The Effects of Board Characteristics and Ownership Structure on the Corporate Financial Leverage

Abstract

The paper aims to investigate the linkage between some corporate governance mechanism such as board characteristics, ownership structure and corporate financial leverage in an emerging market, Egypt. To achieve the objectives of this study, we use a sample of 36 non-financial firms selected from the more actively traded 50 listed Egyptian firms in the Egyptian Stock Exchange (EGX) covering the period from 2007 to 2011. Measures of corporate financial leverage employed are the total debt ratio, the long-term debt ratio and the short-term debt ratio. The explanatory variables of corporate characteristics are board size, outside non-executive directors, CEO duality, and board female proportion. The measures of ownership structure include managerial ownership, institutional ownership, block holder's ownership and governmental ownership. Similarly, the effect of some control variables like firm size, profitability, growth and tangibility has been also examined. The multiple regression models (OLS) were used to analyze the data. Results show that institutional ownership and governmental ownership are significantly positively related to corporate leverage, whereas board size, board female, and block holding are found to be significantly negatively correlated. Although Egyptian firms still have weak corporate governance mechanisms compared to firms in developing countries, the empirical findings suggest that board characteristics and ownership structure playing an important role in deciding the Egyptian corporate financial leverage.