Academic journal article Journal of Management Research

Do Corporate Governance Indicators Lead the Firm to Adopt High/Low Level of Financial Leverage? Case of Jordan

Academic journal article Journal of Management Research

Do Corporate Governance Indicators Lead the Firm to Adopt High/Low Level of Financial Leverage? Case of Jordan

Article excerpt

Abstract

This study aimed to provide evidence of whether or not the corporate governance indicators (CGI) of the Jordanian industrial firms listed at Amman Stock Exchange (ASE) lead the firm to adopt high/low level of financial leverage and to determining which of them have significant effect. The study population consists of (96) Jordanian industrial firms' governance of the Jordanian firms listed at (ASE). (48) Firms were selected randomly to be used in the study. The study found that, corporate governance indicators do matter in Jordanian industrial firms; ownership concentration and Board size have significant negative relationship with financial leverage, when they increases financial leverage decreases, which means they lead the firm to adopt low level of external debt, while CEO duality and CEO compensation have insignificant positive relationship with financial leverage.

Keywords: Corporate governance indicators, Financial leverage, Industrials firms, Jordan

1. Introduction

Corporate Governance is considered as one of the important topics that appeared in the financial markets during recent years, where many of the scholars and researchers from various fields and specialties studied from several different aspects, all interpreted from his perspective. The issue of corporate governance can affect all aspects of the company and management, both in terms of performance management, earnings management and its financial structure (Awan & Khan, 2012). The practice of good corporate governance has become an important requirement to run the company efficiently on a global level, the term corporate governance is relatively new as it is used on the general level and academic level; interest in them has increased dramatically over the past two decades. Shleifer and Vishny defined it as follow: "it deals with the ways in which to ensure providers of money for the company to get a return on their investment". The Corporate Governance indicators reassure investors in the companies that they would receive an adequate return on their investment, but if these indicators are exist or do not function properly, external investors will not lend the company and will not buy their securities (Shleifer & Vishny, 1997). As thus, the consequent resort company to rely on internal sources, which consisting of internal cash flows and the money collected to fund current operations and profitable investment opportunities. So, if the Company is unable to finance these opportunities from its internal sources, they will lose it, and this leads to weaken its financial performance, which will affect the market value of the company and therefore the shareholders' wealth.

Accordingly, the management of the company's capital structure, which reflects the concept of financial leverage and the manner in which they are managed by managers, is considered as one of the most important topics in this context. Therefore, this study is interested in identifying factors that affect the company's trends toward adopt high or low level of debt (financial leverage) in its capital structure to finance its operations through a set of corporate governance indicators within one emerging capital markets (Amman Stock Exchange)

2. Problem of the study

Practicing good corporate governance plays an important role in helping companies to achieve their goals; maximizing the value of the company and optimizing shareholders wealth, through reassure investors that, they will get adequate returns on their investments. As a result of multiple indicators of corporate governance in terms of the Board size, equity structure, leadership duality, CEO compensation and the different preferences towards funding investments in the company by external or internal resources, this study aimed to examine whether or not the corporate governance indicators (independent variables) are taken into consideration at this study lead the Jordanian industrial firms listed on (ASE) to adopt high or low level of financial leverage (Dependent variable), those independent variables are (Ownership Concentration, Board Size, CEO Duality, CEO Compensation). …

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