Debt vs. Equity : Role of Corporate Governance

This paper examines the relationship between corporate firm's ownership and capital structure in context of an emerging market economy, India. We use firm-level time series data of listed companies from 1994 through 2000 and analyze the firm's corporate financing behavior in connection with its corporate governance arrangements, specially its shareholding pattern. Our results show that the debt structure is non-linearly linked to the corporate governance (ownership structure). We find that firms with weaker corporate governance mechanisms, dispersed shareholding pattern, in particular measured by the entrenchment effects of group affiliation, tend to have a higher debt level. Firms with higher foreign ownership or with low institutional ownership tend to have lower debt level. We do not find any significant relationship between ownership of directors and corporate with the capital structure