Open AccessCorporate Governance Quality and Capital Structure Decisions: Empirical Evidence from Canada
Author(s) -
Dan Lin,
Lu Lin
Publication year - 2019
Publication title -
advances in social sciences research journal
Language(s) - English
Resource type - Journals
ISSN - 2055-0286
DOI - 10.14738/assrj.69.7140
Subject(s) - corporate governance , leverage (statistics) , free cash flow , capital structure , business , agency cost , debt , accounting , index (typography) , quality (philosophy) , finance , empirical evidence , cost of capital , cash flow , economics , shareholder , market economy , computer science , incentive , philosophy , epistemology , machine learning , world wide web
This study examines the relationship between corporate governance quality and capital structure of firms listed on the S&P/TSX composite index between 2009 and 2012. Using an aggregate corporate governance index, this study finds support for the outcome hypothesis, which argues that capital structure is an “outcome” of corporate governance quality. Governance quality is found to be positively associated with firms’ leverage. Firms with lower governance quality have lower leverage as these firms’ managers do not like to have only little free cash flow leftover or have extra constraints imposed by debt financing. In contrast, firms with higher governance quality are more leveraged because these firms have lower agency costs and thus lower cost of debt financing. As a result, they can take on more debts. The empirical evidence from this study illuminates important links between governance quality and financing decisions of firms.