeMarzo and Fishman (2007) have described financial contacting in a similar setting of potentially expropriated cash-flow. They introduced two categories of debt, i.e. long-term debt and a line of credit. In a continuous-time setting, Liu and Miao (2006) examined the controlling shareholders’ optimal choice of capital structure.
Dear Adeyemi,
Indeed corporate governance can have an impact on the firm's capital structure. If we assume that the capital structure is partly determined by the firm's risk profile we enter the field of the agency theory. As you certainly know, this theory tries to align the divergent interests of principals (shareholders) and agents (management). It is highly probable that the risk profiles of these groups will be different. Thus, corporate governance mechanisms would try to align the financing behavior of the executives with the return targeted (and thus the risk assumed) by the owners of the company.
Paul
Dear Hubert,
You might have a look to this paper:
The Role of Multiple Large Shareholders in the Choice of Debt Source
Financial Management, Spring 2017 ,volume 46, issue 1, (pages 241–274)
Sabri Boubaker, Wael Rouatbi and Walid Saffar
Best regards
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