Foreign Ownership, Governance Practices and Gearing Level: Evidence from Pakistan Stock Exchange

Abstract

The aim of this study is to find out the impact of ownership structure and corporate governance on capital structure of the 56 companies of PSE 100 index. It explores the impact of foreign ownership and corporate governance factors on capital structure. In this research secondary data is used by annual reports of the companies of Pakistan. In this study, foreign ownership is negatively related to debt ratio and statistically significant. This finding suggests that higher the foreign ownership in the firm lower will be the debt ratio of the firm. Previous studies like Gedajlovic et al. (2005) supported previous studies that there exist negative relationship between foreign ownership and capital structure. This finding suggests that large board size favors higher debt ratio Large companies have large board size and such companies with giant assets take debt on favorable terms. Large board size results in low debt cost because creditors think that the firm is under strict supervision of the diversified board. Coles et al. (2008) reports a positive relationship between board size and capital structure in American context.  They provide a possible explanation for this is that firm with high gearing ratio may have larger advising requirements then firms with low gearing levels. (2004) also found positive relationship between board size and debt ratio, he argues that firm with higher boards have easy access to debt at favorable terms. This finding suggests that CEO duality leads to firm’s lower debt usage. Higher the board independence higher the leverage of the firm. Firm size is positively related to the leverage of the firm and has a significant positive impact on leverage. This means that larger the firm size higher will be the debt

Keywords: Foreign Ownership, Board Size, Board Independence, CEO Duality Capital Structure1. Heading 1