Macroeconomic uncertainty, corporate governance and corporate capital structure

Abstract

Purpose: The purpose of this paper is to examine how corporate governance moderates the relationship between macroeconomic uncertainty and corporate capital structure. Design/methodology/approach: This paper employs the two-step system generalized method of moments regression, considering a sample of 907 listed non-financial firms from seven Asia Pacific countries during the period 2004-2014. Findings: This study finds that macroeconomic uncertainty has a significant negative impact on the capital structure decisions of firms. The results also reveal that the overall effect of macroeconomic uncertainty on capital structure among firms with better governance quality is significantly negative. The evidence suggests that corporate governance acts as an effective mechanism to curb the usage of leverage during times of high volatility. Further analysis shows that board independence, the separation between the roles of CEO and chairman of the board and blockholders' ownership are effective governance mechanisms, whereas similar observations do not hold for board size and institutional ownership. Research limitations/implications: The findings of this study may be useful to policy makers to formulate appropriate policies to mitigate the adverse effects caused by macroeconomic uncertainty. This is important because macroeconomic uncertainty may have potential destabilizing effects on a country's or region's development by jeopardizing the firms' ability to formulate sound investment, production and financing decisions. Additionally, the results suggest that good governance quality can act as a check and balance to ensure that firms use less leverage when they are facing volatility in the macroeconomic environment. These findings could help to reinforce the importance of good governance among policy makers of a country as well as managers of firms. Originality/value: The authors make the first attempt to examine the moderating effect of corporate governance on the relationship between macroeconomic uncertainty and corporate capital structure.

Sectoral Analysis of the Determinants of Corporate Capital Structure in Malaysia

“…This indicates that larger firms can obtain more debt financing since they are more diversified, have lower probability of going bankrupt, and possess greater bargaining power in the debt markets. This is also in accord with empirical findings by Li and Islam (2019), Chow et al (2018), andEbrahim et al (2014).…”

“…As a result, firms with more tangible assets can obtain debt financing with greater ease. Among empirical findings that support the trade-off theory are Li and Islam (2019), Chow et al (2018), andEbrahim et al (2014).…”

“…The dependent variable is book leverage ratio (LEV), which is measured as the ratio of the book value of total debt divided by the book value of total assets. The studies which have adopted similar definitions of book leverage ratio include Chow et al (2018) and Canarella et al (2014).…”

“…SIZE is meant to illustrate the magnitude of the representative company's operations. It is measured as the natural logarithm of total assets (Chow et al, 2018;Ebrahim et al, 2014). According to the trade-off theory, it is predicted that firm size has a positive relationship with leverage because larger firms are more diversified and face lower 5 This also implies that firms with fewer tangible assets would face more difficulties in obtaining debt financing.…”

The Sensitivity of Firms’ Investment to Uncertainty and Cash Flow: Evidence From Listed State-Owned Enterprises and Non-State-Owned Enterprises in China

“…Cf represents the cash flow ratio, computed as the ratio of net profits and depreciation to total assets (Cleary, 2005;Lima Crisóstomo et al, 2014;Phan, 2018). Lev denotes the leverage of a firm, measured as the ratio of total liabilities to total assets (Bai et al, 2014;Chow et al, 2018). Tobin's Q is the ratio of the sum of the market value of equity and total liabilities to lagged total assets (Wang et al, 2017).…”