THE IMPACT OF CORPORATE GOVERNANCE ON CAPITAL STRUCTURE: A NEW PERSPECTIVE

Nadia Hermassi
University Elmanar of Tunis, Tunisia

Fodil Adjaoud
University of Ottawa, Canada

Chaker Aloui
University of Manouba, Tunisia

ABSTRACT

This study investigates the impact of corporate governance quality (measured by
corporate governance index, board compensation, compensation policy, shareholder right, and
disclosure policy) on capital structure (measured by total debt divided by total debt plus market
capitalization) in Canada. Using a sample of firm observations over the period 2002-2011, this
study revealed that firms with stronger corporate governance have lower market leverage.
Interestingly, this result is the same when the sub-indexes (board composition, shareholders
compensation and their rights) are considered separately.
Furthermore, it was found that disclosure policy has a positive impact on leverage. This
result is new to the literature. We also document that the relationship of market leverage with firm
profitability and growth opportunity is negative; and is positive with firm size. These results are
consistent with the Pecking Order Theory. This study is relevant since it adds a new piece to the
puzzle of capital structure and improves our understanding of how corporate governance and
capital structure are linked. It also helps to resurrect the Pecking Order Theory (Myers and
Majluf, 1984). Moreover, in an additional analysis, we find a positive relationship between
dividend payout and capital structure.

Keywords: Capital structure, market leverage, governance quality, Pecking Order Theory, dividend payout