Corporate governance effectiveness and financial leverage: empirical evidence from Saudi Arabia

Abstract EN

This study aims to examine the impact of corporate governance effectiveness on the firms' financial leverage among Saudi firms.

In addition, the study examines the impact of board of director effectiveness and audit committee effectiveness on firms' leverage.

This study employs yearly data of Saudi firms over the period of 2012-2016.

The study utilizes Ordinary Least Square (OLS) model to support the hypothesis of the study.

The study's findings show that Saudi firms with an effective corporate governance are having negative level of leverage in their capital structure.

Further, the study finds that firms with effective board of director and less effective audit committee are having more debts in the capital structure.

The findings of the study imply that for Saudi firms, effective corporate governance mitigates the agency problem which reflected by the less debts used by Saudi firms in their capital structure.

It also provides evidence that effective board reflect that firms are using less debts, this perhaps due to the good performance that means firms are having more internal sources, this leads to use less leverage.

It is also found that once audit committee is more effective, firms are having more financial reporting quality which enhance the creditworthiness of the firms and consequently enable firms to get more borrowings.

These findings provide implications to the regulators, firms' decision makers, creditors, and investors on the importance of corporate governance monitoring mechanisms namely board of directors and audit committee characteristics.

This study enriches the literature and offers valuable implications by providing an empirical evidence on the impact of effective corporate governance captured by internal monitoring mechanisms.