The nexus between corporate governance, capital structure and firm performance of Malaysian public listed companies

Abstract

Past studies revealed that capital structure and corporate governance are the main reasons for various financial crises. Since then, many studies have evaluated the consequences of both factors, particularly on the performance of corporations. However, the literature remains ambiguous about the impact of capital structure and corporate governance on corporate performance because most studies focus on a single measure of capital structure (total debt). The purpose of this study is to furnish incremental information about the interrelationship between corporate governance, capital structure, and firm performance using three measures of capital structure. Additionally, unlike most prior studies, this study has considered all categories of governance, namely board of director attributes, audit committee characteristics, and ownership. This study employs the agency and free cash flow theories in order to explain the inconsistency between reality and conventional beliefs about corporate capital policies. This provides a new perspective on the nature of the corporate capital structure and its association with corporate governance and firm performance. This study used balanced panel data, which included 528 non-financial Malaysian public listed companies from 2015 to 2019. Data were analysed using the Generalized Method of Moments estimations (GMM) to address the endogeneity issue. Generally, findings reveal a significant and positive influence on most corporate governance attributes on the performance of firms and their capital structures. The findings also revealed that board diversity is the most significant attribute that enhances the performance of firms. Malaysian companies achieve higher performance with smaller board sizes, more female directors, more board meetings, a larger audit committee size, higher audit committee independence, less director change (turnover), and fewer audit committee meetings. Additionally, the results of this study have confirmed the mediating role of the corporate capital structure in the relationship between corporate governance and firm performance. Consistent with the Pecking Order Theory, the results suggest that companies need to keep a lower level of debt in order to deal more efficiently with investment opportunities (using an internal source of capital) and also to improve their financial performance. Additionally, it is revealed that a lower debt level strengthens the corporate governance quality of companies so as to compensate for the agency costs rising due to excessive cash. Findings also show that capital structure and firm performance are negatively and significantly associated, which means that Malaysian companies with lower debt ratios have higher performance. This contributes to the body of knowledge by providing insights into the indirect role of various corporate governance attributes in enhancing the performance of companies in Malaysia. This study provides a solid practical implication for regulators and policymakers by indicating empirically that capital structure should be taken into account when structuring the monitoring mechanisms of firms to improve business performance. Finally, this study offers recommendations and directions for future research.