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Capital structure and corporate governance quality: Evidence from the Institutional Shareholder Services (ISS)

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  • Jiraporn, Pornsit
  • Kim, Jang-Chul
  • Kim, Young Sang
  • Kitsabunnarat, Pattanaporn

Abstract

Grounded in agency theory, this study explores how capital structure is influenced by aggregate corporate governance quality. We measure governance quality using broad-based comprehensive governance metrics provided by the Institutional Shareholder Services (ISS). The empirical evidence reveals a robust inverse association between leverage and governance quality. Firms with poor governance are significantly more leveraged. It appears that leverage substitutes for corporate governance in alleviating agency conflicts. Further, we utilize empirical methods that control for endogeneity and show that poor governance quality likely brings about, and does not merely reflect, higher leverage. Our results are important as they show that the overall quality of corporate governance has a material impact on critical corporate decisions such as capital structure choices.

Suggested Citation

  • Jiraporn, Pornsit & Kim, Jang-Chul & Kim, Young Sang & Kitsabunnarat, Pattanaporn, 2012. "Capital structure and corporate governance quality: Evidence from the Institutional Shareholder Services (ISS)," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 208-221.
    • Handle: RePEc:eee:reveco:v:22:y:2012:i:1:p:208-221
    DOI: 10.1016/j.iref.2011.10.014
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    More about this item

    Keywords

    Capital structure; Corporate governance; Agency costs; Leverage;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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