Abstract:
An important financial decision facing firms is the choice between debt
capital and equity capital. The financial structure of a firm is a specific
mixture of debt and equity the firm uses to finance its operations. The
financing choice of firms is crucial for any business organization. This paper
investigated how corporate governance indicators such as board size, board
independence, CEO duality and board meetings impact on financing choice
of firms. Panel data covering a five year period from 2012 to 2016 from
twenty six listed firms on the Colombo Stock Exchange (CSE) was used.
Analysis was done within the Random-effects GLS regression framework.
The findings reveal that organizations with larger board sizes employ more
debt irrespective of the maturity period in order to raise corporate value.
Further, other corporate governance variables such as board independence,
CEO duality and board meetings are not found to have a significant impact
on short term and long term leverage. The firms should increase their board
size for accessing more debt capital as a large board size puts pressure
on managers through stringent monitoring and regulatory mechanisms
to increase the value of a firm. However beyond a certain level, further
increase in board size could lead to adverse effects. Therefore, this study
recommends a policy that may strike a good balance between quality and
quantity of board size.
