Corporate Governance and Capital Structure: Evidence from Europe

Abstract

Purpose: The objective of this paper is to investigate the association between corporate governance and capital structure.   Theoretical framework: Since 1970, when the concept of corporate governance is introduced, the debate on whether it might affect capital structure have been ongoing. It is largely believed that in the real world, when effective cooperate governance adopted, strong capital structure can be achieved. Nonetheless, the experimental evidence reveals a variety of findings on such association.   Design/Methodology/Approach: Panel data was collected form annual reports of 42 non-financial listed firms on Frankfort and Oslo stock exchange over the period 2017-2021. Ordinary Least Square (OLS) regression model is utilized to estimate the connection between dependent and independent variables.   Findings: The finding shows that BS and AUCS are positively related with the capital structure and the result is significant. With respect to corporate governance, BM and BR with DTA have a negative and significant relationship. CEOC has positive but insignificant connection with DTA. Similarly, insignificant relationship between CEOT and DTA was observed. FS as a control variable has positive association with DTA, whereas the CR related DTA inversely. Despite the fact that, European firms mainly followed with a good corporate governance style if compared with developing countries, the results are still recommended further improvement for the firms in both countries in order to improve the financial position   Research, practical & social implications: Future studies should focus on other corporate governance indicators that might affect capital structure significantly. It is also recommended for them to focus on financial firms and make a comparison between financial and non-financial firms.   Originality/Value: By providing significant data for the impact of corporate governance on capital structure, this research contributes with existing literature on governance mechanism and management of capital structure. The findings will guide policymakers in various countries in determining the effectiveness of availability corporate governance reforms to enhance the structure of capital.