Yarmouk University

Faculty of Economics & Administrative Sciences

Department of Banking and Finance

"The Impact of Ownership Structure and Corporate

Governance on Capital Structure of Jordanian Companies

Listed in Amman Stock Exchange"

Prepared by:

Maha Khalil Yousef Shhadeh

2011720030

Supervised by:

Prof. Mona Al Mwalla

May, 2015

i
 "The rmpact of Ownership Structure and Corporate Governance on

Capital Structure of Jordanian Companies Listed in Amman Stock

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, By:

Maha Khalil'Yousef Shhadeh

B.Sc. Banking and Finance - Tafila Technical University, Jordan,20ll

A thesis submitted in partial fulfillment of the requirements for the degree of
Master in Banking and Finance Sciences in the Department of Banking and
Finance Sciences, Yarmouk University, Irbid, Jordan.

Approved bv.

Prof. Mona AI Mwa .........Supervisor and Chairman

Professor of Finance- Yarmouk University

Member
Associate Professor of Finance -Yarmouk University

Prof. Ahmad At-Omari................ Member

Professor of Accountin! -Yarmouk University

Muy, 2015
 Dedication

I dedicate my thesis with love to my father and mother, who worked

hard to raise me and make me what I am,

To my husband Sa'id, who has always supported me,

To my lovely children Ayham and Meera,

To my brothers and sisters, whom I will always remember,

And to all friends.

iii
 Acknowledgement

First, I thank Allah for giving me the strength and ability to fulfill my
ambitions.

Then, I would like to address my appreciation to my beloved parents for

their endless love, to my family and friends; I couldn’t have reached this
far without you.

Very special thanks to my dear professor and thesis supervisor Professor

Mona Al-Mwalla. I couldn’t have finished this work without her guidance

since the very beginning; she gave me hope and encouraged me to go

through this all the way.

I offer deep appreciation and gratitude to the thesis committee members,

Dr. Mohammad Gharaibeh and Prof. Ahmad Al-Omari, for the precious
time they spent reading this thesis and their comments that will
undoubtedly make this dissertation much better.

I would like also to express my sincere thanks to my other professors

and colleagues at Yarmouk University who greatly helped me to express
my ideas and edit typing and language errors.

Thank you,

Maha Kh. Shhadeh

iv
 Table of Contents

Subject Page
Dedication III
Acknowledgement IV
Table of Contents V
List of Tables VII
List of Abbreviations VIII
English Abstract IX
Arabic Abstract X
Chapter One: Introduction
1.1. Preface 1
1.2. Problem of the Study 3
1.3. Importance of the Study 3
1.4. Limitation of the Study 4
1.5. Objectives of the Study 4
1.6. Research Questions 5
1.7. Research Hypotheses 5
1.8. Research Methodology 7
1.9. Structure of the Study 7
Chapter Two: Theoretical Framework
2.1. Introduction 10
2.2. Ownership Structure Definition 10
2.3. Corporate Governance Definition 11
2.4. Definition and Measurements of Capital Structure 22
2.5. Relationship between Ownership Structure and Capital
37
Structure
2.6. Relationship between Corporate Governance and Capital
39
Structure
Chapter Three: Literature review
3.1. Introduction 42
3.2. Developed and Big Markets Studies 42
3.3. Emerging Markets Studies 45
3.4. What Distinguishes this Study from Previous Studies
53

v
 Subject Page
Chapter four : Data and methodology
4.1. Introduction 56
4.2. Methodology Flow Chart 56
4.3.Population and Sample 57
4.4.Data Collection Method 58
4.5. The Model 58
Chapter Five: Data analysis
5.1. Introduction 63
5.2. Descriptive Statistics 63
5.3. Correlation Matrix 68
5.4 Results Analysis of Variables VIP 69
5.5. Estimation Results 70
5.6. Hypothesis Testing 75
Chapter Six: Conclusion and Recommendations
6.1. Introduction 80
6.2. Conclusion 80
6.3. Recommendations 81
References 83
Appendix 94

vi
 List of Tables

Number of Table Title Page

Descriptive Statistics of Dependent and
(5.1) 64
Explanatory Variables
(5.2) Index of Corporate Governance Codes 67
(5.3) Correlation Matrix 68
(5.4) Variables' VIF 69
(5.5) The Estimation Result of Random Effect Model 71

vii
 List of Abbreviations

Abbreviation Description
ASE Amman Stock Exchange
BOD Board of Directors
CEO Chief Executive Officer
CG Corporate Governance
GCC Gulf Cooperation Council
JSC Jordan Securities Commission
Organization for Economic Cooperation
OECD
and Development
OLS Ordinary Least Square
NI Net Income
P/E Price to Earnings Ratio
ROA Return on Assets
TA Total Assets
TE Total Equity
UK United Kingdom

viii
 Abstract
Shhadeh, Maha, “The Impact of Ownership Structure and Corporate
Governance on Capital Structure of Jordanian Companies listed in
Amman Stock Exchange.
Department of Banking and Finance
Yarmouk University, 2015
Supervisor: Prof. Mona Al Mwalla

This study aims to investigate the impact of ownership structure and

corporate governance on capital structure of listed companies in Amman
Stock Exchange during the period (2009-2013). Sixty-five industrial
companies have been selected to make the sample of the study based on
certain criteria. Panel data analysis is used to examine the relationship
between the dependent variables leverage (LEV) and the set of independent
variables which include corporate governance items includes( board size,
CEO/chairman duality, board composition, committee of nominations and
remuneration, meetings number, and ownership mix which is measured by
institutional and largest shareholder). Empirical results show that there is a
significant positive relationship between leverage and size of firm. There is
a significant negative relationship between leverage and return on assets
and board size. All other relationships have been found to be either
positively or negatively insignificant. Based on the findings and discussion,
the study recommends that industrial firms focus more on governance
codes and regulations and recommends conducting research on other types
of companies in Jordan to test the impact of CG on capital structure.

Keywords: Corporate Governance, CEO Duality, Capital Structure,

Ownership Structure, Industrial firms, Amman Stock Exchange.

ix
 ‫انمهخص‬
‫مها‪ ,‬خهيم‪,‬شحادة‪ .‬تأثير هيكم انمهكية وحىكمة انشركات عهى هيكم رأس انمال نهشركات‬
‫األردنية انمذرجة في بىرصة عمان‪ ,‬رسانة ماجستير بجامعة انيرمىك ‪. 5102‬‬
‫انمشرف انرئيسي‪:‬أ‪ .‬د‪ .‬منى انمىال‬

‫هدفج هري اىدزاظت اىً اىخعسف عيً أثس هُنو اىمينُت وحىممت اىشسماث عيً هُنو زأض‬

‫اىماه ىيشسماث اىمدزجت فٍ ظىق عمان اىماىٍ خاله اىفخسة (‪ .) 2013 -2002‬اخخُسث عُىت‬

‫منىوت مه ‪ 56‬شسمت صىاعُت بىاءا عيً معاَس معُىت ‪ .‬حم حىظُف طسَقت اىخحيُو االحصائٍ‬

‫(‪ )Panel Data Analysis‬ىفحص اىعالقت بُه اىمخغُس اىخابع‪ ,‬اىسافعت اىماىُت (‪ )LEV‬ومجمىعت‬

‫مه اىمخغُساث اىمعخقيت اىخٍ حشمو حىممت اىشسماث مىها حجم مجيط اإلدازة‪ ،‬إشدواجُت اىسئُط‬

‫اىخىفُرٌ مع زئُط مجيط اإلدازة ‪ ،‬وحنىَه مجيط‪ ،‬ىجىت اىخسشُحاث واىمنافآث‪ ،‬وعدد اجخماعاث‬

‫مجيط األدازة ‪ ،‬ومصَج اىمينُت اىخٍ حقاض بىعبت معاهمت اىمؤظعاث ووعبت أمبس معاهم‪ .‬وأظهسث‬

‫اىىخائج اىخجسَبُت أن هىاك عالقاث إَجابُت ذاث دالىت إحصائُت بُه هُنو زأض اىماه وحجم اىشسمت‬

‫ومرىل هىاك عالقت ظيبُت ذاث دالىت إحصائُت بُه هُنو زأض اىماه واىعائد عيً األصىه وحجم‬

‫مجيط اإلدازة‪ .‬ووجدث ان جمُع اىعالقاث األخسي حنىن إما اَجابُت او ظيبُت وذاث دالىت غُس‬

‫احصائُت ‪ .‬وبىاء عيً اىىخائج ‪ ،‬حىصٍ اىدزاظت أن حسمص اىشسماث اىصىاعُت أمثس عيً قىاوُه‬

‫وىىائح حىممت اىشسماث ىما ىهرا مه حؤثُس عيً اىسبحُت وهُنو زأض اىماه‪.‬‬

‫كهمات مفتاحية ‪ :‬حىممت اىشسماث ‪ ,‬زئُط مجيط اإلدازة واىمدَس اىخىفُرٌ ‪,‬هُنو زأض اىماه‪,‬‬
‫هُنو اىمينُت ‪ ,‬اىشسماث اىصىاعُت ‪ ,‬بىزصت عمان ىألوزاق اىماىُت‪.‬‬

‫‪x‬‬
 Chapter One
Introduction & Overview

1-0 Preface

Corporate governance has been considered an important issue and

research topic in recent years after the global financial crises and collapse

of major companies and international banks such as the American giant

Lehman Brothers in 2007. Such governance is of great importance to

companies' shareholders and stakeholders. It protects both of them and

defines the functions of the board of directors and gives confidence to

stakeholders as the company follows its stated rules and guidelines and

guarantees a healthy performance. The OECD (2004) (Organization of

Economic Cooperation and Development) defines corporate governance

as: "a set of relationships involving a company's management,

administration board, shareholders and other stakeholders. Such

relationships provide the structure through which the company's

objectives can be set, the means to realize such objectives can be

determined and performance can be monitored. Governance should

provide appropriate and sound financial incentives for board members

and the executive management to drive them to achieve the objectives

which undoubtedly serve the company's and its shareholders' interests.

The effective internal monitoring process, and the existence of an

1
effective governance system, within each company and in the economy as

a whole, should facilitate the provision of a degree of confidence needed

for the safety of the economy's action." (OECD 2014, WWW.OECD.ORG,

no page given)

In other words, through such rules, processes and mechanisms, the

real well-known agency problem (which results from the separation of

ownership from control - (managers) – and which leads to conflict of

interests within the firm) may be solved. In line with this argument, a

related well founded theoretically and empirically based research has

been conducted to explain the relationship between corporate governance

and ownership structure from one side and the relationship between and

corporate governance and capital structure on the other side.

Hence corporate governance and capital structure are related

through their association with agency costs. In the modern corporate

finance literature, agency cost is one of the most important determinants

of capital structure while corporate governance is structured to reduce

agency issues to enhance the capability of a company to achieve stability.

In general, the relationship between corporate governance and

performance has been explored by many researchers but few studies have

investigated the relationship between the corporate governance and

ownership structure and capital structure. So, it is vital to understand

2
such relationship in order to provide a good investment climate for all

parties.

1-2 Problem of the Study:

A very critical part of corporate governance in the company is to

make sure that management is adopting decisions that are protecting

shareholders' interests and improving the firm's management

performance. Corporate governance includes a number of codes that can

be fulfilled using a subset of tasks (rules). One of the important corporate

Governance Codes is related to the Board of Directors (Tasks and

responsibilities, Committees formed by the Board of Directors, and

number of meetings).

Noncompliance with these Codes might lead to Agency Problem

and could have its effects on important decisions such as debt structure.

Therefore, the agency cost can be minimized by studying the relationship

between key corporate governance elements, ownership structure and

capital structure.

1-3 Importance of the Study:

A vast amount of empirical work has been conducted on the impact

of corporate governance on firm’s performance and the influence of

ownership structure on firm value. However, the relationship between

corporate governance and capital structure has not been fully investigated

3
(Bodaghi and Ahmadpour, 2010). Only a few studies have dealt with this

relationship. Few works has been sighted on the influence of corporate

governance on capital structure decisions of firms in developed and

developing or emerging markets (Berger 1997; Friend and Lang, 1988;

Wen et al. 2002; and Abor, 2007). To the researcher's best knowledge, no

such research has been carried on emerging markets.

1-4 Limitations of the Study:

This research covers only sixty-five Jordanian industrial companies

listed in Amman Stock Exchange (ASE) for the period (2009-2013).

Some data related to the other 10 industrial companies on the ASE could

not be found; therefore, the study excluded them. At another level, a

larger sample could have improved the results and made them more

generalizable. The findings are based on research in a single country and

may not be generalized to other countries.

1-5 Research Objectives:

The main objectives of this research are the following:

1- To examine the effect of ownership structure and corporate

governance on capital structure for a sample of sixty-five

Jordanian industrial companies listed on the Amman Stock

Exchange for the period (2009-2013).

4
 2- To find out relationships between the dependent variable

(leverage) and the independent variables which include size and

composition of board, committee of nominations and

remunerations, and number of meetings

In order to achieve the main goal, a panel data analysis is used

to find out relationships between the dependent variable

(leverage) and the independent variables mentioned.

1-6 Research Questions:

The following questions are developed to investigate the impact of

ownership structure and corporate governance on capital structure:

- Is there a relationship between corporate governance and capital

structure?

- Is there a relationship between ownership structure and capital

structure?

To answer the research questions and to achieve the study

objectives, the hypotheses below have been formulated.

1-7 Research Hypotheses:

This study tries to test the following general null hypotheses and

sub-hypotheses in order to investigate the impact of ownership structure

5
  H1: There is no statistically significant relationship between

Ownership Structure and capital structure.

Sub-hypotheses:

H1-a: There is no statistically significant relationship between

institutional members and capital structure.

H1-b: There is no statistically significant relationship between largest

members and capital structure.

 H2: There is no statistically significant relationship between

corporate governance and capital structure.

Sub-hypotheses:

H2-a: There is no statistically significant relationship between board size

and capital structure.

H2-b: There is no statistically significant relationship between board

composition and capital structure.

H2-c: There is no statistically significant relationship between chief

executive officer and capital structure.

H2-d: There is no statistically significant relationship between the

Committee of Nominations and Remuneration and capital structure.

6
H2-e: There is no statistically significant relationship between the number

of meeting and capital structure.

1-8 Research Methodology:

To accomplish the objectives of the study, a sample of 65

Jordanian industrial companies for the period (2009-2013) have been

paneled. A multiple regression technique was used to find the results.

The study employs the model developed by Hasan and Butt (2009) with

some modifications to accommodate the data gathered and the

objectives.

The dependent variable is capital structure and the independent

variables are board size, CEO/chairman duality, number of meetings,

committee of nominations and remuneration, and board composition

which are included as codes of CG, and ownership structure

(institutional and largest shareholder). Firm size and profitability are

used in the study as control variables. Capital structure is measured using

debt to equity ratios (LEV).

1-9 Structure of the Study:

The study is organized through six chapters: the introduction of the

research is presented in the first chapter; the theoretical background and

related previous studies are given in chapters two and three,

7
respectively; the research methodology is given in chapter four, data

analysis and discussion are presented in chapter five. Conclusions and

recommendations are outlined in the chapter six.

8
 Chapter Two:

Theoretical Background

2.1 Introduction

2.2 Ownership Structure Definition

2.3 Corporate Governance Definition

2.3.1 Emergence and Development of Corporate Governance

2.3.2 Principles of Corporate Governance.

2.3.3 Corporate Governance in Jordan.

2.4 Definition and Measurements of Capital Structure.

2.4.1 Capital Structure Theories.

2.4.2 Measures of Corporate Governance and theories.

2.5 Relationships between Ownership Structure and Capital Structure.

2.6 Relationships between Corporate Governance and Capital structure.

9
 Chapter Two:

Theoretical Background

2.1 Introduction

This chapter discusses the definition of ownership structure, its

distribution of equity with regard to votes and capital and according to

identity of equity owners, and classifications of ownership structure. It

also presents a definition of corporate governance's processes and

mechanisms which must ensure that a firm is being directed and managed

in a way that enhances long-term shareholder value through

accountability of managers and enhancement of firm performance.

Furthermore, it shows how the agency problem appears. Then, capital

structure is defined and the relationship between ownership structure and

capital structure is dealt with, in addition to that between corporate

governance and capital structure. Finally, a summary of the development

of Amman stock exchanges is presented in the last section of this chapter.

2.2 Ownership Structure Definition.

The ownership structure is defined not only by the distribution of

equity with regarding votes and capital, but also by equity owners'

identity. A well-known work dealing with this issue is Jensen and

Meckling (1976), who discuss the nature of agency costs associated with

outside claims on the firm, i.e. debt and equity. Ownership structures are

11
of major importance in corporate governance because they affect

managers' incentives, and hence firms' efficiency.

There are many classifications for ownership structure. Many

authors and institutions classified ownership structure based on the nature

of the study. Jensen et al. (1976) differentiated between owners with

inside equity, outside equity, and debt. Charkham (1995) classified

owners as foreign, privately held corporations, legal persons in public

law, private persons, insurance companies, banks, pension funds, and

mutual funds. For his part, Gerndof (1998) classified owners as majority

owners, minority owners, foreign, and domestic owners.

Djakov (1999) also differentiated ownership between employees,

management, state, and local investors.

La Porta et al. (1999) classified the ownership structure into several

types: family-owned, state-owned, and that controlled by corporations.

Gorga (2008) further categorized ownership into that which is widely

held, dispersed ownership, and concentrated ownership.

For the purpose of this research ownership structure used is institutional

shareholder and largest

2.3 Corporate Governance Definition.

There is no universally accepted definition of corporate

governance. But the simplest definition is the following adapted from

11
several sources: it is governance that contains a number of rules and

incentive which help the management to direct and control a company.

(Cadbury, 1992; Charkham, 1995; Adam and Mehran, 2003; OECD,

2004)

Corporate governance has become more prominent today than ever

before. Because of that, many authors gave definitions of this notion. For

example, Khumani et al. (1998) indicate that good corporate governance

maximizes the profitability and long-term value of the firm for

shareholders. Cadbury (1992) defines corporate governance as a system

used to control and manage firms. La Porta et al. (1999) view corporate

governance as a set of mechanisms through which outside investors

protect themselves against expropriation by insiders. Adam & Mehran

(2003) defines corporate governance as a mechanism that includes

structures and processes that make creation of shareholder value easy by

managing corporate affairs in a way that guarantees the protection of the

interests of all the stakeholders.

Corporate governance is generally connected with the agency

problem and its roots can be traced back to separation or paradox of

ownership and firm control. Agency problems are created as a result of

the relationships between shareholders and managers and are based on

conflicts of interest within the firm.

12
 The goal of applying corporate governance is to ensure a

framework providing an appropriate balance between shareholders'

interests and those of managers. Therefore, one can conclude that agency

problems or conflict between managers and shareholders’ interests is the

main cause behind the creation of corporate governance. For the purpose

of this research (Board size, board composition, CEO/Chair duality,

committee of nomination and remuneration and number of meeting are

employed as corporate governance codes.

2-3-1 The Emergence and Development of Corporate Governance

The concept of corporate governance came after the emergence of

agency theory, which means the separation of company ownership from

the management and establishes the agency problem of exposure to

owners' loss as a result of ethics and actions of management, and not

doing enough to maximize owners' returns. This increases the chances

that the owners have no direct means of control to measure the effort of

management's efforts, when the management is offering information to

the owners - a so-called problem of congenital dislocations. Associated

with this also is a reverse choice problem which arises as a result of the

difference in the quantity and quality of information available for each of

the management and owners and appear in cases they cannot be the

13
owners and in such cases where the owners cannot determine whether the

administration choose a suitable alternative or not when making different

decisions (Hammad, 2005) (in Arabic).

As a result of this conflict of interest between company

management and owners an interest has increased in finding the laws and

rules governing the relationship between the two parties, which led

research (Jensen and Meckling, 1976) to the formulation of the agency

theory that launched the mechanics of several to reconcile the interests of

management and the interests of owners so as to make management work

best as possible for the benefit of the company's owners.

The real interesting concept of corporate governance has been at

the beginning when the Cadbury Committee in 1992 issued its report on

the problem by both houses of financial reporting and the London Stock

Exchange entitled "financial dimensions of corporate governance the

financial aspects of corporate governance". The Cadbury Committee

made public this report on the basis of the principles and standards of

corporate governance. The committee claimed that these standards lead to

better decision-making and control of the business process, after the

allegations and growing protests about the lack of confidence in financial

reporting by the shareholders in the London Stock Exchange (Davies,

2006).

14
 Corporate governance has taken another dimension after the

occurrence of crises and financial scandals in major US companies in

2001 and bankruptcy following that, and a law (Sarbanes-Oxley) was

passed and released in 2002 as an amendment to the Securities Law so as

to provide better protection for shareholders in public companies (Carroll

and Buchholtz, 2006). The importance of corporate governance was

further accelerated right after the big economic and real estate mortgage

crisis which began in 2007 and led to the collapse of major US banks like

Lehmans Brothers. A good governance would have been able to prevent

such economic disasters because it could protect both shareholders and

stakeholders .In general, a good governance generates high levels of trust

in the company.

At the international level is a report issued by the Organization for

Economic Development and Cooperation (OECD, 1999) entitled

"corporate governance first official international recognition of this

concept."

Several international organizations have taken the lead to issue

principles for and many definitions of corporate governance, including

the World Bank and the Center for International Private Enterprise which

emerged from the American Chamber of Commerce in Washington.

These organizations worked in conferences and meetings held to explain

15
this concept and work on its publication in the rest of the world (Khalil,

2003).

2-3-2 Principles of Corporate Governance

Corporate governance principles set by OCED (2004) are

considered now an important universal indicator for policy decisions and

makers, investors, corporations and other stakeholders. It has been

utilized as a good means to strengthen corporate governance, and also

improve firms' performance and value. They include the following:

1. Shareholders' Rights:

Shareholders are considered an important human element in a

corporation, so they are endowed with rights to shield them against other

parties (Caton & Goh, 2008). These rights vary according to the structure

of corporate governance in any corporation; they give them the chance to

take a part and vote in regular shareholders' meetings and to question the

board regarding place items on the agenda of these meetings and about

the annual external audit, and then to propose resolution regarding any

problems they might face. In addition, they assume an effective role in

major corporate governance decisions, such as board members elections

(OECD, 2004).

16
 A lot of works have indicated that shareholders rights have an

important effect on major indicators in a firm. Core et al. (2006) consider

that stronger shareholder rights have a lot to do with higher earnings;

Garmaise and Liu (2005) reach the conclusion that strong shareholder

rights may help to soften over-investment problems, lower capital cost,

and as a result enhance or maximize firm value.

2. Stakeholders' Rights:

Stakeholders refer to any group or individuals who have the

capacity to affect or can be affected by the achievements of the

organization's objectives (Freeman, 1984).Stakeholders are usually

classified into internal and external ones; internal stakeholders are those

working within the organization, such as employees or managers,

whereas external stakeholders are not generally considered to be a part of

the organization such as suppliers or customers (Schneper & Guillen,

2004).

Any corporate governance framework must allow for the rights of

Stakeholders stipulated by law or through mutual agreements and

advocate active co-operation between corporations and stakeholders in

creating jobs, increase wealth, and sustain financially successful

enterprises (OECD, 2004(

17
 Stakeholders' rights must be respected and protected by law, and

stakeholders should be given the opportunity to obtain effective

compensation for their right violations. They should also be able to have

access to sufficient and reliable information regularly and on a timely

basis so that they can take an effective role in the corporate governance

process. In addition, they must be able to freely vent their concerns

regarding any illegal or unethical practices to the board (OECD, 2004).

3. Board's Responsibilities:

A good corporate governance framework ensures a strategic

guidance of the company and an effective monitoring of management by

the board of directors. This board is regarded as the top executive unit of

a company and is endowed with the responsibility of supervising and

directing all operations of the management (OECD, 2004).

The board must implement high ethical standards that should take

into Consideration stakeholders' interests and must allow for a fair

treatment of all shareholders when having to take a decision that may

differently affect different shareholder groups .Any decision or work they

may carry out must be based on a completely informed basis and be

achieved in good faith, with utmost assiduity and care, and in the best

interests of the company and shareholders (OECD, 2004(.

18
Tuggle (2010) demonstrates that the presence of an environmental

committee in the board greatly softens any conflict of interests between

stakeholders and management when it comes to unveiling or disclosing

environmental information.

4. Disclosure and Transparence:

An adequate corporate governance framework should ensure that a

timely and precise disclosure of information is made on all physical

matters in the corporation, such as performance, finance, governance, and

ownership (OECD, 2004).

Past studies find that a disclosure is mainly associated with several

financial matters. Botosan and Plumlee (2002) find that a more detailed

disclosure of annual reports results in a decrease in expected cost of

equity capital. This is due to the fact that improved disclosure lessens the

seriousness of asymmetric information problem which is normally

considered as a main factor in increasing the cost of equity capital

(Bushee & Leuz, 2005).

2-3-4 Corporate Governance in Jordan

Jordan sought to integrate itself into global economy and, in order

to that, joined the World Trade Organization, and signed a European

partnership agreement as well as the Free Trade Agreement with the

United States. It also sought trade liberalization, removal of tariff barriers

19
and the abolition of government support policy, calling on market forces

to determine prices and economy competitiveness (Khoury, 2004(in

Arabic)).

The laws and regulations of Jordan included sufficient commitment

by local companies and were linked to the rights of owners. The

Companies Act of 1997, as well as its later amendments, has been

organizing everything related to the company's management and the role

of each of the directors', shareholders' and stakeholders' Councils (Tarif,

2003 (in Arabic)).

Corporate governance in Jordan represents a set of laws including

the Banking Act of 2002, as well as set the regulations and instructions

issued by the capital market institutions, instructions securities issuance,

registration and instructions on listing of Securities on the Stock

Exchange (Tarif, 2003) (in Arabic).

Corporate governance regulations, which entered the Jordanian

financial market in 2005, included the general framework and broad

mode to governance effectiveness for companies in order to maintain

shareholders' equity and activate the principle of justice among them,

highlight the role of stakeholders, ensure disclosure and transparency, and

emphasize the responsibility of the Board of Directors and its role in

protecting the company, its shareholders and stakeholders

(www.ammannet.net ).

21
 The Central Bank of Jordan is also keen in the framework of its

efforts to strengthen corporate governance in the Jordanian banking

system for the development of the corporate governance of banks in

Jordan Guide for the year 2007, with the aim to provide a standard for the

best international practices in this area, based on what was stipulated in

the principles of Corporate Governance issued by the Organization for

Economic Co-operation and Development (OECD) (Central Bank 2007).

The proportion of companies that applied Corporate Governance

has been increasing since 2007, according to the data disclosed in the

Second Forum of corporate governance and social corporate in the

Middle East and North Africa (www.petra.gov.jo).

The Jordan Securities Commission (JSC) also prepared a directory

containing the rules for corporate governance in order to establish a clear

framework that regulates relations and management and defines the

rights, duties and responsibilities in order to achieve the company's goals

and objectives. It also seeks to preserve the rights of individuals with

related interests where these rules are based on the Securities Law and

Companies law in addition to international principles set by the

organization for Economic Co-operation and Development (Jordan

Securities Commission, 2009).

21
2-4 Definition and Measurements of Capital Structure

Capital structure in finance refers to the amount of debt and equity

used in financing the operations of a company. Boateng (2004) provides a

new definition of the capital structure as a ratio of total debt to total

assets. Decisions regarding capital structure are crucial for the financial

well-being of the firm. According to Suhaila et al. (2007), financial

distress, liquidation and bankruptcy are the ultimate consequences that

lay ahead if any major misjudgment occurred following any financing

decision of the firm's activity a proper capital structure is a critical

decision for any business organization. Such decision is of prime

importance not only because of the impact such a decision has on an

organizational entities, but also because such a decision has an impact on

an organization's ability to deal with its competitive environment (Roy et

al., 2000).

In their classic paper, Modigliani and Miller (1958) claim that in a

perfect and frictionless market the value of a firm is unaffected by its

capital structure. However, in the real world market imperfections do

exist, such as taxes, asymmetric information and agency costs which

make the choice of capital structure matter (Myers, 2001). Correia et al.

(2006) refer to optimal capital structure as debt-equity ratio applied by a

company to have the lowest Weighted Average Cost of Capital (WACC).

Although the study of capital structure has inspired a great amount of

research within the field of finance, yet, despite this research, a lot is still

22
not known about the way managers choose between debt and equity

financing. Although optimal capital structure is a topic that has widely

been handled in a lot of research works, a formula or theory that

decisively provides optimal capital structure cannot be found (Onkgtse,

2007). The following section presents main capital structure theories

related to our study.

2-4-1 Capital Structure Theories

There have been a lot of references to the theories of capital

structure in the literature; the Modigliani and Miller model (1958) was

the first to refer to such theories. Bradley et al. (1984) stress that capital

structure has been a very controversial issue in relation to the theories of

finance. Myers (2001) reached a conclusion that there is no universal or

widely accepted theory of debt equity choices and there should be no

motive to expect one. Quite recently, Pagano (2005) made a review of

many theorems based on the Modigliani and Miller model and referred to

some of them being relevant to present day studies. What these studies

indicate is of great importance to the present thesis or study.

1- Trade-off Theory

The Modigliani and Miller (1958) model began by arguing that the

market value of any company is separate from its capital structure. Their

argument was based on the tenet that capital structure does not influence

23
a firm’s cash flow Kyereboah (2007).When try to interpret their

reasoning, we find that capital structure is supposed to remain the same

even if we change companies. Based on their previous 1995 and 1999

works, Barclay & Smith (2005) argue that this “invariance” stems from

the attempt to understand the conditions under which it was first

investigated. They contend that the conditions could have been made

artificial on purpose, such as by leaving out essential date like

information costs, personal or corporate taxes, contracting transaction

costs or a fixed investment policy. Modigliani and Miller in 1963 altered

their first position that the financing decisions of firms do not have an

influence on their value; this indicates that firms which realize higher

profits are liable to use more debt. This in turn leads to substituting debt

for equity to take advantage of interest induced tax shields. Kyereboah

(2007) cites Myers & Majluf (1984) as promoting the static trade-off

theory, which explains how a firm decides on the debt-to-equity ratio. All

this is based on the assumption that some optimal capital structure is

really present, which makes the firm able to work and run efficiently and

making sure that external claims on cash flow are really minimized.

Miller (1988) argues that this means that firms are here encouraged

expanding their debt values .In a study about Greece, Voulgaris et al.

(2004) contend that a trade-off between tax gains and increased

bankruptcy costs bolsters a firm's cost of capital. While stressing

24
restrictions to optimal level of firm debt, Voulgaris et al.(2004) expand

on the debates in Stiglitz )1974; 1988) papers, which claim that

bankruptcy costs go as the same time as the increase in the firm’s debt

level. Myers & Majluf (1984) suggest that companies should seriously try

to obtain an optimal capital structure that aims at maximizing the value of

the firm by striking a balance between tax benefits and bankruptcy costs

normally associated with increased debt levels.

Since its beginning, the trade-off theory has undergone many

debates, and many researchers tried to modify the assumptions to suit

more realistic expectations and investigations. Warner (1977) showed

that when bankruptcy costs are substantially lower than debt tax

advantages, much higher debt than expected is incurred Fquoted in

Ortqvist et al. (2006) as one that shows that encouraging debts with

minimum costs bolsters the amount of resources available for expansion

and development. Kyereboah (2007) was one among other studies that

identified some shortcomings in the theory and indicated that in reality

highly profitable companies seem to have less debt than companies with

less profitability because the former beneficially utilize their profits for

more financing.

25
2- Signaling Theory Based on Information Asymmetry

This theory was developed by Ross in 1977 and sought to get rid

of one more underlying assumption from the Modigliani and Miller’s

(1958) model dubbed value invariance theory. It indicates that complete

information about firms' activities can be easily learned by external

stakeholders. Any information possessed by managers in relation to a

firm’s future prospects (which markets do not have access to) might be

made public by choices of capital structure choice made by these

managers. The markets obtain some indications through certain pointers

within the financing structure. The reasoning for information asymmetry

theory can be interpreted as when leverage increases, the firm's value will

necessarily increase. This in turn is an indication of the size and stability

of future investments. Fama and French (2002), however, referring to

Myers & Majluf (1984) study, offer what they call evidence against

Ross's line of thought. They believe that increasing debt is actually a sign

of poor indications for future earnings and cash flow, with less internal

financing available to finance development. For their part, Voulgaris et

al. (2004) reviewed a study, noticed that information asymmetry, could

imply that a positive relationship exists between debt and asset structure

in relation to high fixed asset ratio. Plainly stated, the higher the value of

assets, the more extended is the amount of loan. In their definition of

26
leverage, Voulgaris et al. (2004) further stress the possibilities of liability

growing with size. Ross (1977) further affirms that firms often taking

more debts in order to surmount information asymmetry. Myers & Majluf

(1984) underscored the sequence according to which firms finance real

assets growth: first, they rely on internal funds; then, they use debt and

afterwards, external equity issue. Reasoning is offered by Voulgaris et al.

(2004) for this behavior are clear and can be attributed to the low cost of

internal funds which can be manipulated without interference from

external funders. In such a case, the need to issue security in terms of

fixed assets does not present itself (Chen, 2004).

3- The Pecking Order Theory

This theory suggests a hierarchical pyramid in the various selection

techniques to obtain funds through different means. Naturally, companies

first utilize internal funds; then, they may use debt and when such method

is no more there, they go on to use new equity finance. According to the

pecking order model, which was developed by Myers and Majluf (1984),

a strict ordering or hierarchy of sources of finance is set and fixed. This

results from adverse selection issues which come into action when the

firm possesses more information about firm value than fund providers .

These issues disappear when retained earnings are employed as marginal

sources of funding and are bigger for equity than debt financing. Myers

27
& Majluf (1984) contrast this with the static trade-off theory, discussing

the rationale behind the Pecking Order model (POT) of corporate

leverage, which was later corroborated by Chen (2004), among others.

The model's explanation is based on real observations of firms, which do

not tend to issue stocks (shares); instead, they prefer to have large cash

reserves in their holdings. Myers & Majluf (1984) conclude that this

unnecessary holding of financial assets may be attributed to conflict of

interests by managers as well as one between old and new shareholders.

Chen (2004) tends to consider that companies go to outside funding only

when they are forced by extremely difficult conditions, and in all cases

debt precedes equity. Kyereboah (2007) further stresses the contrast and

explain that the pecking order theory seem to suggest that a firm's

profitability does indeed impact its financing decisions. The study

elaborates the contention that firms which have not predetermined their

debt and equity mix prefer internal to outside financing. One observes

that the pecking order framework tends to overlap the asymmetric

information and the agency cost theories .

4- Agency Problem

The goal of a company, which was earlier noted to be

maximization of its market value, is not often compatible with the

interests of managers, as they prefer to maximize personal interests, if

28
possible, even at the owners' expense. This discrepancy of interests leads

to agency conflicts, which are especially severe in public companies

(Jensen &Meckling, 1976). So, principal-agent problem or principal-

agency problem is a conflict arising when people (the agents) entrusted to

look after the interests of others (the principals) use the authority for their

own benefit instead.

This is a big problem and exists among shareholders and managers in

practically every organization whether a business, or government

institution. Organizations and government try to solve it by instituting

measures such as tough screening procedures, rewards for positive

behavior and punishment for negative behavior, and so on..... But no

organization can remedy the agency problem completely.

1- Conflict between Shareholders and Debt Holders

It is normally assumed that that, when we talk about agency

conflict between shareholders and debt holders, high levels of debt may

result in asset substitution problems as well as in risk shifting. In asset

substitution, shareholders are tempted to claim the benefits for

themselves. Specifically, if shareholders invest in unsafe projects other

than those designed by debt holders, returns from investments may be

claimed by shareholders even if they are bigger than the debts. If the

investments do not succeed, both shareholders and debt holders share the

losses (Jensen and Meckling, 1978). This is called agency cost of debt,

29
i.e. the cost resulting from conflict between shareholders and debt

holders. It is usually equal to the difference between the total value of all-

equity and that of levered firms (Manso, 2008).

Smith and Warner (1979) distinguish between four causes of

agency cost of debt: dividend payout, asset substitution, claim dilution,

and underinvestment. Dividend payout means that when a company has a

dividend policy with priced bonds, their value may be reduced by

unplanned dividend increases which can be financed by reducing new

investments or by selling debt. Claim dilution means that when additional

debt of similar of higher significance is issued, it lowers the value of

shareholders' claims. As for asset substitution, it happens when a firm

replaces low-risk with high-risk investments and as a result, stockholders'

equity increases while debt holders' claim value goes down. Finally,

underinvestment occurs when a large share of a firm's value goes to

future projects; in such a case, the firm is motivated to refuse such

projects because the benefits from such projects will go add to

bondholders' benefits (Smith &Jensen, 1985).

For his part, Fatmasari (2011) claims that conflicts between

shareholders and debt holders take place because of high risks and

revenue structuring. Risk levels increase when management, working for

shareholders' interests, undertakes activities with higher risks, and this

31
could be more risky to debt holders than to shareholders. Regarding

revenue structuring, bondholders get a fixed amount from benefits and

loan repayment, while shareholders rely only on any excess revenue after

liability. According to Fatmasari (2011), there are three ways to fight the

conflict resulting from these causes: total debt reduction, short maturity

and covenant.

Khan et al. (2012) affirm that liquidity may be a cause for conflict

between debt holders and shareholders. They make it clear that in a firm

with high liquidity, the management normally undertakes projects of high

risk, which may harm, as mentioned above, debt holders. As a

consequence, managers will take from debt holders' revenues to give to

shareholders because the assets are liquid. Thus, high liquidity is likely to

cause agency cost of debt.

2- Conflict between Shareholders and Managers

Conflicts between managers and shareholders may take place due

to different preferences, lack of similarity in goals, and lack of common

actions between the two parties (Berle and Means (1932), cited in Al-

Zeinaty (2014) from Mizruchi (20004). These factors cause conflict of

interests, especially when managers take high-risk decisions, thereby

wasting valuable resources, make unnecessary expenditures, do not make

31
enough efforts to realize shareholders' goals, or work for their own

benefits instead of those of the shareholders (Mizruchi, 2004).

Managers have the opportunity and the power to increase

shareholders' value by growing earnings, dividends and prices of share. If

they fail to do that, this failure affects a firm's ability to add to its cash

flow. Consequently, a conflict happens between shareholders, who aim at

seeing their benefits grow, and managers, who do not work towards this

goal (Kapoor, 2009).

On the other hand, managers who realize shareholders' goals and

agency cost control are usually compensated by shareholders for their

efforts in different means such as giving them bonuses. Different studies

provide a variety of compensation plans, such as one presented by Myers

and Smith (1981), which is based on control of cost. The authors indicate,

however, that real compensation is dependent more of market indicators

and accounting measures of firm performance than on internal

measurement of performance.

2-4-2 Measures of Corporate Governance and their Relation to

Capital Structure

Different factors have been investigated in past studies on how

they contribute towards capital structure decisions. They include four

factors presented as follows:

32
1- Non-Executive Directors

Non-executive directors are cornerstone of modern corporate

governance. The relationship between presence of non-executive

directors and capital structure has been explored by few researchers but

evidence in this regard is mixed. Wen et al .(2002) conclude that the

presence of external directors on the board leads to lower leverage, due to

their superior control. Nevertheless, Abor (2007) indicates that capital

structure has a positive correlation with board composition in Ghanaian

firms. This finding agrees with findings by Jensen (1986) and Berger et

al. (1997) who earlier concluded that firms with higher percentage of

external directors utilize more debt compared to equity. Pfeffer and

Salancick (1978) accentuate that non-executive directors play a pivotal

role in enhancing the capability of a company to get recognition from

external stakeholders. This leads to less uncertainty about company and

enhances a company's ability to raise funds. They discover that higher

percentages of non-executive directors' representation on the board result

in higher gearing levels.

2- CEO Duality

Fama and Jensen (1983) reason that decision management and

decision control functions in any company should be separate. Decision

management's functions include the right to present and implement

33
proposals for the disbursement of a firm's resources. Decision control

functions include the right to agree to and follow up with those proposals.

This dichotomy is guaranteed by a set of internal checks and internal

controls. This system facilitates the judicious utilization of firm’s

resources. As a result, the system should be executed at the first level.

Consequently, the role of (CEO) should also be separated from that of

chief decision control authority (chairman). Board of directors is the seat

of premier level of decision control mechanism in the corporate structure

so it must not be controlled by CEO. CEO/Chair duality is a signal of the

absence of separation of decisions by management and decision control

and it ultimately leads to agency problems. Fosberg (2004) relates that

firms with two-tier leadership structure have a high debt to equity ratio.

This view was further supported by Abor (2007) who finds that capital

structure positively correlates with CEO duality, which shows that firms

use more debt as CEO duality increases

3- Board Size

The board of directors is the highest body of a company that is

responsible for managing the firm's operations. This board plays a vital

role in major decisions regarding financial mix. Pfeffer and Salancick

(1978) find a significant relationship between capital structure and board

size. The evidence regarding direction of relationship between board size

34
and capital structure is mixed. Berger et al. (1997) find that larger board

of directors generally cause low gearing levels for firms, arguing that

such big board's pressure managers to adopt lower gearing levels and

improve a firm's performance.

Abor and Biekpe (2007) discuss corporate governance and capital

structure regarding their decisions in Ghanaian Small and Medium

Enterprises and provide evidence for a negative relationship between

board size and leverage ratios and SMEs with larger boards having low

levels of gearing .On the other hand, Wen et al. (2002) find positive

relationship between board size and capital structure. They find that

larger boards adopt higher levels of gearing to strengthen firm value

especially when they are subjected to greater monitoring by authorities.

They also find that larger boards may find it difficult to reach consensus

in decisions, which may later affect the quality of corporate governance

and will result into higher leverage levels .

Hamdan (2015) finds that the structure of BOD and its size do not

seem to significantly affect banks performance. However, her results

show a significant relationship between CEO/chairman duality and

ownership, among other things, and performance in the banks under

study.

35
4- Ownership Structure

The literature concerning the role of block shareholders strongly

suggests that external block holders have incentives to monitor and

influence management appropriately to protect their significant

investments (Friend and Lang, 1988). Because of their big economic

stake, investors usually have a determined desire to watch over

management closely, making sure that management does not engage in

activities that are detrimental to the wealth of the shareholders. Since the

economic stake of block shareholders increase as their share ownership

rises, the incentive of block shareholders to protect their investment and

consequently monitor management can be expected to increase with the

level of their share ownership. Jensen and Meckling ,(1976) Friend and

Lang (1988) discuss the role of managerial self-interest in making

decision regarding capital structure. They find a negative relationship

between leverage ratio and shareholding by the management. This means

that, in the absence of any outside principal stockholder, the tendency of

low debt to equity ratio will continue which will lead to higher non

diversifiable risk of debt to management. Berger et al. (1997) investigate

the relationship between managerial entrenchment and firms' capital

structures. Findings show that CEOs who are not dynamic and

adventurous do their best to stay away from debt and gearing ratios

36
remain lower in the absence of request from owners. An important

investigation of variations in leverage levels reveals that gearing levels

moves upward when steps to reduce entrenchment are taken.

In concluding this section, one has to mention several studies in

Jordan that examine the impact of corporate governance on various

aspects of Jordanian firms and banks. For example, Al-Mwala &

Bataineh (2013) studies corporate governance and dividend policy for a

number of firms in Jordan. He finds that strong governance is beneficial

to companies while a weak one is unable to impact positively firms'

performance. Haddad (2013) deals with the relationship between

voluntary disclosure and corporate governance for banks listed in ASE.

Finally, as mentioned above, Hamdan (2015) finds mixed results

regarding BOD nationality, BOD size, and ownership, among other

elements, and performance.

2.5 Relationship between Ownership Structure and Capital

Structure

Capital structure is one of the important and critical decision areas

for any company as it has significant impact not only for the

organizational stakeholders but also for the survival of a business

organization in the competitive business market. The present literature on

capital structure stems from a work by Modigliani and Miller (1958) in

37
the context of role of capital structure on the firm's value. They indicate

that financial policies have no relationship with the firm’s value in an

ordinary business world where there are no taxes, no transaction costs,

and under perfect capital market environments.

Researchers are seeking to explore if capital structure does affect

firms' value and investigate the determinants of an optimal capital

structure in financial economics. Various capital structure theories were

developed by the researchers but still the optimal capital structure puzzle

remains unresolved.

More and more researches have shown the vital relationship

between ownership structure and capital structure. They include; Jensen,

1986; Morck et al., 1988; Chagnati and Damanpour, 1991; Mehran, 1992;

Zychowicz, 1994; Berger et al. (1997); Bajaj et al.1998; Thomsen and

Pedeson, 2000; Miguel et al., 2004; and Cespedes et al., 2010. These

authors all discovered a significant positive relationship between

ownership structure and capital structure. However, on the other hand,

Friend and Lang (1988), Agrawal and Nagarajan (1990) and Nam et al.

(2003) found that ownership has a significant negative relationship with

capital structure (leverage).

38
2.6 Relationship between Corporate Governance and Capital

Structure.

Ownership structure determines the organizational structure of the

organization, and different stakeholder's parts play different functions in

corporate governance. Various corporate governance functions affect

financing choice and influence the proportion of debt and equity the firm

will choose (Shi, 2010). Thus, firm’s capital structure choice depends on

who actually controls the firm (Pindado & La Torre, 2011).

Corporate governance has been identified in previous studies

(Friend and Lang, 1988; Berger et al., 1997; Wen et al., 2002; Abor,

2007) to impact to a large extent capital structure decisions of firms.

Already existing literature identified the main features of corporate

governance to consist of board composition, board size and CEO duality.

Empirical evidence shows a positive relationship between board size and

financial leverage (capital structure) (Pfeffer & Salancick, 1978; Jensen,

1986; Lipton & Lorsch, 1992; Wen et al., 2002; Abor, 2007).

External directors enhance the ability of a firm to protect itself

against the external environment, reduce uncertainty and raise funds.

Pfeffer (1973) and Pfeffer and Salancick (1978) argue that outside

directors tend to monitor managers more decisively, and managers are

forced to adopt lower leverage for getting improved performance results.

In other words, they increase the possibility that outside directors are
39
associated with high leverage. Other researchers, however, find a

significantly negative relationship between number of outside directors

on the board and leverage (Wen et al., 2002).

CEO duality influences in a direct way the financing decision of

the firm when the board of directors and the CEO position are not for the

same person. In general, CEO, the person with the senior decision

management and authority, should not be allowed to exercise the senior

decision control authority as well. Instead, the board of directors is the

highest level decision control structure in the firm; this requires that the

board must not be under the control of the CEO.

Fama and Jensen (1983) indicate that the separation of decision

management and decision control is compromised when the chairman of

the board is also the CEO of the firm or if the board is controlled by the

CEOs. Agency problems are associated with the separation of ownership

and control in any corporations. Thus, requiring that the chair and CEO

positions be held by different people should provide more effective

control.

41
 Chapter Three

Literature Review

This chapter includes the following sections:

3.1 Introduction.

3.2 Developed and Big Markets Studies.

3.3 Emerging Markets Studies.

3.4 What distinguishes this study from previous studies.

41
 Chapter Three
Literature Review
3-1 Introduction:

This chapter reviews some of the previous studies that have

investigated the effect of ownership structure and corporate governance

on capital structure. The first section focuses on research that have been

conducted in big markets, while the second section deals with studies

conducted in developing and emerging markets.

3-2 Developed and Big Markets Studies:

Friend & Lang (1988) investigate the relationship between capital

structure decisions and managerial self-interest. The sample of the

research includes 65 financial firms on NYSE firms during 1979 to 1983.

A multiple regression test was used to arrive at the results which showed

that there is negative relationship between leverage ratio and management

shareholding, but a positive relationship between size of firm and

leverage levels is revealed.

Berger et al. (1997) examine the relationship between managerial

entrenchment and firms' capital structures. The sample of the research

includes 452 industrial firms in U.S.A public corporations for the period

1984-1991. They used ordinary least squares (OLS) regression for testing.

They find that corporate governance influences the capital structure

42
decisions of firms, and firms with larger board of directors generally have

low gearing levels (leverage levels).

Florackisa & Ozkanb (2009) investigate the effect of managerial

incentives and corporate governance on capital structure using a sample

of 956 UK listed firms during (2000-2006) using PCA to aggregate

individual governance characteristics into a single governance index.

They found a significant relationship between executive ownership and

leverage, corporate governance have a significant impact on leverage, the

results reveal that the nature of the relation between executive ownership

and leverage depends on the firm’s corporate governance structure.

Saad (2010) investigate the compliance level among public listed

companies with the implementation of corporate governance code of best

practices and the association to firm’s capital structure in 126 Malaysian

firms during (1998-2006) using multiple regression analyses. She

concluded that there is a significant relationship between corporate

governance and capital structure. At the same time, there is evidence to

show that there are no relationships between the variables.

Su (2010) investigates how corporate diversification into related

and unrelated industries affect capital structure. The sample of the study

includes 926 firms of listed firms in China for the period from 2000 to

2006 using multivariate and panel data regressions. They found that firms

43
that diversify across product lines have less leverage than non-diversified

firms and that government-controlled firms have less leverage than

nongovernment controlled firms. For firms owned by the government,

there is strong negative relationship between diversification and leverage

and a weak positive relationship between unrelated diversification and

leverage.

Ganguli (2013) investigates how ownership structure impacts the

capital structure of the listed mid-cap companies in India. The sample

consists of 100 companies during (2005-2009). A fixed effect panel

regression model is used to analyze and find the relation between

leverage and ownership structure. He found that ownership structure does

impact capital structure but not vice-versa, and that leverage is positively

related to concentrated shareholding and has a negative relation with

diffuseness of shareholding after controlling for risk, profitability,

growth, tangibility, and size. Results agree with the managerial

entrenchment hypothesis and pecking order theory of capital structure.

Bekiris (2013) examines the interrelationships among ownership

structure and board characteristics in a small open economy, such as the

sample of Greek listed firms during (2000-2006). A simultaneous

equations framework is adopted in order to control the potential inner

structure of boards. The study found companies whose CEO is also the

44
chairman of the board tend to have fewer outside directors and lower

block holder ownership. Bekiris also presents evidence that independent

boards have better opportunities to be employed by firms with higher

external block holder shareholdings and whose board size is negatively

correlated with managerial ownership and board independence.

Reddy & Locke (2014) investigate the relationship between co-

operatives’ ownership structure, capital structure and agency costs. The

sample includes 160 co-operatives in New Zealandan companies during

(2005-2011) using ordinary least squares regression. The findings

indicate that an increase in independent directors, board member

experience and size reduces agency costs in co-operatives and mutual in

New Zealand. Furthermore, loaning from members not banks reduces

agency cost and increases profitability in co-operatives and mutual.

Dimitropoulos (2014) explores the effect of corporate governance

quality on the capital structure. The sample is 67 European soccer clubs

over the period of (2005-2009). Panel data techniques are used and results

show a negative relationship between leverage and board size; however, a

positive relationship between ownership structure and leverage was

found.

3-3 Emerging Market Studies:

Abor (2007) seeks to examine the relationship between the

corporate governance and the capital structure decisions of 22 listed

45
manufacturing firms on the GSE, Ghana during the six-year period

(1998-2003). The study used multiple regression analysis in estimating

the relationship between the corporate governance characteristics and

capital structure. He found significant and positive associations between

capital structures and board size, board composition, and CEO duality.

Results also show a negative relationship between the tenure of the CEO

and capital structure.

Al-Najjar & Taylor (2008) investigate the relationship between

capital structure and ownership structure in Jordan. The sample was 86

Jordanian non-financial firms during (1994-2003), and a pooled and panel

regression analysis. Results show that leverage and institutional

ownership have a significantly negative relationship and that there is no

significant relationship between dividend policy and leverage. However,

there is a significant negative relationship between leverage and business

risk and profitability and a positive relationship between leverage and

asset tangibility, liquidity, growth rate, and firm size.

Abor & Biekpe (2007) considered the effect of corporate

governance mechanisms on the capital structure of small and medium-

sized entities in Ghana using a regression model. They used various

variables, namely size of board of directors, board combination, board of

directors' skills and CEO duality. The results of their study show that

46
small and middle-sized entities expect less debt and larger board of

directors. Moreover, the study found that small and middle-sized entities

whose external directors are more than internal directors make use of

more debt policy.

Bokpin & Arko (2009) examine the effect of ownership structure

and corporate governance on capital structure decisions of firms on the

Ghana Stock Exchange (GSE) during (2002-2007) using pooled panel

crossed-section regression data .They found that managerial shareholding

significantly positively influences leverage. Also, corporate governance

variables, like board size, were found to be positively and statistically

significantly related to capital structure choices.

Bodaghi & Ahmadpour (2010) investigate the relationship

between corporate governance and capital structure, using data collected

from 50 financial companies listed at Tehran Stock Exchange. The

sample period was 1380 to1385 (Hegirah). Results found that board size

is significantly negatively correlated with debt to equity ratio, but not

significantly influenced by CEO/Chair duality and the presence of non-

executive directors on the board. Finally, firm size and return on assets

were found to have a significant effect on capital structure.

Sbeiti, (2010) investigates the determinants of capital structure of

142 firms operating in three GCC stock markets in Kuwait, Saudi Arabia

47
and Oman for the period (1998-2005) using OLS for each country. They

found that liquidity, tangibility and profitability are negatively and

significantly related to the leverage ratios, while firm size is positively

and significantly related to leverage ratio of firms operating. Finally,

growth opportunities are positively related to book leverage and

negatively related to market leverage.

Al-Najjar (2010) investigates the relationship between ownership

structure and corporate governance, using a sample of 86 Jordanian non-

financial firms cover the period of (1990 to 2003). A panel data analysis is

applied by different OLS models. The results show that the Jordanian

institutional investors consider firms’ capital structure, business risk,

profitability, asset liquidity, asset structure, growth rates, and size of firm

when they making investment decisions. In addition, institutional

investors in Jordan prefer to invest in services firms rather than industrial

firms. Finally, the study could not find a significant relationship between

firms’ dividend policy and institutional investors.

Ezeoha & Okafor (2010) investigate the effects of certain classes

of corporate ownership on capital structure decisions. The sample

included 71 quoted companies– (Non-financial & financial) listed in

Nigerian Stock Exchange during (1990 - 2006). The study adopts panel

fixed effects regression models .The results found a positive relationship

48
between local ownership and leverage; however, a negative relationship

between foreign ownership and leverage was found.

Arouri et al. (2011) explore the effect of ownership structure and

corporate governance on bank performance in the GCC region in 2008

for 27 banks from GCC countries for the period (2008), excluding Kuwait

for lack of data, using OLS regression model for analysis. Corporate

governance proxies were duality and board size, and other variables

included ownership concentration, foreign ownership, and institutional

ownership.

The results show that duality and board size had insignificant

impact on performance. The results also showed a positive and significant

relationship between foreign ownership and performance. However,

concentrated ownership was found to be related in a negative way to

ROA.

Sheikh &Wang (2012) studied the effects of corporate governance

on capital structure of non-financial firms listed on the Karachi Stock

Exchange, Pakistan, during (2004-2008). A multiple regression analysis

is used to estimate the model values. They found that board size, outside

directors, and ownership concentration are positively related to the total

debt ratio and the long-term debt ratio, while control variables such as

profitability and liquidity are negatively related to the total debt ratio and

49
the long-term debt ratio, but firm size is positively related to both debt

ratios.

Kajananthan (2012) studied the impact of corporate governance

on capital structure of 28 manufacturing companies listed in Colombo

Stock Exchange, Sri Lanka, during (2008-2012). The dependent variable

is leverage to measure capital structure and four independent variables are

included to specify corporate governance. Those variables were board

size, board structure, board meeting and proportion of independent non-

executive directors. Multiple regression analysis was applied to analyze

the data and a significant and positive statistical relationship was found

between variable, specifically a positive relationship between capital

structure and board size, leadership style, proportion of non-executive

directors and board meeting.

Al-Mwalla & Bataineh (2013) investigated corporate governance

and dividends policy in industrial and financial companies listed in ASE

during (2007-2009). A governance index was developed in order to

measure governance level. Three analytical models were used to measure

the relevance of dependent variables (dividends yield) and independent

variables (governance level). The models were: Ordinary Least Squares

(OLS), Random effect model, and TOBIT methods. They found that

dividends' yields decrease in firms with strong governance structure due

to lower information asymmetry, and that firm cash flow is retained.

51
 Yaseen & Amarneh (2013) investigated the relationship between

the corporate governance and leverage for Jordanian stock market during

(2005-2011). Dependent variable includes leverage measured by

debt/equity ratio and the independent variables are corporate governance.

Estimation showed that an institutional member has a negative

relationship with leverage they also found that a large shareholder has

positive relationship with leverage while foreign member has no impact

on leverage.

Al-Janadi et al. (2013) studied the impact of internal and external

corporate governance mechanisms in 87 companies from the Saudi

Arabian Stock Market during (2006-2007) using an index in their

analysis. Proxies were duality and board size, non-executive directors and

other variables included ownership structure which was divided to

government ownership and foreign ownership. The results found that

non-executive directors, CEO duality, board size, government ownership

and audit quality significantly impact providing quality voluntary

disclosure.

Ranti (2013) examined the effects of board size and CEO duality

on the capital structure of 40 listed firms in the Nigerian stock exchange

market for the period (2006-2011), using the regression analysis method.

They found a significant negative relationship between board size and the

capital structure of the selected listed firms. Furthermore, the study found

51
a significant positive relationship between CEO duality and the capital

structure. It concluded that firms with smaller board size, resulting from

weak corporate governance, have a tendency to use larger amounts of

debt in order to reduce major agency problems.

Agyei & Owusu (2014) investigate the relationship between

ownership structure and corporate governance on capital structure for

eight (8) randomly selected manufacturing listed companies from Ghana

Stock Exchange during (2007-2011) by using a descriptive, correlation

and a multivariate regression analysis. They found that board size, board

composition, and institutional and managerial shareholding are

significantly and positively correlated with leverage ratio, but it is found

to be negatively influenced by CEO/Chair duality. Return on assets has a

negative significant effect, and firm size has a positive one, on capital

structure.

Hamdan (2015) investigates the impact of board of directors’

structure on performance of Jordanian banks listed in ASE during the

period (2005-2013). Panel data analysis is used to examine the

relationship between the dependent variables: return on assets and return

on equity, as measurements of profitability, and the independent variables

which include two proxies of corporate governance (board size and CEO

duality) and board members’ ownership mix, nationality, gender

52
diversity, stock beta and family relations. Results show that there is no

significant relationship between board of directors' nationality, board

size, and family members and bank performance. However, the results

show that significant relationships exist between CEO duality, gender

diversity, board ownership, beta and bank performance.

3-4 What distinguishes this study from previous studies.

The discussion above reveals that the issue of the effect of

corporate governance on capital structure has received a great attention.

In Jordan, there have been a number of studies on this topic that

witnessed the establishment of CG Department in 2009, when

enforcement of OECD began. Studies prior to that date in Jordan are

considered lacking in value because CG was not taken into consideration.

The present study, which covers the years (2009-2013), is different from

previous studies because it was conduct when the enforcement of CG

codes was in place.

This study is also distinct from other previous studies in Jordan like

Al-Najjar and Taylor (2008), Al-Najjar (2010), Al-Mwalla and Bataineh

(2013), Yaseen and Amarneh (2013), and Hamdan (2015) in terms of the

covered period under investigation, where the time factor is one of the

most important factors that distinguish one study from others, and

because of the topic investigated since it handles the impact of the

53
ownership structure and corporate governance on the capital structure of

the industrial sector companies during the period (2009-2013).

Moreover, this study is different from others because it included

three additional independent variables which are largest ownership,

number of meetings, and committee of nominations and remunerations,

not investigated before. The study also uses CG codes not used in other

studies before, to the best of the researcher's knowledge.

On the other hand, this study is applied to the Amman Stock

Exchange which is different in institutional set up in developed markets

and this in turn leads to imperfection or different results on the point of

view

Finally, most studies on the subject of corporate governance have

focused on performance, but a few studies have addressed the issue of the

impact of ownership structure and corporate governance on capital

structure.

54
 Chapter Four

Methodology

This chapter includes the following sections:

4.1 Introduction.

4.2 Methodology Flow Chart.

4.3 Population and Sample.

4.4 Data Collection Method.

4.5 The Model.

55
 Chapter Four
Methodology
4-1 Introduction:

This chapter explains the methodology followed in the research to

investigate the impact of ownership structure and corporate governance

on capital structure of industrial Jordanian firms listed in Amman stock

exchange for the period (2009-2013).

4.2 Methodology Flow Chart:

The impact of ownership structure and corporate governance on

capital structure are examined, after taking into consideration firm size

and profitability. The model is, therefore, designed to suit natural

occurrence, as shown in Figure (1-1); the model is based on the argument

that there is impact of ownership structure and corporate governance on

capital structure.

56
Figure (1-1): Theoretical proposed relation between the study variables

 Ownership structure:

 largest shareholder

 institutional shareholders  Capital structure:

 leverage

 Corporate Governance
 Board size
 Board composition
 CEO/Chair Duality
 Committee of Nomination and the
Remuneration.
 Number of meeting

 Size of firm

 Profitability
(ROA).

Independent variable controlling variables dependent variabl

(Source: Developed by the researcher)

Discussion of the model is given in section 4-5 and later sections below.

4-3 Population and Sample:

The population of the study consists of all 75 industrial sectors'

companies for the period 2009-2013 based on the availability of data.

57
The firm sample includes only 65 firms, which had their annual reports of

the companies available for the period from 2009-2013 (an essential

criterion for selection)

4-4 Data Collection Method:

Ownership structure, financial ratios (ROA, LEV, TA, and SIZE)

and corporate governance used in the study are obtained from companies'

annual reports for the selected sample and period. Related articles,

journals, securities depository center (SDC) and company disclosures on

(ASE) website are also used.

4-5 The Model:

This study investigates the impact of ownership structure and

corporate governance on capital structure. Board size, board composition,

CEO/Chair duality, committee of nomination and remuneration and

number of meeting are employed as corporate governance codes.

Ownership structure variables used in the study are largest ownership and

institutional ownership; leverage is used to measure capital structure.

Firm size and return on assets are also used in the study as control

variables.

The relationship between capital structure and the independent

variables is tested by applying panel data regression analysis. Using the

model below, which based on Hasan & Butt (2009) and odaghi &

Ahmadpour (2010) :

58
 LEV = α๐ + (β1*%Largest) + (β2*% INST) + (β3*%BZ) + (

β4*%BC) + ( β5* DUALITY) + ( β6*% NMeeting) + ( β7* CNOM &

REM) + ( β8* Log TA) + ( β9* *%ROA) + Ɛ .

Where:

LEV : Leverage.

Largest: is the largest ownership percentage in the company.

INST: (institutional) is equal to the sum of the percentage of ownership of

the institutional shareholders of each company.

BZ : Board Size.

BC : Board Composition.

DUALITY: CEO/Chair Duality.

NMeeting: Number of Meeting

CNOM & REM: Committee of Nomination and Remuneration

ROA: Return on Assets.

LOG TA: Size of Firm.

α: is the constant.

β: coefficients of independent variables (explanatory variables).

Ɛ : residual.

The model includes BZ, CEO /Chair duality, SZ, ROA and institutional

shareholding which are taken from Hasan & Butt (2009) and Bodaghi &

59
Ahmadpour (2010), but the remaining contents of the model have been

developed by the researcher. They are Board Composition, LARGEST,

CNOM & REM, and Log TA.

Variables included in study have been measured as follows:

Dependent variable: capital structure (leverage)

Capital Structure is quantified by using debt to equity ratio and is

measured as the ratio of total debt to total assets (Merhan, 1992; Hasan &

Butt, 2009)

LEVit =

Where:

LEVit : leverage for company I in year t.

: Total debt for company I in the year t.

TAit : total assets for company I in year t.

Independent Variables:

1- Board Size

"The board of directors, the highest body in the corporate set up,

plays an essential role in a firm’s strategic decisions like financial mix.

Therefore, it is considered an important variable in studying the impact of

corporate governance on capital structure. "Board size is measured as

logarithm of number of board members."(Bodaghi & Ahmadpour,

2010:53)

61
 2- Board Composition

The variable board composition is included as a dummy variable. If

the person is a member in more than five companies, he is given zero (0),

but if he is member in less than five corporations, he is given one (1) in

agreement with CG codes.

3- CEO/Chair Duality

If a person holds both positions of chief executive officer and

chairman, it may cause serious agency problems. The variable CEO/Chair

duality is included as a dummy variable. It is 1 if CEO is chairman;

otherwise, it is 0.

4- Committee Nomination and Remuneration

It is included as a dummy variable. It is taken as 1 if (CNOM &

REM) exists; otherwise, it is taken as 0.

5- Number of Meeting

It is included as a dummy variable. It is taken as 1 if number of

meetings in fiscal is 6; otherwise, it is taken as 0.

6- Institutional Shareholders

They are measured as the sum of the percentage of ownership of

institutional shareholders of each company.

7- Largest Shareholder

It is measured as the percentage of the greatest shareholder's

ownership in each company.

61
 8-Firm Size (SIZE):

Firm size is measured in this study by a natural log of total assets.

Cho (1998) and Bodaghi & Ahmadpour (2010) are examples of using a

natural log of total assets as a proxy for the size.

SIZEit = Ln (TAit)

Where:

SIZEit : size for company I in year t.

TAit : total assets for company I in year t.

Ln (TAit) : natural log of total assets for company I in year t.

9-Profitability- Return on Assets (ROA)

Return on assets (ROA) is adopted as an accounting measure of

profitability. It is measured as the ratio of net income (after interest and

taxes) to total assets (Bodaghi &Ahmadpour, 2010):

ROAit =

Where:

ROAit : return on assets for company I in year t.

NIit : net income after interest and taxes for company I in year t.

TAit : total assets for company I in year t.

Data analysis and results of the model are presented in the following

chapter.

62
 Chapter Five:

Data Analysis

5.1. Introduction

This chapter presents and discusses the descriptive statistics of the

study variables and the interpretation of the results. It also investigates the

impact of ownership structure and corporate governance on capital

structure, and presents the regression results by using panel data analysis

that is estimated by the random effect model. In general, this chapter aims

to answer the questions presented in this study and to test the study

hypotheses.

It must be mentioned here before starting the discussion and

analysis that the adoption of corporate governance in Jordan started in

2009 and there has been a gradual adoption of governance rules and

codes by Jordanian firms. Therefore, the data analysis presented here

reflects a standard panel analysis.

5.2. Descriptive Statistics

This section provides the most important descriptive and statistical

information for the variables used in the 65 industrial Jordanian firms

with 325 observations within the period 2009–2013. It specifically shows

the mean value, standard deviations, maximum values and minimum

values of the study variables.

63
Table (5.1) below shows the means and standard deviations for the

Dependent and explanatory variables for the sample of the 65 companies.

Table (5.1): Descriptive statistics of dependent and explanatory

variables N=65 company

Variable Mean Std. Dev. Max Min

LEV 0.3693 0.2540 2.275 0.004
SIZE 16.732 1.4043 20.925 13.222
ROA 0.0111 0.1163 0.841 -0.965
Largest 0.3258 0.2132 0.9846 0
INST 0.0010 0.0030 0.0256 0
BZ 0.8893 0.1303 1.413 0.4771
Where (LEV) is the leverage, (SIZE) is the size of company, (ROA) is the return on assets, (largest) 1 is the
biggest shareholder, (INST) is the institutional shareholders, and (BZ) is the board size. Five dummy
variables (BC, NM, CEO Duality, CNOMs, and REM) were excluded from the table.

Table (5.1) shows that leverage has a mean value of (0.36) ranging

from (0.004) to (2.27) and a standard deviation of (0.25). Comparing

these figures with the findings and results of other studies is of

importance here. In the Pakistani market (Karachi stock Market),Hasan

ad Butt (2009) reported that the Pakistani firms had a mean value of

(1.48). Bodaghi and Ahmadpour (2010) indicated a mean value of (1.43)

for the Iranian market in Teheran. The present study's mean leverage is

close that found by Zurigat and Al-Mwalla (2011) who reported a mean

of (0.383). The difference of leverage among firms may be due to

differences in risk levels and profitability of firms, which may lower

external funds.

64
 The firm size variable has been measured by the Log of total assets

and reported a mean value of (16.73), ranging from (13.22) to a

maximum of (20.92), and a standard deviation of (1.40). The difference

of companies’ size is attributed to the difference in total assets for each

company.

The Profitability Variable was measured using the ROA of firm. Its

values show a high variation since they range from (-0.96) to (0.84) with

a mean of (0.011) and a standard deviation of (0.11). This demonstrates a

high variation in profitability for Jordanian industrial firms in the period

2009-2013.

Table (5-1) also shows the firm’s largest ownership which is

calculated by the percentage of the highest contribution by one

shareholder to the total contributions. The largest ownership has a mean

value of (0.32) and a standard deviation of (0.21). Its values range from

(0.0) to (0.98), which indicates a shareholding of 50% or more by one

contributor. The value 0 indicates that a certain variable in the sample is

not applicable for this part under company.

The variable of institutional contributions shows a mean of

(0.0010), ranging from (0.0) to (0.03), and a standard deviation of

(0.003). This indicates that contribution by institutions is very small

65
compared to that of individuals. This finding is in contrast with findings

by Hasan and Butt (2009) who found much higher contributions by

institutions in the Pakistani market (Karachi) where the mean was (0.15)

with a standard deviation of (0.12). This study's findings also contrast

with those by Bodghani and Ahmadpour (2010) who found similar

figures for the Iranian market (Tehran) to those given by Hasan and Butt

(2009), namely a mean 0f (0.15) and a deviation of (0.11).

The board size variable (BZ) has been calculated by the LOG of

board size yielding a certain percentage. The mean value of (0.88),

ranging from (0.48) to (1.41), and a standard deviation of (0.13). This

represents a high percentage of board membership compared to board

sizes in developed countries but it shows similar results to board sizes in

developing countries like Pakistan (Hasan and Butt, 2009) and Iran

(Bodghani and Ahmadpour, 2010).

66
 Table (5-2) index of corporate governance codes:

not %of % of not

Item year comply total
comply comply comply
2009 53 10 65 0.84 0.16
2010 53 10 65 0.84 0.16
BZ 2011 52 11 65 0.83 0.17
2012 53 10 65 0.84 0.16
2013 53 10 65 0.84 0.16
2009 54 9 65 0.86 0.14
2010 55 8 65 0.87 0.13
BC 2011 54 9 65 0.86 0.14
2012 54 9 65 0.86 0.14
2013 55 8 65 0.87 0.13
2009 49 14 65 0.78 0.22
2010 49 14 65 0.78 0.22
DUALITY 2011 50 13 65 0.79 0.21
2012 50 13 65 0.79 0.21
2013 52 11 65 0.83 0.17
2009 11 52 65 0.17 0.83
2010 13 50 65 0.21 0.79
CNOM & 2011 17 46 65 0.27 0.73

REM
2012 16 47 65 0.25 0.75
2013 17 46 65 0.27 0.73

Where (BZ) is the size of board, (BC) is the board composition, (CEO/DU) means both CEO and chairman duality,
(CNOM& REM) is committee of nominations and remuneration, and (N/M) is the number of meetings. Source: Output
developed by the researcher.

Table 5-2 provides an index measurement of items related to board of

director as proxy of corporate governance codes. This has been developed

by calculating the compliance versus non-compliance using percentages

for the sample under investigation. From the above table, it can be seen

for board size the compliance level reaches a value of 0.84, for board

67
Composition the compliance level reaches a value of 86% , but for

duality the compliance percentage reaches a value of 78% and committee

of nomination and remuneration the compliance percentage was only

27%.

5-3 Correlation Matrix:

The table below shows the direction of relations between the dependent
variable (LEV) and the independent variables of the study using STATA.

Table (5-3) Correlation Matrix:

CNOM
LEV SIZE ROA LARGEST INST BZ BC CEO/DU N/m
& REM
LEV 1

SIZE 0.112 1

ROA -0.199 0.257 1

LARGEST 0.141 0.138 -0.067 1

INST -0.043 -0.167 0.0193 -0.083 1

BZ -0.158 0.335 0.058 -0.312 0.078 1

BC 0.148 0.128 -0.000 0.001 0.104 0.006 1

CEO/DU 0.032 -0.020 -0.001 0.061 0.138 0.113 0.081 1

CNOM &
0.067 0.040 0.044 0.027 -0.093 0.030 -0.025 -0.016 1
REM
N/m -0.119 0.080 0.090 0.025 -0.017 0.131 0.086 0.149 0.211 1

Where (SIZE) IS the size of the company, (ROA) is profitability, (LARGEST) is the biggest ownership, (INST) is
institutional shareholder, (BZ) is the size of board,( BC) is the board composition, (CEO/DU) means both CEO and
chairman duality, (CNOM& REM) is committee of nominations and remuneration, and (N/M) is the number of meetings.
Source: Output developed by the researcher using STATA

The correlation matrix reported in Table (5-2) shows that the

highest value of correlation coefficients is (0.257) which is found for the

variables (ROA) and (SIZE). Most other values are too small, and this

makes us confident enough to run the multiple linear regression models.

68
Model (LEV) is shown to have a negative correlation with institutional,

board size, number of meetings and return on assets. The results for (BZ,

ROA) are consistent with findings by Hasan and Butt (2009), Bodaghi

and Ahmadpour (2010) but are inconsistent with their findings regarding

duality of CEO/chair. The present study's findings show a positive

correlation with CEO duality, size of firm, board composition, committee

of nominations and remuneration, and large ownership. The results for

(BC, LARGE, SIZE) are consistent with findings by Hasan and Butt

(2009) and Bodaghi and Ahmadpour (2010) for the Pakistani and Iranian

markets, respectively.

5-4 Results analysis of Variables' VIF

Table (5-4): Variables' VIF

VIF

Variable VIF 1/VIF

SIZE 1.43 0.69919

BZ 1.42 0.70483

LARGEST 1.25 0.8028

ROA 1.11 0.90150

NMEETING 1.11 0.9043

INST 1.10 0.9087

DUALITY 1.08 0.9297

CNOM & REM 1.06 0.9436

BC 1.06 0.9465

Mean VIF 1.18

69
 It is widely believed that multicollinearity inadvertently inflates

standard errors, making some variables statistically significant but others

insignificant. This may influence determining each variable's role in the

model and is helpful to study whether there is a causal link between the

variables and this, in turn, affects the interpretation of results (Pan and

Jackson, 2008, cited in Al-Khateeb, 2015). In multiple regression, the

variance inflation factor (VIF) is used as an indicator of Multicollinearity.

The (VIF) for the variables of the model that are presented in Table (5-3)

has a mean value of (1.18) and none of the values of (VIF) exceed 10.

This indicates that no multicollinearityis found among the variables of the

model, which proves that the model does not suffer from any

multicollinearity problems (Gujarati, 2003; Al-Khateeb, 2015).

5.5 Estimation Results for the Impact of Ownership Structure and

Capital Structure on Capital Structure.

The model (LEV) is tested using the Random Effect Models. The

model selection is based on the Hausman Test results. The adjusted R

square is (0.2263) for the model. The estimation results for the impact of

ownership structure and corporate governance on capital structure of

Jordanian industrial firms in the period (2009-2013) are shown in Table

(5-5) below. The random Effect Model was the one selected to discuss

and analyze the findings.

71
Table (5-5): Estimation result of random effect model
Random Effect Modal
LEV

coefficient -0.104
Constant Z-test -0.39
Prob. 0.699
coefficient 0.044
SIZE Z-test 2.62
Prob. (0.009)***
coefficient -0.319
ROA Z-test -2.880
Prob. (0.004)***
coefficient 0.18
LARGEST Z-test 0.19

Prob. 0.851
coefficient -1.740
INST Z-test -0.24
Prob. 0.814
coefficient -0.351

BZ Z-test -2.18

Prob. (0.029)**

coefficient 0.51
BC Z-test 1.07
Prob. 0.287
coefficient 0.025
DUALITY Z-test 0.55
Prob. 0.583
coefficient 0.015
CNOM & REM Z-test 0.36
Prob. 0.718
coefficient -0.047
NMeeting Z-test -1.27
Prob. 0.204
R-squared 0.2263

Chi2 (19.53 ,0.0211)

F-statistic
Prob.

Chi2 statistic = 17.07

Hausman test
Prob. > Chi2 = 0.0476

Chi2 statistic = 52.43

B-P test Hetroskedastcity
Prob. > Chi2 = (0.0000)***
Where (SIZE) is the size of the company, (ROA) is profitability, (LARGEST) is the biggest ownership,
(INST) is institutional shareholder, (BZ) is the size of board, (BC) is the board composition, (DUALITY)
means both CEO and chairman duality, (CNOM& REM) is committee of nominations and remuneration,
and( NMEETING) is the number of meetings. Denote variable is significant level at *** 1%, **5%, and
*10%

71
 One can see from above table that the Hausman test has a ch2 value

of (17.07) and a p-value of (0.047), which indicates that Hausman test, is

significant, suggesting that the random effect method is better than the

fixed effect method.

The following section shows the estimation results of independent

variables of the model.

- There is a significant positive relationship between the size of firm

and leverage at a p-value of (0.009). Hasan and Butt also find a similar

result for their Pakistani sample. According to many studies, debt to

equity ratio is greatly affected by firm size: the bigger the firm size is,

the more tendency for the firm to resort to debt mode and the capable it

is to repay debts. The positive relationship found may be attributed to

their widely established reputation as stable and strong institutions with

sizable assets on the balance sheet that can be used as collateral.

Hence, it becomes much easier for big firms to obtain financing on

terms good for them.

- There is a significant negative relationship at p-value of (0.004)

between return on assets and leverage. Hasan and Butt (2009) also find

a negative relationship for Pakistani firms and point to the economic

importance of such funding and that it agrees with the pecking order

theory which stipulates that profitable firms resort to internally

generated funds to finance projects as a first choice.

72
- There is an insignificant positive relationship between largest

ownership and leverage at a p-value (0.851). Usually, managerial

ownership affects in a significant way debt to equity ratio. Hasan and

Butt (2009) mention that an increase of 1% in managerial shareholding

reduces leverage y about 0.9%, and this is due to the fact that

managerial interests persuade them to reduce debt and equity options.

But the present study results seem to run against findings by other

researchers as the results here show only an insignificant relationship

between largest ownership and leverage. Friend, Irwin and Lang

(1988) contend that the tendency to have lower debt to equity ratio will

exist and increase in the absence of significant external ownership, and

this will lead to higher risk of debt for the managers.

- There is an insignificant negative relationship at a p-value (0.814)

between institutional shareholding and leverage. Hasan and Butt

(2009) did not find similar values for Pakistani firms on Karachi stock

market. They comment that institutional shareholding has normally a

positive correlation with ownership, and this is the result of efficient

control by shareholders which may lead to reduction in cost and

managerial exploitation for personal interests. The present study's

results may different from those by Hasan and Butt because CG began

in Pakistan in 2005, or 4 years before it started in Jordan.

- There is a significant negative relationship between board size and

leverage at a p-value of (0.029). This translates into bigger boards

73
 resulting in less leverage, due to the fact that more members on the

board allow for more expertise in firm management and interests.

Hasan and Butt (2009) find similar negative results for Pakistani firms.

Both this study's findings and those by Hasan and Butt agree with other

findings by Berger et al. (1997) and Abor (2007), who affirm that

larger boards will fight for lower debt levels. Such boards make clear

to the managerial staff that using more equity capital is important to

improve the firm's performance, according to the latter two authors.

- There is an insignificant positive relationship at a p-value (0.287)

between board composition and leverage. According to Jordanian

codes of corporate governance, a person can only be member in five

firm boards provided that the firms perform different tasks. The goal is

to limit interference in interests and focus attention on a limited

number of firms. Since the correlation between board composition and

leverage was significantly positive, the Jordanian code of corporate

governance was found useful for the firms' performance and interests.

This result does not agree with findings by Bodghani and Ahmadpour

(2010), who found only an insignificant positive relationship between

board composition and leverage.

- There is an insignificant positive relationship between duality of

CEO/chairman and leverage. This is partially in agreement with results

by Bodghani and Ahmadpour (2010) who found an insignificant

negative relationship between duality and leverage. It is preferable not

74
 to have the same person occupy both positions of CEO and chairman

of board to avoid agency problems, according to Hasan and Butt

(2009), who argue that high control by CEO may cause managerial

opportunistic manipulation. Thus, a negative correlation between

duality and leverage is preferable. But in our case, the findings were

not quite clear, as the correlation was found to be positive albeit

insignificantly so.

- There is an insignificant positive relationship between the committee

of nominations and remuneration and leverage. This part of the

analysis is unique to our study and was not found in other studies. The

existence of such a committee in the firms studied has been found to be

useful for the companies since it exercises a monitorial and supervisory

role, leading to more controls on spending and remunerations.

- Number of meetings is found to be insignificantly and negatively

correlated to leverage at a p-value of (0.204).

5-6 Hypotheses Testing:

 H1: There is no statistically significant relationship between

Ownership Structure and capital structure.

Sub-hypotheses:

H1-a: There is no statistically significant relationship between

institutional members and capital structure.

75
 Under the model the null hypothesis H1a is accepted; there is no

significant relationship between institutional members and capital

structure.

H1-b: There is no statistically significant relationship between largest

members and capital structure.

Under the model the null hypothesis H1b is accepted; there is no

significant relationship between largest members and capital structure.

 H2: There is no statistically significant relationship between

Corporate Governance and capital structure.

Sub-hypotheses:

H2-a: There is no statistically significant relationship between board size

and capital structure.

Under the model the null hypothesis H2a is rejected; there is a

statistical significant and negative relationship between board size and

capital structure.

H2-b: There is no statistically significant relationship between board

composition and capital structure.

76
 Under the model the null hypothesis H2b is accepted; no

significant relationship is found between board composition and capital

structure.

H2-c: There is no statistically significant relationship between chief

executive officer and capital structure.

Under the model, the null hypothesis H2c is accepted; there is no

significant relationship in the study between chief executive officer and

capital structure.

H2-d: There is no statistically significant relationship between the

committee of nominations and remuneration and capital structure.

Under the model, the null hypothesis H2d is accepted since no

significant relationship is found between the committee of nominations

and remuneration and capital structure.

H2-e: There is no statistically significant relationship between the

mumber of meeting and capital structure.

Under the model, the null hypothesis H2e is accepted since no

significant relationship is found between The number of meeting and

capital structure.

The hypotheses testing reported above reflect the relationships

between the independent variables and the model of capital structure

77
(LEV). Regarding the control variable of the study, total assets is a

significant control variable under the model and return on assets is a

significant control variable under the model

Conclusions stemming from the results of the study and their

matching with previous literature are presented in the next chapter.

78
 Chapter Six
Conclusions and Recommendations

6-1 Introduction

6-2 Conclusion

6-3 Recommendations

79
 Chapter Six
Conclusions and Recommendations
6-1 Introduction

This chapter includes a summary of the main findings of the study

and provides recommendations for companies and future research.

6-2 Conclusion:

This research has empirically examined the relationship between

corporate governance, ownership structure and capital structure for

Jordanian listed industrial companies for the period 2009-2013 by using

multivariate regression analysis. Results reveal the following:

1- Board size is significantly related to capital structure.

2- Representation of BC on board and CEO/Chair duality has no

significant relationship with capital structure.

3- Correlation analysis suggests that CEO/Chair duality, BC and

institutional ownership are negatively correlated with profitability.

4- Largest ownership has a positive relationship with debt to equity ratio,

which indicates that ownership concentration induces the managers to

lower leverage; however, it is not related to GC.

5- Institutional ownership has a negative relationship with capital

structure, but this does not agree with corporate governance codes and

norms. This relation is found to be statistically insignificant, however.

81
 This may be due to the fact that corporate governance practices are still

in an infancy stage in Jordan.

6- Traditional determinants of capital structure like size and

profitability have a significant effect on corporate financing decisions.

7- Profitability is negatively related to capital structure and it is

consistent with the pecking order hypothesis.

Therefore, one can conclude, as Hasan & Butt (2009) and Bodaghi &

Ahmadpour (2010) suggest that corporate governance has serious

implications for financing decisions.

6-3 Recommendations:

Based on the study results, the recommendations below are suggested:

 Generalizing the application of the concept of corporate governance in

companies and strengthening mechanisms to control them must be

emphasized.

 Companies must seek to increase focus on ownership and maintenance

of both the level of disclosure of the data and the independence of the

board of directors and increase the number of board members because

corporate governance has a positive impact on corporate performance.

81
 The regulatory follow-up to the commitment of Jordan to abide by the

principles of corporate governance of companies and impose sanctions

on non-committed companies must be emphasized.

 Ownership membership in the companies must always be disclosed; as

such disclosure will force them to act in the best interests of the firm.

 Further studies on the subject of corporate governance and its

relationship to the capital structure must be carried out, as it was found

that there is a lack of studies on this topic in Arab countries.

82
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 

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93
 ‫‪Appendix‬‬

‫‪Code‬‬ ‫‪Ticker‬‬ ‫‪Name‬‬

‫‪141009‬‬ ‫‪ICAG‬‬ ‫اٌصٕاعٍت اٌخجارٌت اٌزراعٍت ( اإلٔخاج )‬

‫‪141026‬‬ ‫‪JOIC‬‬ ‫اٌصٕاعاث اٌىٍّاوٌت األردٍٔت‬

‫‪141027‬‬ ‫‪UNIC‬‬ ‫اٌعاٌٍّت ٌٍصٕاعاث اٌىٍّاوٌت‬
‫‪141054‬‬ ‫‪NATC‬‬ ‫اٌىطٍٕت ٌصٕاعت اٌىٍىرٌٓ‬
‫‪141086‬‬ ‫‪INOH‬‬ ‫اٌّخىاٍِت ٌٍّشارٌع اٌّخعذدة‬
‫‪141039‬‬ ‫‪WIRE‬‬ ‫اٌىطٍٕت ٌصٕاعت اٌىىابً واألسالن اٌىهزبائٍت‬
‫‪141059‬‬ ‫‪JNCC‬‬ ‫اٌشزق األوسط ٌٍىابالث اٌّخخصصت ‪ِ /‬سه_األردْ‬
‫‪141072‬‬ ‫‪AEIN‬‬ ‫اٌعزبٍت ٌٍصٕاعاث اٌىهزبائٍت‬
‫ِجّع اٌشزق األوسط ٌٍصٕاعاث اٌهٕذسٍت واإلٌىخزؤٍت‬
‫‪141097‬‬ ‫‪MECE‬‬
‫واٌثمٍٍت‬
‫‪141019‬‬ ‫‪JOPI‬‬ ‫األردٍٔت ٌصٕاعت األٔابٍب‬
‫‪141038‬‬ ‫‪WOOD‬‬ ‫األردٍٔت ٌٍصٕاعاث اٌخشبٍت‬
‫‪141065‬‬ ‫‪RMCC‬‬ ‫اٌباطىْ اٌجاهز واٌخىرٌذاث اإلٔشائٍت‬
‫‪141077‬‬ ‫‪IENG‬‬ ‫رَ عالء اٌذٌٓ ٌٍصٕاعاث اٌهٕذسٍت‬
‫‪141098‬‬ ‫‪ASPMM‬‬ ‫اٌعزبٍت ٌصٕاعت اٌّىاسٍز اٌّعذٍٔت‬
‫‪141002‬‬ ‫‪JPPC‬‬ ‫األردٍٔت ٌخجهٍز وحسىٌك اٌذواجٓ وِٕخجاحها‬
‫‪141004‬‬ ‫‪JODA‬‬ ‫األٌباْ األردٍٔت‬
‫‪141029‬‬ ‫‪GENI‬‬ ‫اإلسخثّاراث اٌعاِت‬
‫‪141044‬‬ ‫‪UCVO‬‬ ‫اٌمزٌت ٌٍصٕاعاث اٌغذائٍت واٌزٌىث إٌباحٍت‬
‫‪141052‬‬ ‫‪UMIC‬‬ ‫اٌعاٌٍّت اٌحذٌثت ٌصٕاعت اٌزٌىث إٌباحٍت‬
‫‪141084‬‬ ‫‪NATP‬‬ ‫اٌىطٍٕت ٌٍذواجٓ‬
‫‪141092‬‬ ‫‪AIFF‬‬ ‫اٌّصأع اٌعزبٍه اٌذوٌٍت ٌألغذٌت واإلسخثّار‬
‫‪141094‬‬ ‫‪NDAR‬‬ ‫داراٌغذاء‬
‫‪141141‬‬ ‫‪JVOI‬‬ ‫ِصأع اٌزٌىث إٌباحٍت األردٍٔت‬
‫‪141055‬‬ ‫‪JOIR‬‬ ‫اٌّىارد اٌصٕاعٍت األردٍٔت‬
‫‪141015‬‬ ‫‪JOCF‬‬ ‫ِصأع اٌخزف األردٍٔت‬
‫‪141005‬‬ ‫‪GENM‬‬ ‫اٌعاِت ٌٍخعذٌٓ‬
‫‪141006‬‬ ‫‪AALU‬‬ ‫اٌعزبٍت ٌصٕاعت األٌٍّٕىَ ( آراي )‬
‫‪141011‬‬ ‫‪NAST‬‬ ‫اٌىطٍٕت ٌصٕاعت اٌصٍب‬
‫‪141018‬‬ ‫‪JOPH‬‬ ‫ِٕاجُ اٌفىسفاث األردٍٔت‬
‫‪141042‬‬ ‫‪JOCM‬‬ ‫ِصأع اإلسّٕج األردٍٔت‬
‫‪141043‬‬ ‫‪APOT‬‬ ‫اٌبىحاس اٌعزبٍت‬
‫‪141070‬‬ ‫‪JOST‬‬ ‫حذٌذ األردْ‬
‫‪141091‬‬ ‫‪NATA‬‬ ‫اٌىطٍٕت ٌصٕاعاث األٌٍّٕىَ‬
‫‪141170‬‬ ‫‪SLCA‬‬ ‫اٌذوٌٍت ٌصٕاعاث اٌسٍٍٍىا‬
‫‪141203‬‬ ‫‪TRAV‬‬ ‫شزوت اٌخزافزحٍٓ‬
‫‪141017‬‬ ‫‪JOPC‬‬ ‫ِصأع اٌىرق واٌىزحىْ األردٍٔت‬
‫‪141003‬‬ ‫‪APCT‬‬ ‫اٌعزبٍت ٌٍّشارٌع اإلسخثّارٌت‬
‫‪141081‬‬ ‫‪PERL‬‬ ‫اٌٍؤٌؤة ٌصٕاعت اٌىرق اٌصحً‬
‫‪141012‬‬ ‫‪DADI‬‬ ‫دار اٌذواء ٌٍخٍّٕت و اإلسخثّار‬
‫‪141023‬‬ ‫‪APHC‬‬ ‫اٌّزوز اٌعزبً ٌٍصٕاعاث اٌذوائٍت واٌىٍّاوٌت‬
‫اٌشزق األوسط ٌٍصٕاعاث اٌذوائٍت واٌىٍّاوٌت‬
‫‪141073‬‬ ‫‪MPHA‬‬
‫واٌّسخٍزِاث اٌطبٍت‬
‫‪141100‬‬ ‫‪EKPC‬‬ ‫اإللباي ٌٍطباعت واٌخغٍٍف‬
‫‪141014‬‬ ‫‪JOWM‬‬ ‫ِصأع األجىاخ االردٍٔت‬
‫‪141031‬‬ ‫‪WOOL‬‬ ‫عماري ٌٍصٕاعاث واإلسخثّاراث اٌعمارٌت‬
‫‪141061‬‬ ‫‪ELZA‬‬ ‫اٌزي ٌصٕاعت األٌبست اٌجاهزة‬

‫‪94‬‬
 ‫‪Code‬‬ ‫‪Ticker‬‬ ‫‪Name‬‬
‫‪141074‬‬ ‫‪UTOB‬‬ ‫ِصأع اإلححاد إلٔخاج اٌخبغ واٌسجائز‬
‫‪141204‬‬ ‫‪IPHM‬‬ ‫األردٍٔت إلٔخاج األدوٌت‬
‫‪141210‬‬ ‫‪HPIC‬‬ ‫اٌحٍاة ٌٍصٕاعاث اٌذوائٍت‬
‫‪141219‬‬ ‫‪PHIL‬‬ ‫فٍالدٌفٍا ٌصٕاعت األدوٌت‬
‫‪141209‬‬ ‫‪MBED‬‬ ‫اٌعزبٍت ٌصٕاعت اٌّبٍذاث واألدوٌت اٌبٍطزٌت‬
‫‪141217‬‬ ‫‪IPCH‬‬ ‫اٌصٕاعاث اٌبخزووٍّاوٌت اٌىسٍطت‬
‫‪141010‬‬ ‫‪ACDT‬‬ ‫اٌّخصذرة ٌألعّاي واٌّشارٌع‬
‫‪141026‬‬ ‫‪JOIC‬‬ ‫اٌصٕاعاث اٌىٍّاوٌت األردٍٔت‬
‫‪141032‬‬ ‫‪INMJ‬‬ ‫اٌصٕاعاث واٌىبزٌج األردٍٔت ( جٍّىى )‬
‫‪141205‬‬ ‫‪FNVO‬‬ ‫اٌىطٍٕت األوٌى ٌصٕاعت وحىزٌز اٌزٌىث إٌباحٍت‬
‫‪141222‬‬ ‫‪SNRA‬‬ ‫سٍٕىرة ٌٍصٕاعاث اٌغذائٍت‬
‫‪141047‬‬ ‫‪ICER‬‬ ‫اٌذوٌٍت ٌٍصٕاعاث اٌخزفٍت‬
‫‪141117‬‬ ‫‪INTI‬‬ ‫اإلسخثّاراث واٌصٕاعاث اٌّخىاٍِت (لابضت)‬
‫اٌىطٍٕت إلٔخاج إٌفط واٌطالت اٌىهزبائٍت ِٓ اٌصخز‬
‫‪141216‬‬ ‫‪JOSE‬‬
‫اٌزٌخً‬
‫‪141220‬‬ ‫‪MANS‬‬ ‫اٌّخحذة ٌصٕاعت اٌحذٌذ واٌصٍب‬
‫‪141221‬‬ ‫‪JMCO‬‬ ‫رخاَ األردْ‬
‫‪141224‬‬ ‫‪NCCO‬‬ ‫اسّٕج اٌشّاٌٍت‬
‫‪141208‬‬ ‫‪AQRM‬‬ ‫اٌمذس ٌٍصٕاعاث اٌخزسأٍت‬
‫‪141214‬‬ ‫‪ASAS‬‬ ‫أساس ٌٍصٕاعاث اٌخزسأٍت‬

‫‪95‬‬