Capital Structure and Corporate Governance: Evidence from the Gulf Cooperation Council Countries

Abstract

<p>The primary aim of this study is to assess the impact of corporate governance characteristics on the capital structure across firms in the Gulf Cooperation Council (GCC) countries. In addition to exploring the direct effects of board size, independence and gender diversity, this research delves into the roles of CEO age, tenure and gender. This study also analyses the influence of different ownership forms, including institutional, governmental and foreign ownership on capital structure. The study adopts a robust quantitative approach using a sample of non-finance companies listed from 2010 to 2020 in the stock markets in the six GCC countries, employing panel regression models.</p><p>Empirical findings indicate that board characteristics significantly influence firm capital structures. For instance, increased board size is positively linked to higher leverage owing to increased board heterogeneity of expertise while gender diversity is inversely related to leverage due to risk avoidance. The evidence also reveals that there is an inverse relationship between the age of the CEOs and leverage which is evidence of the conservative approach to financing in the GCC. The analysis also reveals that while institutional ownership is linked to increased leverage, suggesting a preference for debt financing, foreign ownership has a diverse impact based on investor origin and philosophy.</p><p>The study also explores the interplay between corporate governance characteristics, ownership structures and internal firm factors in shaping the capital structure of GCC firms. The findings show that board characteristics such as size and gender diversity significantly impact leverage with larger boards facilitating higher leverage because of a broader expertise base. In contrast, gender diversity tends to reduce leverage which indicate risk aversion. Furthermore, CEO traits such as age and gender play a crucial role, with older CEOs associated with higher leverage, which means experience and network advantage.</p><p>By providing empirical evidence on the relationship between governance and capital structure in GCC firms, this research addresses a significant gap in the literature, which has primarily focused on Western economies. Consequently, the findings enhance the understanding of developments in emerging markets, which is helpful to corporate managers, investors, and policymakers. They emphasise the need for strong corporate governance structures for special financial planning in the GCC.</p>