Impact of Corporate Governance on Capital Structure Choice in Emerging Markets

This paper analyses the roles of corporate governance and national culture as factors explaining the chosen capital structure of companies operating in emerging economies. Developing countries are especially interesting for such analysis because there non-financial factors are supposed to play a more important role in the firms’ financial choices. Econometric estimation used 375 companies from 8 emerging economies. It was found that generally stronger corporate governance is associated with lower leverage both with and without control for cultural background. Namely, higher share of female directors has a significant negative relationship with debt-to-assets ratio in all cases unless uncertainty avoidance or masculinity scores of a country are also taken into account. The significance of board size’s inverse relationship with leverage is only revealed in presence of uncertainty avoidance or long-term orientation scores of corresponding societies. Share of independent directors on the board has shown to be statistically insignificant for the choice of capital structure. It can be derived from these results that cultural beliefs persistent in a country affect the ways in which corporate governance shapes capital structure. The findings could be valuable both for researchers in further studies on the subject and for professionals engaged in business, particularly in countries with developing markets.