Corporate governance practices and capital structure decisions: the moderating effect of gender diversity

• Pages: 939-964
• DOI: https://doi.org/10.1108/CG-11-2019-0343
• Date: 02 July 2020
• Published date: 02 July 2020
• Author: Mohammad A.A Zaid,Man Wang,Sara T.F. Abuhijleh,Ayman Issa,Mohammed W.A. Saleh,Farman Ali
• Subject Matter: Corporate governance,Strategy

Corporate governance practices

and capital structure decisions: the

moderating effect of gender diversity

Mohammad A.A Zaid, Man Wang, Sara T.F. Abuhijleh, Ayman Issa,

Mohammed W.A. Saleh and Farman Ali

Abstract

Purpose –Motivated by the agency theory, this studyaims to empirically examine the nexus between

board attributes and a firm’s financing decisions of non-financial listed firms in Palestine and how the

previousrelationship is moderated and shaped by the level of genderdiversity.

Design/methodology/approach –Multiple regression analysison a panel data was used. Further, we

applied three different approaches of static panel data ‘‘pooled OLS, fixed effect and random effect.’’

Fixed-effects estimatorwas selected as the optimal and most appropriate model.In addition, to control

for the potential endogeneityproblem and to profoundly analyze the study data, the authorsperform the

one-step system generalizedmethod of moments (GMM) estimator. Dynamic panel GMMspecification

was superiorin generating robust findings.

Findings –The findings clearlyunveil that all explanatory variablesin the study model have a significant

influence on the firm’s financingdecisions. Moreover, the results report that the impactof board size and

board independenceare more positive under conditions of a high levelof gender diversity, whereas the

influenceof CEO duality on the firm’s leverage level turned fromnegative to positive. In a nutshell, gender

diversitymoderates the effect of board structureon a firm’s financing decisions.

Research limitations/implications –This study was restricted to one institutional context (Palestine);

therefore, the results reflect the attributes of the Palestinian business environment. In this vein, it is

possibleto generate different findings in othercountries, particularly in developedmarkets.

Practical implications –The findings of this study can draw responsible parties and policymakers’

attention in developingcountries to introduce and contextualize new mechanismsthat can lead to better

monitoring process and help firms in attracting better resources and establishing an optimal capital

structure. For instance, entities should mandate a minimum quota for the proportion of women

incorporationin boardrooms.

Originality/value –This studyprovides empirical evidence on themoderating role of gender diversityon

the effect of board structureon firm’s financing decisions, something that was predominantly neglected

by the earlier studies and has not yet examined by ancestors. Thereby, to protrude nuanced

understanding of this novel and unprecedented idea, this study thoroughly bridges this research gap

and contributes practically and theoretically to the existing corporate governance–capital structure

literature.

Keywords Corporate governance, Capital structure, Leverage, Board characteristics, Agency theory,

Gender diversity

Paper type Research paper

1. Introduction

In the contemporary business environment, there is a plausible consensus among

researchers and practitionersabout the significant role of good corporate governance (CG)

policies in an organization’s success. In this context, corporate performance and survival

are affected by CG practices. In particular, countries that have implemented good CG

Mohammad A.A. Zaid,

Man Wang and

Sara T.F. Abuhijleh are all

based at the School of

Accounting, China Internal

Control Research Center,

Dongbei University of

Finance and Economics,

Dalian, China. Ayman Issa

is based at the School of

Accounting, Dongbei

University of Finance and

Economics, Dalian, China.

Mohammed W.A. Saleh is

based at the Department of

Accounting Information

System, Palestine

Technical University,

Tulkarm, State of Palestine.

Farman Ali is based at the

School of Accounting,

China Internal Control

Research Center, Dongbei

University of Finance and

Economics, Dalian, China.

Received 1 August 2019

Revised 15 May 2020

Accepted 5 June 2020

Conflict of interest: The authors

declare that they have no

conflict of interest.

DOI 10.1108/CG-11-2019-0343 VOL. 20 NO. 5 2020, pp. 939-964, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 939

mechanisms generally experienced enormous growth in the corporate sector and therefore

attract more capital (Ahmed Sheikh and Wang, 2012). The great breadth and depth of

CG–capital structure literature is a hint of the intrinsic role that CG practices can play in

constituting corporate capital structure-related decisions. According to Aman and Nguyen

(2013) and Mande et al. (2012), entities are expected to use from better governance by

being able to access funding “debt creation” at a lower cost and in larger amounts. In the

strict sense of the word, good governance mechanisms are more likely to dilate greater

confidence among debtholders that the company will not make detrimental decisions that

hurt their interests.

Considering the above arguments, managers of entities operating under poor CG incline to

maximize their own utilities. Hence, according to Morellec (2004), self-interested managers

who follow personal objectives may prefer less debt than optimal, because debt can be

used as a disciplinary to restrain mangers from the opportunistic use of the available cash.

In the same direction, it is often assumed that executive managers will pursue self-

interested operating strategies that benefit themselves at the expense of the firm’s

shareholders and bondholders (Bradley and Chen, 2011), which eventually leads to

magnify the agency conflict. In this vein, the effectiveness of the board of directors can take

a leading role in mitigating the agency conflict (Kumar, 2015). Incontestably, a better board

of directors reinforces the monitoring functions by augmenting the right incentives to make

rational and good decisions anddeterring opportunistic actions that damage firm reputation

and value. As a consequence, it seems arguably reasonable to hypothesize that board of

directors’ effectiveness affects the managers’ decision-making process (Das, 2014).

Therefore, it is no surprise that firms with more sophisticated boards decrease the

investment risk and attract more capital. Thereby, we build the first argument that the board

of directors’ attributes may play a strikingly conspicuous role in shaping the firm’s capital

structure choices.

A stream of prior studies emphasizes that CG, particularly the role of board structure, is vital

in maintaining shareholders’ confidence, whose loyalty can assist in the realization of high-

level financial performance and market growth (Bonn et al.,2004;Hermalin and Weisbach,

1991;Jackling and Johl, 2009). In this vein, numerous scholarly articles have examined

different CG practices that affect the patterns and trends of firm performance (Ciftci et al.,

2019;Pillai and Al-Malkawi, 2018;Mardnly et al., 2018;Paniagua et al.,2018;Joh, 2003;

Core et al.,1999;Darko et al.,2016). Furthermore,preceding literature on board of directors

has theoretical and empirical evidences on the systematic relationship between board

effectiveness and cost of borrowing (Lorcaet al.,2011;Hashim and Amrah, 2016;Ghouma

et al.,2018

;Usman et al., 2019).

Additionally, a vast array of theprevious literature has recognized different drivers of capital

structure. Nevertheless, so far, the immense majority of research efforts have been devoted

to investigating the influence of firm-specific and tax-related determinants,including but are

not limited to the effects of earnings volatility, non-debt tax shields, growth, industry

classification, size and profitability on the optimal capital structure (Titman and Wessels,

1988;Chen, 2004;Karadeniz et al.,2009;Ahmed Sheikh and Wang, 2011;Bevan and

Danbolt, 2002;Noulas and Genimakis, 2011;Czerwonka and Jaworski, 2019). Moreover,

comparatively few previous research, mostly in developed markets, have examined the

impact of CG on the firm’s capital structure (Dimitropoulos, 2014;Pindado and de La Torre,

2011;Hewa Wellalage and Locke, 2015;Granado-Peir

oandL



opez-Gracia, 2017).

Contrariwise, a limited number of prior scholarly articles have been performed within

developing countries (Wen et al., 2002;Ahmed Sheikh and Wang, 2012). According to the

aforementioned discussion, so far, there is an absence of extensive research efforts about

how CG practices affect a firm’s financing decisions. Besides that, the existing findings are

still controvertible, and the soliddebates remain scarce and unsatisfactory.

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