Umar Butt, Zayed University

Document Type

Article

Source of Publication

Theoretical Economics Letters

Publication Date

9-17-2019

Abstract

In this paper we explore the static trade-off theory of capital structure under different governance structures. We find that good governance firms have leverage ratios that are higher (forty-seven percent) than poor governance firms per unit of profit. Evidence also suggests that while the leverage ratio for good governance firms has a narrower range and adjusts with changes in profit, the same is not true for poor governance firms. Direct test of the theory finds that good governance firms exhibit a positive relationship between profits and leverage, while poor governance firms show an inverse relationship. Further tests provide evidence for the varying use of tangible assets and size in leverage increasing activities for the two classifications of firms. The results of the paper demonstrate that the mixed results of prior studies notwithstanding, leverage is increasing in profits when controlled for agency problems, and shareholder-controlled firms exhibit the results predicted by the theory.

ISSN

2162-2086

Publisher

Scientific Research

Volume

9

Issue

7

First Page

2236

Last Page

2261

Disciplines

Business

Keywords

Trade-Off Theory, Corporate Governance

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Indexed in Scopus

no

Open Access

yes

Open Access Type

Gold: This publication is openly available in an open access journal/series

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