Corporate Governance and Capital Structure Dynamics: An Empirical Study

41 Pages Posted: 16 Sep 2012 Last revised: 17 Aug 2016

See all articles by Li-Kai (Connie) Liao

Li-Kai (Connie) Liao

Tunghai University

Tarun K. Mukherjee

University of New Orleans

Wei Wang

Cleveland State University

Date Written: January 25, 2013


Morellec, Nikolov, and Schürhoff (2012) predict that a self-interested manager prefers a leverage level that is lower than the shareholders’ desired level, and effective corporate governance encourages timely capital structure rebalancing. In a U.S. sample during 1996-2008, we confirm that both a higher level of financial leverage and a faster speed of adjustment of leverage toward the shareholders’ desired level are associated with a better corporate governance quality as defined by a more independent board featuring CEO-Chairman separation and greater presence of outside directors, coupled with larger institutional shareholding. In contrast, managerial incentive compensation on average discourages use of debt or adjustments toward the shareholders’ desired level, consistent with its entrenchment effect. The effect of corporate governance on leverage adjustments is most pronounced when the initial leverage is between the manager’s desired level and the shareholders’ desired level where the interests of managers and shareholders conflict.

Keywords: Capital structure, corporate governance, adjustment costs, partial adjustment

JEL Classification: G30, G32, G34

Suggested Citation

Liao, Li-Kai and Mukherjee, Tarun K. and Wang, Wei, Corporate Governance and Capital Structure Dynamics: An Empirical Study (January 25, 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: or

Li-Kai Liao (Contact Author)

Tunghai University ( email )

BOX 979, No.1727, Sec.4, Taiwan Boulevard
Xitun District
Taichung, 40704

Tarun K. Mukherjee

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Wei Wang

Cleveland State University ( email )

Cleveland, OH 44115
United States

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