Corporate governance and capital structure decision: insights from Oman

This study aims to explore the impact of various board composition elements (board size, board meeting frequency, multiple directorships, and board independence) on capital structure decisions within emerging markets, specifically focusing on the Sultanate of Oman. The study employs a sample of 14 non-financial firms listed on the MSM30 index over seven years (2009-2015). To address endogeneity between the interrelated variables of dividends and debt ratio, an endogeneity test is performed. Given that the dividend per share is an endogenous variable, the Two-Stage Least Squares (2SLS) method is used for data analysis. The findings of this study indicate positive associations between debt ratio and board size, board independence and multiple directorships but negative association with board meetings frequency. Board independence serves to support the active monitoring hypothesis, and debt acts as a complementary mechanism to mitigate agency issues, larger board size results in introducing more debts in the firm's capital structure to offset decision making complexities. Furthermore, multiple directorships increase the use of debt ratio as disciplinary mechanism to offset the busyness of board members who have several multiple directorships. However, the frequency of board meetings was found to have a negative association with debt ratio. Our findings are robust to alternative measures of leverage and endogeneity. This study concentrates on a limited set of factors related to board composition. The use of debt as a substitute mechanism suggests that the followed corporate governance practices are relatively weak and may benefit from further reforms. This study offers to the readers a new insight from an emerging market on the impact of board composition on financing decision. The results are of particular importance to such market, since this market has distinctive characteristics of weak external law to protect investors and it is well known by using debt as substitute mechanism of corporate governance practices.