DefinePK

Abstract

In recent years, Pakistan's economy has shown astounding performance and a heavy amount of foreign direct investment (FDI) has been attracted to Pakistan. Therefore, the researcher believes that it is time to study the connection between corporate governance (CG) and firms' capital structure (CS) from Pakistan’s economic perspective. The study uses panel data of 350 non-financial companies listed on PSX with eleven years starting from 2010 to 2021. To resolve the unobserved heterogeneity and endogeneity problems in the panel data series, the researcher applies a one-step dynamic GMM model approach. The study uses static (random effect & fixed effect) estimation techniques for checking robustness. The results of the dynamic GMM model show that the board size, female directors, and outside independent directors have a positive and significant impact on CS. At the same time, CEO duality is reported as a statistically insignificant impact on CS and validates the agency theory. This study uses internal CG mechanisms it does not include external likewise media exposure, government rules, a takeover of the new government market competition, etc. To the best of the researcher’s knowledge, this study contributes as well as extends the literature on CG mechanism and CS by proposing new evidence on the impact of CG on CS. The researchers conclude that a higher amount of debt substitutes for weaker governance mechanisms in resolving agency problems because of the role of debt in reducing agency costs.