Impact of Corporate Governance Practices on Firm's Capital Structure Decisions

Abstract

The classical Agency theory relative to corporate governance believes that most of the time there is a conflict of interests between agents (managers or directors) and principals (shareholders). Agents (Managers) want to minimize agency costs in their decisions and this penchant compel them to increase the debt in the capital structure. The inclusion of debt may affect the overall performance and market value of the company. This paper analyzed theoretical and empirical studies that were done in the past and delineated the impact of major corporate governance practices on firm's capital structure decisions. Conclusions extracted from this study advocated that to mitigate the agency problems and for selecting an optimal capital structure, a good corporate governance is required that acts as a balancing tool. Every country should analyze corporate governance variables influence on firm's capital structure decisions for developing good corporate governance practices.