Capital structure and corporate governance in an emerging economy: Evidence from Bangladeshi manufacturing firms

Abstract

Capital structure decision is a major issue in corporate finance because it determines the mix of debt and equity used to finance firms’ activities. Although traditional capital structure theories explain leverage using firm-specific determinants, recent studies suggest that these variables cannot fully explain persistent differences in firms’ financing behavior. Corporate governance has therefore emerged as an important determinant of capital structure, particularly in emerging economies characterized by concentrated ownership and weak institutional environments. In Bangladesh, where firms rely heavily on bank-based financing and family-controlled ownership structures dominate the corporate sector, examining the relationship between governance and leverage is particularly important. This study investigates the determinants of capital structure of manufacturing firms listed on the Dhaka Stock Exchange during 2012–2021. The study incorporates both firm-specific and corporate governance variables and employs panel data regression techniques with year fixed effects to examine firms’ leverage decisions. The findings show that firm size, growth, industry median leverage, and firm age are positively associated with leverage, while profitability and tangibility are negatively related to leverage. Among governance variables, independent directors are negatively associated with leverage, indicating that firms with more independent boards adopt more conservative financing policies. Family-controlled firms rely more on short-term debt while avoiding long-term debt financing while firms with larger board size rely more on long-term debt financing. The study concludes that both firm-specific characteristics and corporate governance mechanisms significantly influence capital structure decisions in Bangladesh. The findings contribute to the capital structure literature by providing evidence from an emerging economy characterized by concentrated ownership, weak governance practices, and dependence on bank-based financing.