Capital Structure and Corporate Governance Quality: Evidence from the Institutional Shareholder Services (ISS)

40 Pages Posted: 4 Oct 2011

See all articles by Pornsit Jiraporn

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Pattanaporn Chatjuthamard

Sasin GIBA

Date Written: October 4, 2011

Abstract

Grounded in agency theory, this study explores how capital structure is influenced by aggregate corporate governance quality. We employ broad-based governance measures that encompass multiple factors, including boards, audit quality, charter/bylaws, director quality, executive compensation, ownership, and state of incorporation. We document a robust negative association between leverage and governance quality. The evidence reveals that firms with poor governance are significantly more leveraged. It appears that leverage substitutes for corporate governance in alleviating agency conflicts. We also present supportive evidence that leverage helps firms raise capital by sending a signal to the capital markets about the firm’s governance. Finally, we utilize empirical methods that control for potential endogeneity and show that poor governance quality likely brings about, and does not merely reflect, higher leverage. Our results are important as they show that the overall quality of corporate governance has a material impact on critical corporate decisions such as capital structure choices.

Suggested Citation

Jiraporn, Pornsit and Kim, Jang-Chul and Kim, Young Sang and Chatjuthamard, Pattanaporn, Capital Structure and Corporate Governance Quality: Evidence from the Institutional Shareholder Services (ISS) (October 4, 2011). Available at SSRN: https://ssrn.com/abstract=1938679 or http://dx.doi.org/10.2139/ssrn.1938679

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Accounting, Finance, and Business Law
Highland Heights, KY 41099
United States
859-572-1486 (Phone)

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Pattanaporn Chatjuthamard

Sasin GIBA ( email )

Bangkok
Thailand

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