Aamer Shahzad, Mian Sajid Nazir, Flávio Morais and Affaf Asghar Butt
The role played by corporate governance mechanisms on corporate deleveraging policies has not been clarified. Empirical evidence is confined to developed economies, even with…
Abstract
Purpose
The role played by corporate governance mechanisms on corporate deleveraging policies has not been clarified. Empirical evidence is confined to developed economies, even with conflicting and inconclusive results. This paper aims to examine the role of corporate governance mechanisms, such as ownership structure, board composition and CEO dominance, in explaining corporate deleveraging policies.
Design/methodology/approach
Using a sample of listed Pakistani firms between 2010 and 2022, this study resorts to binary response models to examine the effects of governance mechanisms on firms’ decision to go debt-free.
Findings
A greater ownership concentration, institutional ownership and family ownership increase the propensity for zero leverage. Board gender diversity decreases the propensity for deleveraging policies, which seems to indicate that the presence of females reinforces the monitoring function of the board. Finally, lower managerial ownership or CEO dominance decreases the propensity toward zero leverage (interest convergence hypothesis), but higher managerial ownership or CEO dominance increases the propensity toward zero leverage (managerial entrenchment hypothesis).
Practical implications
Risk-averse managers who prefer to control a firm using little or no debt will find it easier to implement these financing policies in firms with greater ownership concentration and where institutional holders have a substantial stake. For shareholders, this study suggests that investing in firms with females on board reduces the risk of corporate deleveraging policies being adopted for entrenched reasons.
Social implications
The presence of females on board seems to decrease the propensity of managers to adopt opportunistic actions and may also contribute to enhancing human welfare and society in developing countries.
Originality/value
To the best of the authors’ knowledge, this is the first study considering the effect of board diversity on zero leverage. Another singularity is that this study exhibits a nonlinear relationship between managerial ownership and corporate deleveraging policy.