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The impact of state affiliated directed on the capital structure speed of adjustment in an emerging market


Hussain, Hafezali Iqbal and Zainal Abidin, Irwan Shah and Kamarulzaman, Rashidah and Shawtari, Fekri Ali (2018) The impact of state affiliated directed on the capital structure speed of adjustment in an emerging market. Polish Journal of Management Studies, 18 (1). pp. 133-148. ISSN 20817452

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Abstract

This study analyses a unique aspect of the speed of adjustment to optimal debt levels in an emerging market by accounting for the impact of State Affiliated Directors (SAD) on internal governance mechanisms. The paper is motivated based view where firms adjust to reach an optimal level of debt ratio as well as the agency problem arising from the separation of ownership and control leading to conflicting interests between managers and shareholders in order to maximize firm value, which could ultimately impede shareholders wealth maximization. Furthermore, the potential for conflict between controlling and minority shareholders are also captured in the appointment of directors linked to the state. The authors, therefore, evaluate the presence of state affiliated directors and their potential to compromise board independence, which may lead to sub-optimal financing decisions. Analyzing firms below target levels, the study finds that the presence of SAD allows firms below target levels to adjust at more rapid rates given the potential for favorable treatment while obtaining credit financing from financial institutions. Contrastingly, the findings, however, show that firms which exceed target leverage levels tend to adjust at more rapid rates in the absence of SAD on boards. The study results point towards the reluctance of these firms to raise financing in equity markets given the possible dilution of ownership of controlling shareholders as well as the reluctance to reduce debt levels. The findings are consistent regardless of measuring debt based on book or market values and across randomized measures of board composition implying that the presence of SAD alters the dynamics of the cost of capital and thus managerial financing decisions.

Item Type: Article
Uncontrolled Keywords: capital ctructure, speed of adjustment, state affiliated directors, board composition, board independence, randomized tests
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: School of Economics, Finance & Banking
Depositing User: Mrs. Norazmilah Yaakub
Date Deposited: 28 Aug 2019 03:11
Last Modified: 28 Aug 2019 03:11
URI: http://repo.uum.edu.my/id/eprint/26327

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