Academy of Strategic Management Journal Volume 20, Issue 1, 2021 1 1939-6104-20-1-684 AN EMPIRICAL INVESTIGATION OF THE IMPACT OF OWNERSHIP AND BOARD STRUCTURE ON CAPITAL STRUCTURE OF LISTED FIRMS IN SUB-SAHARA AFRICAN COUNTRIES Benjamin Ighodalo Ehikioya, Covenant University Alexander Ehimare Omankhanlen, Covenant University Ofe Iwiyisi Inua, National Open University of Nigeria Lawrence Uchenna Okoye, Covenant University T. C. Okafor, Covenant University ABSTRACT Corporate governance and capital structure are two compelling factors that affect the performance and value of the firm. The two concepts are important areas in financial management for firms to achieve high value and growth rate. This paper examines the impact of ownership and board structures on the capital structure of firms listed on the stock exchanges of selected sub-Saharan African countries for the period 2010 to 20019. The study analyses whether ownership and board structure plays any significant role in the capital structure of the firm. The result of the panel data regression analysis reveals that concentrated ownership structure negatively impacts on debt ratio in sub-Saharan African firms. The study shows that managerial ownership and board structure explains the capital structure of firms in sub-Saharan Africa. The study demonstrates evidence of a significant negative influence of managerial shareholding and CEO’s tenure on the debt ratio of listed firms in sub-Sahara Africa. The result of the study suggests that the outside directors and board size positively influence the debt ratio of listed firms in sub-Sahara African countries. Given the results of this study, it is imperative for stakeholders in the region to continually improve the ownership and board structures of the firm to avoid the negative effect of debt on performance and the value of shareholders’ wealth. Keywords: Ownership; Capital Structure; Agency Theory; Performance. JEL Classification: G32; G34, G38 INTRODUCTION The level of economic activities since the global financial crises and the need to ensure shareholders' wealth maximisation has again brought corporate governance and financial structure of the firm into the spotlight of an interesting debate with implications. Corporate governance and the capital structure of the firm are two important mechanisms to enhance the market value of the firm. The literature on corporate governance has established that a good corporate governance structure can function as an instrument to reduce the agency costs arising from agency problems while improving the performance of the firm (Ararat et al., 2016; Ehikioya, 2019; Mohammed, 2018). Moreover, corporate governance can serve as an instrument to influence the financing decisions for the overall well-being of the firm (Bokpin & Arko, 2009; Lioa et al., 2015). To enhance public confidence, create access to the capital markets and
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Academy of Strategic Management Journal Volume 20, Issue 1, 2021
1 1939-6104-20-1-684
AN EMPIRICAL INVESTIGATION OF THE IMPACT OF
OWNERSHIP AND BOARD STRUCTURE ON CAPITAL
STRUCTURE OF LISTED FIRMS IN SUB-SAHARA
AFRICAN COUNTRIES
Benjamin Ighodalo Ehikioya,
Covenant University
Alexander Ehimare Omankhanlen, Covenant University
Ofe Iwiyisi Inua, National Open University of Nigeria
Lawrence Uchenna Okoye, Covenant University
T. C. Okafor, Covenant University
ABSTRACT
Corporate governance and capital structure are two compelling factors that affect the
performance and value of the firm. The two concepts are important areas in financial
management for firms to achieve high value and growth rate. This paper examines the impact of
ownership and board structures on the capital structure of firms listed on the stock exchanges of
selected sub-Saharan African countries for the period 2010 to 20019. The study analyses
whether ownership and board structure plays any significant role in the capital structure of the
firm. The result of the panel data regression analysis reveals that concentrated ownership
structure negatively impacts on debt ratio in sub-Saharan African firms. The study shows that
managerial ownership and board structure explains the capital structure of firms in sub-Saharan
Africa. The study demonstrates evidence of a significant negative influence of managerial
shareholding and CEO’s tenure on the debt ratio of listed firms in sub-Sahara Africa. The result
of the study suggests that the outside directors and board size positively influence the debt ratio
of listed firms in sub-Sahara African countries. Given the results of this study, it is imperative for
stakeholders in the region to continually improve the ownership and board structures of the firm
to avoid the negative effect of debt on performance and the value of shareholders’ wealth.
Keywords: Ownership; Capital Structure; Agency Theory; Performance.
JEL Classification: G32; G34, G38
INTRODUCTION
The level of economic activities since the global financial crises and the need to ensure
shareholders' wealth maximisation has again brought corporate governance and financial
structure of the firm into the spotlight of an interesting debate with implications. Corporate
governance and the capital structure of the firm are two important mechanisms to enhance the
market value of the firm. The literature on corporate governance has established that a good
corporate governance structure can function as an instrument to reduce the agency costs arising
from agency problems while improving the performance of the firm (Ararat et al., 2016;
Ehikioya, 2019; Mohammed, 2018). Moreover, corporate governance can serve as an instrument
to influence the financing decisions for the overall well-being of the firm (Bokpin & Arko, 2009;
Lioa et al., 2015). To enhance public confidence, create access to the capital markets and
Academy of Strategic Management Journal Volume 20, Issue 1, 2021
2 1939-6104-20-1-684
increase value creation, among other compelling benefits, the need for sound corporate
governance is now a matter of necessity for firms in emerging countries. Indeed, investors and
other stakeholders of the firm feel that organisations with the right governance structure will take
measures to protect their interest. In turn, this would help such an organisation to obtain funds
with less stress and at a reduced cost (AlNodel & Hussainey, 2010; Hassan, 2017).
In the present economic environment, the significance of corporate capital structure to
increase the worth of the organisation has been emphasised (Afolabi et al., 2019). The capital
structure of a firm, which is a blend of debt and equity capital for a firm to fund its assets, is one
of the strategic tools available for the managers to improve the performance and worth of the
company (Abubakar, 2015). The management of capital structure aimed to lessen the cost of
funds and increase the shareholders’ wealth. The capital structure of a firm according to the
agency theory is determined by agency costs ensuing from the clashes of interest arising from the
relationship between the owners and the managers of the firm (Jensen & Meckling, 1976; Fama,
1980; Abobakr, 2017 and Ehikioya, 2019). In modern organisations, the debt policy can be
deployed as a control mechanism to alleviate the agency conflicts between the managers and the
owners of the firm (Jensen & Meckling, 1976). Grossman & Hart (1980) state that debt financing
can serve as a disciplinary measure to alleviate the agency costs of free cash flow accessible by
the managers. However, Myers (1977) argued that debt could as well restrict competent
managers from taking up opportunities capable of adding value to the firm. In the application of
debt policy as a control measure, one important measure for consideration is how to avoid future
financial distress, especially where there are no adequate assets for the firm to generate the
required inflows.
In developing countries, agency problems persist due to weak corporate governance
structure, institutional structure and other factors that continued to impact the value and
performance of the firm. Firms in the sub-Saharan African countries have an ownership structure
that is mainly in the hands of individuals and corporate organisations (Afolabi et al., 2019;
Orumo, 2018). In the absence of other quality control mechanisms, the ownership structure of a
firm may be available to monitor and control the actions of the managers directly, especially
when firms are continuously inundated with debt portfolio that impacts on the value and
performance of the firm. This scenario is somewhat different from what obtains in some other
developing countries like China, where the ownership of the firm is concentrated in the hands of
the institutions and state government with the capacity to manage and monitor the activities of
the manager (Wen et al., 2002; Zou et al., 2017). Sub-Saharan African countries need sound
corporate governance and institutional structures that would ensure the well-being of the firms
and return value to the shareholders.
Since the ground-breaking work of Modigliani & Miller in 1958 on the irrelevance of
capital structure, debates on firms' choices of finance have continued to resonate among the
stakeholders of the firm. Several theoretical and empirical studies have been developed to
explain further the concepts of corporate governance and financing decisions, and their impact
on the worth of the firm (Ararat et al., 2016; Jensen & Meckling, 1976). A lot of these studies
with conflicting results have been carried out in advanced countries with few recent studies in
This study extends the agency framework and examines the impact of ownership and
board structures on the capital structure of firms listed on the Stock Exchanges of sub-Saharan
African countries. The study employs the ordinary least squares regression model to analyse
panel data during the period 2010 - 2019. The result of the study provides supportive evidence to
Academy of Strategic Management Journal Volume 20, Issue 1, 2021
11 1939-6104-20-1-684
demonstrate that concentrated ownership structure negatively influences the debt ratio of listed
firms in sub-Saharan Africa. This result suggests the incentives of block shareholders to monitor
and control the activities of the management and persuades the managers to use lower debt in
financing economic activities. Consistent with entrenched managers pursuing less debt, the
results indicate a significant adverse connection between director shareholding, CEO tenure and
debt ratio. This finding demonstrates the ability of outside directors to monitor and check the
activities of the executive to ensure that the debt ratio is low to avert future financial distress.
The undesirable impact of CEO tenure on debt ratio suggests that the entrenched CEO is likely to
deploy less debt to finance investments, thereby mitigating the costs of future financial distress.
The findings of this study reinforce the need to align the managers' interests with the owners of
the firm.
Further, the results provide evidence to show that board size and outside directors have a
significant positive connection with debt ratio. This result indicates the ability of the board
members to use their influence in society to raise the required funds from the debt market to
finance any positive investment. The study demonstrates that larger firms are likely to have a
desirable link with the debt ratio. This study has contributed to the understanding of corporate
governance and capital structure concepts, and the connection between corporate governance
structure and capital structure. There is absolutely no doubt that corporate governance is also
vital to firms not listed at the stock exchange. Thus, further research work is essential to extend
this study to firms in the financial sector and the ones not listed, taking into account additional
variables, regional analysis, industry and other firm-specific effects.
ACKNOWLEDGEMENTS
We would like to thank the Editor and anonymous referees for useful comments. We
acknowledge and thank Covenant University, Ota, Nigeria for financial support.
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