EAST ASIAN CORPORATE GOVERNANCE: A TEST OF THE RELATION BETWEEN CAPITAL STRUCTURE AND FIRM PERFORMANCE

Year 2011, Volume: 3 Issue: 2, 1 - 10, 01.12.2011

Ari Warokka Juan Jose Duran Herrera Haim Hilman Abdullah

Abstract

Corporate governance theory predicts that leverage affects agency costs and
thereby influences firm performance. Agency costs represent important problems
in corporate governance in both financial and non-financial industries. Prior
evidences have demonstrated an association between ownership structures, capital
structure, and firm performance.
This study extends the literature by proposing a further link between capital
structure and firm performance in term of post Asian Financial Crisis that is rarely
investigated. Using an agency framework, the research argues that the distribution
of equity ownership among corporate managers and external block holders has a
significant relationship with leverage and firm performance, and there is reverse
causality effect between ownership structure, capital structure, and firm
performance. The paper tests two hypotheses that explore various aspects of this
relationship. This study uses 532 East Asian companies, which are located in
seven most affected countries when the crisis took place during period 1996-1997.
The time frame of analysis is 2000-2001 period that is believed as a start of
recovery period. Statistic methods used for testing the hypothesis are t-test and
multivariate regression model.
The empirical results indicate that the East Asian companies after the crisis apply
the efficiency-risk argument. In analyzing the reverse causation of capital
structure and corporate performance relation, the result confirms the incentive
signaling approach, which debt can be used to signal the fact that firm has
prospect and equity issues may be interpreted as a negative signal.

Keywords

Agency Cost, Ownership Structure, Leverage, Firm Performance

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