risks

Article
Corporate Governance and Capital Structure Decisions:
Moderating Role of inside Ownership
Suman Paul Chowdhury 1 , Riyashad Ahmed 1,2 , Nitai Chandra Debnath 1, *, Nafisa Ali 3
and Roni Bhowmik 4,5,6, *

1 BRAC Business School, BRAC University, Dhaka 1212, Bangladesh; [email protected] (S.P.C.);
[email protected] (R.A.)
2 Putra Business School, Universiti Putra Malaysia, Serdang 43400, Malaysia
3 Department of Economic, University of Nottingham, Nottingham NG7 2RD, UK; [email protected]
4 School of Business, Guangdong University of Foreign Studies, Guangzhou 510515, China
5 Lancashire School of Business and Enterprise, University of Central Lancashire, Preston PR1 2HE, UK
6 Department of Business Administration, Daffodil International University, Dhaka 1216, Bangladesh
* Correspondence: [email protected] (N.C.D.); [email protected] (R.B.);
Tel.: +880-171-320-1390 (N.C.D.); +86-156-7928-7628 (R.B.)

Abstract: This study empirically investigates the association between board attributes and capital
structure decisions of non-financial listed firms in Bangladesh. This study also investigates how this
association is shaped and moderated by the level of insider ownership. The current study takes
3096 firm-year observations of firms that are listed on the Dhaka Stock Exchange from 2004 to 2023.
Multiple regression analysis on panel data was used, and pooled OLS was selected by resolving
stationary issues. Moreover, this study used lagged variables and a GMM estimator to address
endogeneity. The results show that both board size and board independence are more positively
correlated with a firm’s leverage under conditions of a high level of inside ownership. On the other
hand, without the moderating effect of inside ownership, gender diversity on the board does not
have any significant impact on a firm’s leverage, and it turns into a positive association due to
the moderating effect of inside ownership. This result is consistent with the existing theory and
Citation: Chowdhury, Suman Paul, previous findings. After the introduction of corporate governance guidelines, the inside owners’ effect
Riyashad Ahmed, Nitai Chandra
on board size and board independence became substantial, indicating that corporate governance
Debnath, Nafisa Ali, and Roni
guidelines with the moderating role of inside ownership play a significant role in capital structure
Bhowmik. 2024. Corporate
decisions in Bangladeshi listed firms.
Governance and Capital Structure
Decisions: Moderating Role of inside
Ownership. Risks 12: 144. https://
Keywords: corporate governance; capital structure; board size; gender diversity; inside ownership
doi.org/10.3390/risks12090144

Academic Editors: Jian Xu and

Feng Liu
1. Introduction
Received: 9 July 2024 Capital structure is one of the major areas of concern for any firm, whether for-profit
Revised: 3 September 2024 or non-profit, and private or public. It recognizes the nature of a firm’s arrangements
Accepted: 4 September 2024 to finance its overall operational activities and growth. Agency theory argues that the
Published: 10 September 2024 association between corporate governance (CG) and the debt of the firms reflects the role
of CG in shaping capital structure and cost of debt. Debtholders expect that strong CG
can lessen the possibility of default and enhance the availability of reliable accounting
information for decision-making (Brown et al. 2011). In this context, (La Porta et al. 2000)
Copyright: © 2024 by the authors.
described CG as ‘corporate governance deals with the ways in which suppliers of finance
Licensee MDPI, Basel, Switzerland.
to corporations assure themselves of obtaining a return on their investment’. As well as
This article is an open access article
distributed under the terms and
good CG practices induce significant growth in firms and appeal to more funds (Ahmed
conditions of the Creative Commons
Sheikh and Wang 2012). Therefore, companies with better CG are able to use more funds
Attribution (CC BY) license (https:// at a lower cost due to the enhanced confidence among debtholders (Mande et al. 2012).
creativecommons.org/licenses/by/ From the agency theory perspective, Meckling and Jensen (1976) argue that managers do
4.0/). not always adopt value-maximizing debt levels in their capital structure decisions. A high

Risks 2024, 12, 144. https://doi.org/10.3390/risks12090144 https://www.mdpi.com/journal/risks

Risks 2024, 12, 144 2 of 22

debt level restricts managers from using free cash flow to achieve personal benefits (Jensen
1986). Thus, to ensure an optimal level of debt, the firm must deploy good CG practices.
Leverage can play a self-disciplining role in internal CG practices that mitigate agency
costs (Meckling and Jensen 1976). Similarly, Brown et al. (2011) argue that debt can
constrain managers’ appropriation of resources. Given the above arguments, managers
are less likely to achieve their benefits if the firms are operating under good CG. Hence,
Morellec (2004) documents that managers who want their interests may favor less debt
than optimal because debt may be used as a corrective to confine managers from devious
behavior. Moreover, Ortiz-Molina (2007) finds that leverage reduces the conflict between
managers and shareholders. In this vein, an effective corporate board may resolve this
conflict of interest (Kumar et al. 2022), perform better, and increase the market value of the
firm (Shaukat and Trojanowski 2018).
Like other emerging nations, listed Bangladeshi firms are characterized by a high
degree of concentrated ownership, and they own significant stakes in a single firm (Rashid
2015). Usually, they are the founding family members who dominate the boards, often try
to minimize other monitoring mechanisms (Rashid 2016) and control firm decisions. In
most cases, these dominant shareholders also occupy firms’ top management positions.
Sobhan and Werner (2003) notice that about 73% of boards of non-financial listed firms
are conquered by the sponsor shareholders, who also belong to a single family. Hence,
outside board members, financial analysts, and the financial media play insignificant roles
in monitoring firm management (Rashid 2016). As a result, majority shareholders pursue
their own agenda, even at the cost of minority shareholders’ interests (Chen and Young
2010). Moreover, several corporate scandals and the volatile nature of capital markets
manifest as weak legal and institutional enforcement regimes (Bhowmik and Wang 2019).
The practice of weak CG leads to poor firm performance and risky financing decisions
(Abor 2007; Claessens et al. 2002). The above-mentioned constraint scenarios have given
momentums to regulatory authorities for developing guidelines and establishing good
governance practices in Bangladesh. The Bangladesh Securities and Exchange Commis-
sion (BSEC) is the supreme authority that regulates listed firms. In 2006, the BSEC first
introduced the CG guidelines on a ‘comply or explain the basis for protecting minority
shareholders and enhancing investors’ confidence in capital markets. The guidelines were
amended and reissued on a ‘comply’ basis in 2012 after significant changes in board compo-
sition, different committee formulations, and reporting and compliance levels. The practice
of good CG provokes investor confidence, increases firm value, and boosts the bottom
line (Gompers et al. 2003), implying that CG is highly associated with firms’ financing and
capital structure decisions (Abor 2007; Graham and Harvey 2001). Similarly, Claessens
et al. (2002) also assert that firms with good governance frameworks enjoy reasonably easy
access to funds with lower cost of capital, better performance, and auspicious behavior from
stakeholders. Even though debt financing itself is a measure of an important governance
mechanism for mitigating agency conflict (Harris and Raviv 1991), it is also important
to find the association between debt financing and agency costs that took place between
controlling and minority shareholders (Haque et al. 2011; Bhowmik and Wang 2018).
Considering the above arguments, agency conflicts may be resolved through the
effectiveness of the board. This also prevents the management of the firm from engaging
in opportunistic behavior for personal benefits. To the best of our knowledge, most of the
contemporary studies are being conducted to see the direct impact of the board of directors
on a firm’s capital structure decision and are very limited in observing the moderating
effect on this relationship (Alves et al. 2015; Heng et al. 2012). Deng and Wang (2006) argue
that ownership structure has significant effects on a firm’s reported earnings, and their
effect on the firm’s decision-making process is also dissimilar. One study by Wu et al. (2022)
found that firms with higher levels of insider ownership tend to have better performance
in terms of profitability. Some firms may have the largest inside owners, while others may
have institutional ownership. The behaviors of various owners are also different. The
authors argue that insider ownership can align the interests of managers and shareholders,
Risks 2024, 12, 144 3 of 22

leading to better decision-making and improved financial performance. Another study

by Li et al. (2018) found similar results, showing that insider ownership has a positive
effect on a firm’s return on assets (ROA) and return on equity (ROE). From this perspective,
it is worthwhile to study what has so far been ignored by prior studies and extract new
perceptions of capital structure decisions beyond the thin outlook. Therefore, this study
selects inside ownership as a moderator variable, which may open a new door between CG
and capital structure. Prior studies have documented that inside ownership has a strong
impact on the efficiency of the board (Im and Chung 2017; Bokpin 2009), and it may be
assumed that the presence of significant inside ownership impacts CG practices, which
may affect the dimension of a board decision, including capital structure.
The outcome of this study may be helpful for policymakers, researchers, and differ-
ent stakeholders in the financial markets of emerging economies. This empirical study
extends its contribution to the literature in various ways by closely investigating how board
composition affects a firm’s capital structure decisions through the moderating effect of
inside ownership.
First, as far as we understand, most prior studies ignored the indirect relationship,
such as moderating variables, and exclusively focused on the direct relationship between
board composition and capital structure, failing to provide a clear idea about the role
of board composition in this issue. This is the only empirical study to investigate the
moderating effect of inside ownership on the relationship between board composition and
a firm’s capital structure decision.
Second, as an internal characteristic of CG, board composition and ownership structure
may play an important role in a firm’s financing decision. Thus, this empirical study makes
a theoretical contribution to the literature on the effects of board composition. Due to
lower agency costs, firms with higher inside ownership are more likely to perform better
(Balatbat et al. 2004) and are less likely to be involved in earnings management practices
(Debnath et al. 2021). This study shows the impact of the interaction between the two
internal characteristics of CG on a firm’s capital structure. On capital structure decisions, if
they interact with another internal characteristic of CG, such as inside ownership. Third,
as an emerging economy, prior studies document that Bangladeshi listed firms have more
inside ownership (Debnath et al. 2021) and an absence of financial transparency (Knox
and Yasmin 2007; Bhowmik et al. 2022); this study contributes to the literature on this
special situation.
Finally, prior studies have shown both positive and negative relationships between
board composition and capital structure decisions. Moreover, Ji et al. (2020) argue that
the relationship between board composition and capital structure is an irreconcilable
topic. Therefore, this study swells the present argument about the relationship with an
indirect method, the “moderating role of inside ownership,” to confirm the relationship
between them.
The remainder of the article is organized as follows: Section 2 reviews the existing
literature on CG attributes and a firm’s capital structure. Section 3 describes the research
design and methodology, and Section 4 presents the empirical analyses, findings, discussion,
and interpretations of the results. Finally, Section 5 concludes the study with the possible
implications of the outcomes.

2. Literature Review
The capital (or financial) structure decision of a firm is a crucial corporate policy choice
that leads to agency problems and affects the performance and riskiness of a firm (Meckling
and Jensen 1976). According to CG characteristics, to mitigate this problem, top managers
and the board of directors have the responsibility to monitor the financial decisions of a firm
(Boateng et al. 2017). Board directors are generally believed to be intensely aligned with
the interests of shareholders, along with those of managers, in mitigating agency problems
(Adams and Ferreira 2009; Meckling and Jensen 1976; Rose 2007). Pillai and Al-Malkawi
(2018) state that small board size, non-duality, and dividend payments are known as CG
Risks 2024, 12, 144 4 of 22

proxies and pointedly affect firm performance. Being a supreme decision-making body
and an active mechanism for monitoring all management activities, the board of a firm is
accountable for approving strategic and financing decisions (Ferreira 2010; Liu 2006). Firms
with expert members on boards usually enjoy a lower cost of financial leverage (Nugraha
and Soewarno 2022). Hence, debt financing is an effective choice for firms with boards of
diverse experts.
The quality of governance of listed firms in an emerging economy is also affected by
their ownership structure (Boateng et al. 2017; La Porta et al. 1999; Wang and Zhou 2017).
The focus of such ownership is generally concentrated on a group of people or family or
institutional investors who retain control and influence investment and financing decisions
(Firth et al. 2008; La Porta et al. 1999; Liu and Tian 2012). Bajaj et al. (1998) advocate that
ownership structure is highly correlated with firms’ various measures of leverage ratios.
The practice of a good governance system leads to efficient resource utilization, which
lowers the cost of financing (Bhojraj and Sengupta 2003), whereas a weak governance
system allows controlling bodies with additional control for involvement in tunneling
activities. Several prior studies, such as Berger et al. (1997), Wen et al. (2002), Abor and
Biekpe (2007), and Bokpin and Arko (2009), identify that both the board of directors of
a firm and its ownership structure have significant influences on making better financial
decisions that lead to determining its value. However, the empirical outcomes appear to be
varied and debatable (Abor and Biekpe 2007). This study attempts to investigate how the
board characteristics and ownership structure of listed Bangladeshi firms influence their
capital structure decisions.
Similar to most other emerging economies, the CG system is relatively weak in
Bangladesh, where high ownership concentration and dominance on boards are prevalent
(Rahman and Khatun 2017; Rashid 2016; Rashid 2015). Consistent with Boateng et al. (2017),
Wen et al. (2002), Berger et al. (1997), and Friend and Lang (1988), this study believes that
the agency theory perspective will provide valuable insight into how Bangladeshi firms
make financing decisions. This study identifies the main board characteristics by board
size, board independence, gender diversity, and ownership concentration of insiders and
formulates the following hypotheses.

2.1. Board Size

Board size plays a significant role in the effectiveness of CG (Jackling and Johl 2009).
Similarly, Said et al. (2009) document that board size is one of the vital dimensions of CG for
measuring the activities of their agent. According to resource dependency theory, increased
size is more likely to give better benefits to the firm through a network by securing a
broader resource base (Pearce and Zahra 1992). Consistently, Florackis (2008), Fauzi and
Locke (2012) argue that a large board is more likely to be powerful than a small board and
obtains better outcomes, and agency costs are comparatively lower. Moreover, a company
with a larger board size has a better capacity to monitor financial accounting and restrain
management from involving earnings management (Anderson et al. 2004).
The size of a board can affect a firm’s capital structure and its level of financing (Abor
2007). Several prior studies have investigated this relationship, and they document that
firms with larger boards also have high debt levels, indicating that firms with larger board
sizes are likely to use more debt to finance (Gill et al. 2012; Yusuf and Sulung 2019). Their
study shows that large boards usually adopt such policies to improve performance, which
may lead to high gearing levels with the aim of raising firm value. The pecking order theory
expects that the higher the information asymmetry between management and investors,
the costlier it is to raise funds. Therefore, they argue that companies with larger boards
are more likely to reduce information asymmetry, which helps motivate lenders to invest
funds in companies at a lower cost (Alves et al. 2015; Cheng and Courtenay 2006). In
contrast, Chitiavi et al. (2013) and Uwuigbe (2013) find a negative association between
firms’ debt-to-equity ratios and board size. They state that in the case of a larger board,
Risks 2024, 12, 144 5 of 22

debt cost will be inferior due to severe checks and balances, which indicates the preference
for internal financing with low leverage ratios.
Consistent with agency theory, this study argues that companies with larger boards are
more able to restrain management from opportunistic behavior, and accordingly, Peasnell
et al. (2005) recommend that larger boards will enhance the quality of financial statements.
Moreover, a small board cannot reflect the dispersed ownership of the company (as opposed
to a concentrated ownership firm), which in turn can negatively affect the quality and
quantity of financial information disseminated to the public domain (Chau and Gray 2002).
It is more pervasive in Bangladesh, where concentrated ownership is widely prevalent
(Debnath et al. 2021). Furthermore, Cheng and Courtenay (2006) document that large
board size is positively associated with the level of firm voluntary disclosure and motivates
investors to invest in companies. Based on this theoretical argument and the literature
review, this study develops its first hypothesis as follows:

H1. Board size is positively associated with a firm’s leverage level.

2.2. Board Independence

Independent directors have no economic or psychological dependency on a firm’s
management and are not employed by firms (Baysinger and Butler 1985). Different at-
tributes create differences between their independent and non-independent counterparts,
such as the absence of material relationships and financial interests in management. In-
dependent directors can deliver strategic advice and valuable insights to the board by
applying their expertise, diverse backgrounds, and industry knowledge (Fama and Jensen
1983). Accordingly, companies with more independent directors are more capable of fa-
cilitating board independence and diversity, as well as ensuring the integrity of financial
reporting (Adams and Ferreira 2009). Moreover, according to agency theory, the presence
of independent directors on the corporate board is considered an effective CG mechanism
(Fan et al. 2022), and their knowledge, broad vision, and independence from management
enable them to rigorously monitor top management actions to take effective governance
decisions (Conheady et al. 2015).
The importance of independent directors is more pervasive for an emerging econ-
omy characterized by governments with low-levels of administrative efficiency and weak
investor protection (La Porta et al. 2000), weak rule of law, and poorly defined property
rights (La Porta et al. 1999) and absence of financial transparency (Fan et al. 2022). As
an emerging economy, Bangladesh has observed almost all of these characteristics. Khan
(2003) articulates that Bangladesh has many features of an emerging economy, including a
lack of accountability and transparency, widespread corruption, low-capacity in terms of
public governance, and insufficient rule of law. In order to protect the interests of different
stakeholders, including minority shareholders, Bangladesh’s capital market has observed
significant regulatory reforms in the last decade. Bangladesh Securities and Exchange
Commission (BSEC) introduced CG guidelines in 2006. The fundamental purpose of CG
is to enhance the dependability of financial reporting by reducing accounting deception
and earnings management (Cohen et al. 2008). This guideline was put into action on a
“comply or explain basis”. In 2012, the BSEC issued a new CG guideline (Biswas 2012), and
compliance was mandatory. The 2012 guidelines recommend that one-fifth of the directors
should be independent directors of listed companies, and the BSEC expects that indepen-
dent directors do their best in different decision-making processes (including operating
and financing) for the wealth maximization of shareholders by applying their knowledge
and integrity.
Weisbach (1988), Byrd and Hickman (1992), and Brickley et al. (1994) suggest that
the more outsider dominant boards are, the higher is the associated independence and the
more likely they are to look after shareholders’ interests. The inclusion of non-executive
independent members on a board enhances its monitoring ability, which subsequently helps
reduce uncertainty about firms and increases firms’ fundraising ability (Abor 2007). The
Risks 2024, 12, 144 6 of 22

empirical literature provides mixed results on the relationship between board independence
and firm leverage. Some studies argue that there is a positive association between board
independence and debt level in firms (Abor 2007; Berger et al. 1997; Bokpin and Arko 2009).
The presence of more independence in the board enhances financial accountability, which
results in more fund or capital availability for the respective firms due to better credit
rating (Chen and Hsu 2009) and also assists as a guarantee that debtholders will obtain
their interest on time (Zaid et al. 2020).
Moreover, independent directors play an important role in monitoring top manage-
ment activities and increasing confidence in the safety of their principal and interest amount
(Bokpin and Arko 2009). Furthermore, the positive association between board indepen-
dence and firm value aligns with the representation theory’s particular views (Khan et al.
2020). Khan et al. (2020) added that a conflict of interest is always visible among directors
and shareholders, as directors’ actions are not correlated with maximizing shareholder
value. Hence, it is important to strengthen monitoring mechanisms by appointing sufficient
independent directors who can oversee activities and enhance operational effectiveness. On
the other hand, Wen et al. (2002), conducted a study on Chinese listed firms and reported
that there is a negative relationship between the two variables. Additionally, Abdoli et al.
(2021), Kuo et al. (2012), and Wen et al. (2002) have evidence that a low leverage level
occurs due to the high market value of equity and the representation of non-executive
independent members on boards.
Both the Sarbanes Oxley Act (Sarbanes-Oxley Act 2002) and the Cadbury report
(1992) emphasized the importance of boards’ independence and their positive role in
reducing conflicts of interest between principal and agent. Similarly, considering resource
dependency theory, firms that have more independent directors are more likely to use
higher leverage because of their high networks, which give easy access to debt providers.
Moreover, with reference to agency theory, Jensen (1986) and Berger et al. (1997) report
that firms have lower agency costs and higher financial leverage levels if they have more
independent directors on the board. Considering theoretical aspect and empirical results,
this study, therefore, hypothesizes that

H2. The presence of more independent directors on the board is positively associated with a firm’s
leverage level.

2.3. Gender Diversity

Gender diversity has been receiving priority among academicians and policy makers
recently. In a similar vein, the Bangladesh Government is keen to empower females in all
sectors, and the state minister for Finance of Bangladesh urges to increase the proportion
of female directors on the board and states that “with a supportive working environment,
women can efficiently handle challenging tasks” (The Business Standard 2024). Relevant
stakeholders expect that feminization policy is not supposed to be based on demographic,
ethical, and moral considerations; rather, it should be based on economic and financial
considerations for the sustainability of companies. The participation of female members
on boards has noticeably increased worldwide, but the presence of under-representation
of females on corporate boards still persists across the globe, fluctuating from as low as
3.7% in Asia–Pacific to a maximum of 23% in Sweden (Davies and Hopt 2013) and 14% in
Bangladesh (Debnath et al. 2019). Women and men show different abilities and boldness
because of diverse socialization procedures (Srinidhi et al. 2011). Meier-Pesti and Penz
(2008) find differences between women and men across numerous scopes of financial and
monetary principles. They argue that women highlight mutual behaviors, while men
highlight affluence and promotion in administrative positions. Moreover, women are more
likely to communicate incidents of irregularities in financial statements and are inclined to
be more compliant with morals in their workplace (Kaplan et al. 2009).
In a similar vein, prior studies also document that females are less inclined to be
involved in unprincipled conduct though making administrative choices, they also assign
Risks 2024, 12, 144 7 of 22

less priority to upstreaming individual benefits (Krishnan and Parsons 2008), and they are
more likely to be risk-averse compared to males (Barber and Odean 2001). Accordingly,
they are more cautioned and more self-protective compared to men in diverse methods of
decision-making procedure (Byrnes et al. 1999), which enhance the reporting quality and are
able to avoid the reputational loss and the risk of lawsuits” (Srinidhi et al. 2011). However,
the role of female directors in emerging nations, where most shares of a company are held
by a group of controlling members, remains dubious. In most cases, the controlling male
members appoint their female family members or friends to board positions to accomplish
their personal agenda. Fundamentally, female board members do not have any active role
in ensuring boards’ quality as they are employed based on their personal identity rather
than expertise, knowledge, and ability to perform their role. Following this view, Debnath
et al. (2019) conducted a study on Bangladeshi listed firms and documented that female
directors fail to restrain management from an earnings management attitude. They follow
the instructions made by affiliate members (Rahman and Saima 2018), meaning that they
may not have any significant influence on firm decisions.
The outcomes of empirical evidence on the role of female directors in firms’ financing
decisions are mixed. Maxfield et al. (2010) argue that women are more likely to avoid
risk than men and that their presence on the board negatively affects the leverage of firms.
Similarly, Abobakr and Elgiziry (2016) show that female board members reduce firms’
leverage by creating more dependency on equity financing. On the other hand, trade-off
theory recommends that listed firms have a goal to reach an optimal capital structure,
which helps them to maximize the difference between the cost and benefits of issuing debt
(Adusei and Obeng 2019). With some exceptions, due to tax benefits, debt financing is
less costly compared to equity (Modigliani and Miller 1963) and ultimately maximizes the
value of the firms.
Similar to the trade-off theory, according to the agency theory, due to the separation
between ownership and management and their different goals, information asymmetries
may be high, leading to an increase in the opportunistic behavior of managers (Meckling
and Jensen 1976), which can be mitigated through proper monitoring by the board of
directors (Chung et al. 2015). Virtanen (2012) conducted a study to examine women’s role
in the corporate decision-making process and found that women play a more active role in
decision-making and impact the decision-making process on the board compared to males.
Since women are more aware of reputation risk (Bernardi and Threadgill 2011; Zhang et al.
2013), a gender-diverse board gives positive signs to debtholders (Kaur and Singh 2017).
In addition, Emoni et al. (2017) found an association between a firm’s capital structure
and board gender diversity in the Nairobi market. They also document that firms with
more female directors on the board are more likely to give a positive signal to the market
regarding financial reporting transparency. From the above possibilities, the current study
hypothesizes the relationship between gender diversity and the capital structure of a firm
as follows:

H3. The presence of more female directors on the board is positively associated with a firm’s leverage level.

2.4. The Moderating Role of Insider Ownership

Ownership is understood from two perspectives: inside and outside (Warfield et al.
1995). Insider ownership refers to the proportion of a company’s shares that are owned
by insiders, including directors, executives, and key personnel of the company (Demsetz
and Villalonga 2001; and Brailsford et al. 2002). For the listed companies on the Dhaka
Stock Exchange (DSE), there are five different types of ownership. These are (i) inside,
(ii) institutional, (iii) government, (iv) foreign, and (v) general. Significant shares (41.31%)
are held by inside owners in Bangladesh (Debnath et al. 2021). In most cases, these inside
ownerships try to control the board and make key decisions in Bangladesh. Due to the
diverse ownership structures of listed companies, controlling and monitoring systems are
not the same. Some companies may have the largest inside owners, while others may have
Risks 2024, 12, 144 8 of 22

institutional ownership. The behaviors of various owners are not the same. The authors
argue that insider ownership can bring into line the interests of shareholders and managers,
leading to better decision-making and improved financial performance. Another study by
Li et al. (2018) found similar results, showing that insider ownership has a positive effect
on a firm’s return on assets (ROA) and return on equity (ROE).
Corporate governance plays a significant role in the development and functioning
of capital markets and has a strong impact on resource allocation (Bokpin 2009). Kim
and Sorensen (1986) find that the agency cost of debt is lower when insider ownership is
higher. Consequently, debt financing is increased due to low agency costs, which report a
significant positive association between debt financing and insider ownership (Yang and
Shyu 2019). Prior studies argue that inside ownership is positively associated with the
leverage of a firm (Bokpin 2009; Bin-Sariman et al. 2016). In a similar vein, firms with better
CG frameworks are more likely to obtain easier access to financing, lower cost of capital
(Claessens et al. 2002), better financial performance, and more satisfactory treatment of all
stakeholders (Abor 2007); Graham and Harvey 2001. Cheng and Firth (2005), and Agyei
and Owusu (2014) reveal a positive connection between inside ownership and leverage.
Moreover, managerial share ownership is positively associated with firms’ debt level
only when it belongs to the range of 17.8 to 46.4 percent. In an Australian study of top ASX
500 companies, Brailsford et al. (2002) found an inverted U-shaped relationship between
the level of managerial ownership and leverage ratios. Furthermore, from an agency point
of view, Meckling and Jensen (1976), Fama and Jensen (1983), and Jensen (1986) state that
insiders of a firm often try to develop firm size for their benefits, which lead to a colossal
rise in leverage ratio. Jensen (1986) also points out that managers of a firm may make
efforts to expand the firm beyond its optimal size for their gains, which may result in an
increase in gearing levels. From the arguments above, we expect that the presence of more
inside ownership will have a positive influence on the board’s efficiency through better
board decisions and monitoring management activities. Therefore, the leverage decisions
of the company will be taken accordingly. From the above discussion, this study develops
the following hypotheses

H4. Firms with more inside ownership will strengthen the positive association between board size
and leverage of the firm.

H5. Firms with more inside ownership will strengthen the positive association between independent
directors and leverage of the firm.

H6. Firms with more inside ownership will strengthen the positive association between female
directors and the leverage of the firm.

3. Materials and Methods

3.1. Sample and Data Collection
Firms listed on the DSE over 20 years, from 2000 to 2022, are included in this study.
The CG guidelines are being launched and reformatted during this study period, and
listed Bangladeshi enterprises have begun to focus more on adhering to CG regulations
at this time. Following the existing literature, financial firms are not included because
of their unique capital structure and financial character (Ozkan and Ozkan 2004; Uyar
and Kuzey 2014; Zaid et al. 2020), as well as their higher level of regulation (Khan 2003)
compared to other firms. The DSE listed all non-financial firms, and those for which the
necessary data are accessible have been selected. A total of 3096 firm-year observations
from the sampled firms comprise the final sample. Market data have been collected from
DSE monthly reviews, while firm-level data have been collected from published annual
reports and websites.
Risks 2024, 12, 144 9 of 22

3.2. Research Variables and Measurements

3.2.1. Dependent Variables
Capital structure is the dependent variable in this study. Following the extant literature
(e.g., Zaid et al. 2020; Wen et al. 2002; Boateng et al. 2017; Butt and Hasan 2009; Ganiyu and
Abiodun 2012), this study uses total leverage (Liab2Assets) as a proxy for capital structure,
defining the variable as the proportion of total liabilities and total assets.

3.2.2. Explanatory Variables

Following recent empirical studies, this study examines the effect of attributes of the
board on capital structure. We accommodate three attributes of the board in our study to
see their effect on capital structure concerning prior studies, such as board size (BdSize)
(Mande et al. 2012; Saleh and Mujahiddin 2020; Zaid et al. 2020); board independence
(BdIndir) (Zaid et al. 2020) and gender diversity (BdFeml) (Chow et al. 2023).

3.2.3. Moderating Variable

This empirical study has considered both the direct and indirect impacts while ex-
amining the relationship between individual CG mechanisms and financing decisions. In
this regard, the influence of inside ownership (OwnInsid) as a moderator variable on the
relationship mentioned above has been examined.

3.2.4. Control Variables

In order to lessen the effect of confounding variables on the empirical investigation,
this study employs firms’ economic variables: firm size (Assets), firm performance (ROA),
growth opportunities (Book2Mkt), listing age (Age), and incurrence of financial loss (Loss)
as control factors. Large firms can take on more debt because they are more dispersed
and have more steady income levels, which lowers their liquidation risk (Alves et al. 2015;
Feng and Fay 2020). Larger firms provide more information to their stakeholders than
smaller firms. Hence, there is less information asymmetry. Because of this, larger firms
can easily obtain debt at relatively low costs, even when they have a high share of debt
(Palacín-Sánchez et al. 2013). On the other hand, Sogorb-Mira (2005) argues that large firms
typically have strong operational competency and a proven record, which allows them
to develop more internal resources and have access to a wider range of financial sources,
reducing their reliance on debt. According to Haque et al. (2011), the book value of total
assets is a useful indicator of firm size. Better financial performance allows firms to be more
stable and generate more cash flows that can lower the cost of debt financing (Anderson
et al. 2004), in turn enticing firms to take on additional debt.
According to Singh and Faircloth (2005), borrowing has a negative impact on a com-
pany’s potential for future investment, which may eventually have a negative impact
on operating performance. Garcia-del-Barrio and Szymanski (2009) claim that European
firms are more interested in maximizing wins over profits and are willing to employ debt
financing and bear substantial losses in order to enhance their on-field performance. The
link between firm performance and leverage is, therefore, expected to be negative. This
study measures performance by return on assets (ROA), as it is the most commonly used
measure of the profitability of firms (Feng and Fay 2020). Mande et al. (2012) claim that
debt holders closely monitor firms with more growth potential, allowing executives fewer
opportunities to closely regulate the implementation of strategic initiatives. As a result,
firms borrow less to fund their future initiatives. According to Al-Najjar and Taylor (2008),
firms with high growth rates employ less debt to lower agency costs brought about by
high information asymmetry. It is important to take the age of the listing firm into account
(Bajagai et al. 2019). The reason for this is that the established and more experienced firms
tend to have more knowledge and financing capacity. This study also includes the variable
incurrence of loss to see the firms’ reactions to financing decisions while experiencing a
financial loss in a particular year. Table 1 provides the definitions of all the variables used
in this study.
Risks 2024, 12, 144 10 of 22

Table 1. Definitions of variables.

Acronym Measures Definition References

Zaid et al. (2020);
Feng and Fay (2020);
proportion of total liabilities
Liab2Assets Book Leverage Wen et al. (2002);
and total assets
Boateng et al. (2017);
Butt and Hasan (2009)
Zaid et al. (2020);
BdSize Board Size number of board members
Feng and Fay (2020)
presence of independent Zaid et al. (2020);
BdIndir Board Independence
director(s) on the board Feng and Fay (2020)
Khan et al. (2020);
number of female members on
BdFeml Gender Diversity Chow et al. (2023);
the board
Mande et al. (2012)
proportion of outstanding
OwnInside Inside Ownership shares held by insiders Feng and Fay (2020)
(sponsors, directors, etc.)
Haque et al. (2011);
LnAssets Firm Size natural log of total assets Feng and Fay (2020);
Khan et al. (2020)
proportion of earnings before Zaid et al. (2020);
ROA Firm Performance
interest and taxes to total assets Feng and Fay (2020)
proportion of book value of
Al-Najjar and Taylor
Book2Mkt Growth Opportunity equity to market value
(2008)
of equity
natural log of the firm’s Bajagai et al. (2019);
Age Listing Age
listing age Zaid et al. (2020)
dummy variable indicating an
Loss Incurrence of a loss
accounting loss for the year

This study uses unbalanced panel data analysis because of the combination of a
large number of cross-sectional observations with time series. Additional diagnostic
tests are conducted in this study to assess the hypotheses. The Jarque–Bera test was
used to determine whether the observations were normally distributed. A Chi-square
value of 0.6452 indicates that the dataset used for the analysis is normally distributed.
This study also performs Fisher-type panel unit root tests for the model variables to
address the stationary issue. The test result indicates that all variables, except BdFeml and
Owninside, are stationary. Hence, this study uses the first difference transformation of the
non-stationary variables (to make the data stationary) and develops the following model in
order to assess the potential associations between board attributes and capital structure,
along with the moderating role of inside ownership of listed Bangladeshi companies:

Liab2Assets = β 0 + β 1 BdSizeit + β 2 BdIndirit + β 3 D.BdFeml it + β 4 D.OwnInsideit

+ β 5 BdSize ∗ D.OwnInsideit + β 6 BdIndir ∗ D.OwnInsideit
+ β 7 D.BdFeml ∗ D.OwnInsideit + β 8 Assetsit + β 9 Roait + β 10 Book2mktit + β 11 Ageit
+ β 12 Lossit + Industry Dummy + Year Dummy
According to Bradley et al. (1984), different sectors have different leverage ratios; the
results may, therefore, be affected if the control for industry categories is excluded. To
account for industry variations, this study uses an industry dummy. For any potential
volatility in output over time, this analysis additionally controls for year fixed effects (e.g.,
Zaid et al. 2020). The explanatory variables in the model fitted using OLS are standardized
to a mean of zero to facilitate the interpretation of the estimated coefficients.
Risks 2024, 12, 144 11 of 22

In addition, this study divides the sample into pre- and post-reform periods to evaluate
the impact of introducing the 2006 CG guidelines (on a comply and explain basis). There
are also two time periods for the post-reform period: up until 2011 and from 2012 onward,
when CG standards are enforced for all listed corporations. The research objectives are
then examined for these periods following the model mentioned above.
According to earlier research (Brown et al. 2011; Roberts and Whited 2013), endogene-
ity can be a significant issue that may bias the outcomes of CG studies. Earlier governance
studies have used a variety of methods to alleviate the adverse impacts of endogeneity.
They include fixed effect estimates, the instrumental variable approach (2SLS, 3SLS, and
system generalized method of moments (GMM)), and the use of lagged explanatory vari-
ables. Fixed effect estimation identifies results based on within-firm variation, but it would
be impractical to use this approach for CG studies in the presence of ‘stickiness’ in CG mea-
sures. Stickiness in CG practices is common in Bangladesh and other nations, as reported
by Biswas (2012). Thus, this study uses lagged variables and a GMM estimator to address
endogeneity in the robustness tests.

4. Empirical Outcomes and Discussion

4.1. Descriptive Analysis
A summary of the descriptive analysis of the variables used in this study is shown in
Table 2. According to the data, the non-financial Bangladeshi firm’s average leverage ratio
(Liab2Assets) is over 62%, which is much higher than the 30% and 47% leverage ratios in
several European nations (Morri and Cristanziani 2009). The ratio ranges from 7% to over
200%. This implies that some people favor using debt to fund their assets. However, a few
firms rely heavily on outside financing to thrive. As for CG, the average board size (BdSize)
shows that listed non-financial Bangladeshi firms typically have about seven members on
the board, which is an adequate board size for a company (Lin et al. 2006). According to
Lin et al. (2006), an ideal board should consist of seven to nine people. The table, however,
demonstrates that the standard deviation of board size is very high, indicating how widely
board size varies in this industry. The mean value of board independence (BdIndir) is
0.5444, indicating that boards of non-financial firms include fewer than one independent
director. With a minimum representation of 0 and a maximum representation of 5, the
average number of female board members (BdFeml) is 0.5101. According to statistics on
inside ownership (OwnInsid), the average shareholdings of the sponsors and directors of
non-financial Bangladeshi firms are 42 percent, ranging from 0 percent to 99 percent.

Table 2. Descriptive Statistics.

Variable Obs Mean SD P50 Min P25 P75 Max

Liab2Assets 3044 0.6249 0.4050 0.5619 0.0742 0.3688 0.7684 2.0604
BdSize 3088 6.8397 2.3306 7 3 5 8 18
BdIndir 3088 0.5444 0.4981 1 0 0 1 1
BdFeml 3096 0.5107 0.9108 0 0 0 1 5
OwnInside 3016 42.4120 21.2501 46.8700 0 30 51.3850 99.1600
LnAssets 3088 20.5538 1.8284 20.4320 17.0889 19.2687 21.8085 26.0892
Roa 3038 0.0593 0.0780 0.0541 −0.1098 0.0143 0.0974 0.2541
Book2Mkt 2929 0.8859 1.8638 0.6798 −5.1952 0.2475 1.5134 6.1455
Age 3096 15.3865 9.3295 14 1 7 22 35

4.2. Bivariate Relationship

Table 3 shows a matrix of correlation coefficients for all variables. In terms of the
relationship between the dependent and independent variables, book leverage and board
size are both significantly and positively correlated, indicating that the larger the board, the
more debt financing the firm may acquire. There is also a significant positive relationship
between book leverage and board independence and gender and book leverage. Leverage
of the firms is also linked to a number of characteristics of the listed firm, including firm
Risks 2024, 12, 144 12 of 22

size, profitability, growth opportunities, firm age,” and incurrence of loss. By evaluating
the data, it is evident that there is no multicollinearity problem because no correlation
coefficient value between any two variables is greater than 0.80 (Gujarati 2009). The variance
inflation factor (VIF) is also used to verify the assumption that there is no multicollinearity
among the input variables. A VIF of more than 10 often indicates significant collinearity
(Gujarati 2009). Table 3 shows that the VIF values range from 1.11 to 3.41, indicating that
the regression analysis no longer has a significant problem with multicollinearity.

Table 3. Correlation coefficients matrix.

VIF Liab2Assets BdSize BdIndir BdFeml OwnInside LnAssets Roa Book2Mkt Age
BdSize 1.27 0.0486 *
BdIndir 3.41 0.2035 * 0.1455 *
BdFeml 1.49 0.1417 * 0.1908 * 0.3619 *
OwnInside 1.29 0.015 −0.012 0.0031 0.0649 *
LnAssets 1.72 0.2107 * 0.2173 * 0.4245 * 0.2078 * −0.0563 *
Roa 1.59 −0.3184 * 0.0675 * 0.1547 * 0.0751 * 0.1961 * 0.2157 *
Book2Mkt 1.11 −0.5518 * −0.0378 * −0.0692 * −0.0091 −0.0068 0.0945 * −0.0258
Age 1.25 0.1492 * 0.0565 * 0.2066 * 0.1108 * −0.0874 * 0.0001 0.0218 −0.1320 *
Loss 1.49 0.3583 * −0.0965 * −0.2343 * −0.1343 * −0.0373 * −0.2879 * −0.6107 * −0.0540 * −0.0096
* significant at 10%.

4.3. Multivariate Regression Results

The empirical findings regarding the relationship between a firm’s capital structure
choices and its degree of governance quality are presented in this section. The findings
on the relationship between firms’ leverage decisions and various governance structures
are shown in Table 4. The association between leverage and firm-level characteristics
is shown in Model 1 in Table 4. Model 2 in Table 4 incorporates the interplay of inside
ownership with individual governance mechanisms to discover the moderating influence
of inside ownership in financing decisions. The R2 values of Models 01 and 02 are 0.593
and 0.560, respectively, which indicates that 59% and 56% of financial leverage, respectively,
are explained by the independent variables. In terms of CG characteristics and ownership
patterns, board size and board independence are significantly and positively correlated with
firms’ capital structure decisions. There is no statistical relationship found between leverage
and gender diversity and inside ownership patterns. It is revealed that all other control
variables and funding decisions made by Bangladeshi non-financial listed companies have
a strong correlation.
In terms of CG variables, according to Table 4, board size is significantly positively
related to the leverage ratio. This outcome is similar to the findings of Zaid et al. (2020),
Ahmed Sheikh and Wang (2012), Bokpin and Arko (2009), Kyereboah-Coleman and Biekpe
(2006), and agency theory. The results suggest that, in Bangladesh, firms with larger
boards have more capability and are likely to increase funds through external financing to
maximize firm value. A larger board is believed to be better able to monitor management
behavior by delegating tasks among its members, enhancing the firm’s image, ultimately
lowering the cost of debt, and influencing corporate financing trends (Zaid et al. 2020).
According to the empirical data in Table 4, independent directors on the board are also
positively associated with a firm’s choice of funding. Our results are consistent with those
of previous studies. Such as, the presence of more independence on the board enhances
financial accountability, which results in more fund or capital availability for the respective
firms due to better credit rating (Chen and Hsu 2009) and also assists as a guarantee
that debtholders will obtain their interest on time (Zaid et al. 2020). This finding is also
consistent with agency theory, where Jensen (1986) and Berger et al. (1997) report that firms
have lower agency costs and higher financial leverage levels if they have more independent
directors on the board.
Risks 2024, 12, 144 13 of 22

Table 4. Regression Results.

Variable Model 01 Model 02

BdSize 0.0394 * 0.0061 *
(0.0196) (0.0282)
BdIndir 0.1272 * 0.1966 **
(0.0621) (0.0987)
D.BdFeml 0.0078 0.0223
(0.0083) (0.0207)
D.OwnInside 0.0014 0.0056
(0.0301) (0.0004)
BdSize *D.OwnInside 0.0039 ***
(0.0012)
BdIndir *D.OwnInside 0.0029 ***
(0.0004)
D.BdFeml *D.OwnInside 0.0032 *
(0.0019)
LnAssets 0.0126 ** 0.0283 ***
(0.0041) (0.0056)
Roa −1.1499 *** −1.1489 ***
(0.0950) (0.0942)
Age 0.0058 *** 0.0056 ***
(0.0006) (0.0007)
Book2Mkt −0.1384 *** −0.1374 ***
(0.0030) (0.0030)
Loss 0.1439 *** 0.1405 ***
(0.0182) (0.0180)
Const 0.686 *** 0.2982 ***
−0.0439 (0.0945)
Sector Dummy Yes Yes
Year Dummy Yes Yes
Observations 2817 2817
R-squared 0.5947 0.5649
See Table 1 for definitions of the variables. All explanatory variables are ‘mean-centered’. *** Significant at 1%;
** significant at 5%; and * significant at 10%.

The effectiveness of the board of directors is expected to be high with the presence of
females on the board (Wasiuzzaman and Wan Mohammad 2020; Zaid et al. 2020). Gender
diversity has an indirect impact on the capital structure decisions made by enterprises,
claim Ben Saad and Belkacem (2022). They contend that having women on the board
affects how much and what kind of information the company discloses, which ultimately
affects decisions about capital structure. However, this study does not identify any impact
that female directors may have had on the capital structure decisions made by the listed
Bangladeshi firms.
Regarding the moderating effect, it is revealed that insider ownership moderates the
relationship between board characteristics (board size, board independence, and gender
diversity) and a firm’s debt level rather than having a substantial direct influence on the
leverage level. This study contends that, in terms of the monitoring function, there may
be a complementary or substitution effect between inside ownership and corporate board
characteristics. According to Rediker and Seth (1995), the ideal arrangement of governance
mechanisms should be viewed as a package, with the efficacy of one mechanism contingent
on the efficacy of the others. Debnath et al. (2021) document that inside ownership is
inversely related to real earnings management in Bangladeshi listed firms. They argue
that firms with more inside ownership are less likely to be involved in manipulation and
do their best for themselves. In a similar vein, we expect that inside ownership will play
a significant role in moderating the relationship between board composition and capital
structure decisions. The outcomes of Model 2 in Table 4 reveal a significant positive relation
(at a level of 5%) impact of the interaction between board size and inside ownership on
financing decisions. This indicates that the impact of board size on the firm’s debt level will
Risks 2024, 12, 144 14 of 22

be more favorable as the percentage of inside ownership rises. This finding may explain
why companies with more inside ownership and larger boards are more capable of raising
funds at a lower cost and maximizing the value of the firm.
Model 2 also demonstrates that the degree of firm leverage is significantly and posi-
tively impacted by the interaction between board independence and inside ownership. This
finding supports the idea that when there is a significant percentage of inside ownership,
the impact of board independence on “accumulating debt” is more favorable. To put it
more simply, having independent members on the board increases the likelihood that the
company’s management will act in the lenders’ best interests (Zaid et al. 2020).
The findings show that the estimated coefficient of the interface between female board
members and inside ownership is positive and statistically significant on leverage decisions,
even though inside ownership and gender diversity are not found to have any significant
direct effects individually. The most likely explanation is that a gender-diverse board in the
presence of high inside ownership will support the view that gender diversity will work
in the greatest interests of creditors. As a result, the cost of debt will be lower, allowing
businesses to borrow more money, especially if they want to increase the value of the firm
(Zaid et al. 2020).
With respect to control variables, this study finds that listed non-financial Bangladeshi
firms with more assets are linked to higher levels of leverage. These results are consistent
with those of prior studies (Alves et al. 2015; Chang and Lee 2006) and suggest that larger
companies are less risky and more likely to use more debt than equity. The outcomes
in Table 4 also show that in Bangladesh, the capacity to take on more debt is higher for
more experienced and established companies. The coefficient of profitability (ROA) is
found to be negative and significant, implying that more profitable Bangladeshi firms rely
more on equity and less on debt. This result is consistent with Zaid et al. (2020), who
argue that profitable firms usually borrow less since they may have sufficient funds for
their regular operations. Growth is found to be negatively related to debt financing. This
result is consistent with the argument of Al-Najjar and Taylor (2008) that firms with high
growth rates employ less debt to minimize agency costs driven by significant information
asymmetry. This study predicts that firms that experience financial losses each year require
more funds for operations and will tend to borrow funds from outside sources. The
outcome in Table 4 supports this assumption.
In Table 5, we report the relationship in three different time zones: the first one is
before CG guidelines (Earlier than 2006), the second time zone is 2006–2011, when firms
had to comply with or explain the CG guidelines, and the last one is after 2012, when
all listed firms must comply with the CG guidelines. This table shows the effects of pre-
and post-CG reforms on the relationship between board composition and firm capital
structure decisions, including the moderating effect of inside ownership. The findings
in Table 5 show that following the introduction of the CG guidelines in 2006, board size
and independent directors became influential factors in firms’ financing decisions. In the
pre-reform stage, female directors are found to have a detrimental impact on financing
decisions, but they are not found to have a significant impact once the BSEC introduces
governance mechanisms. Regarding the moderating role of inside ownership, after reform,
the inside owners’ effect on board size and the number of independent directors became
substantial, indicating that CG guidelines with the moderating role of inside ownership
play a significant role in capital structure decisions in Bangladeshi listed firms.
Risks 2024, 12, 144 15 of 22

Table 5. Regression results: CG pre- and post-reform phases.

Pre-Reform Post-Reform
Variable Overall
2005 2011 2012>
BdSize 0.0051 0.0110 ** 0.0819 *** 0.0061 *
(0.0044) (0.0051) (0.0059) (0.0282)
BdIndir 0.0596 0.278 ** 1.216 *** 0.1966 **
(0.1300) (0.1150) (0.4080) (0.0987)
D.BdFeml −0.0429 * 0.0279 0.0191 0.0223
(0.0258) (0.0258) (0.0161) (0.0207)
D.OwnInside 0.00821 0.00116 0.00701 0.0056
(0.0073) (0.0017) (0.0078) (0.0004)
BdSize *D.OwnInside 0.0004 0.0045 * 0.00114 *** 0.0039 ***
(0.0003) (0.0025) (0.0002) (0.0012)
BdIndir *D.OwnInside −0.0092 0.0027 *** 0.0024 *** 0.0029 ***
(0.0087) (0.0009) (0.0006) (0.0004)
D.BdFeml *D.OwnInside 0.0053 *** 0.0035 * 0.0099 * 0.0032 *
(0.0015) (0.0020) (0.0054) (0.0019)
LnAssets 0.0044 * 0.0014 * 0.011 * 0.0283 ***
(0.0025) (0.0008) (0.0056) (0.0056)
Roa −1.451 *** −1.295 *** −0.755 *** −1.1489 ***
(0.1710) (0.1540) (0.1680) (0.0942)
Age 0.00669 *** 0.00401 *** 0.00591 *** 0.0056 ***
(0.0014) (0.0012) (0.0011) (0.0007)
Book2Mkt −0.1430 *** −0.1510 *** −0.0695 *** −0.1374 ***
(0.0037) (0.0048) (0.0097) (0.0030)
Loss 0.110 *** 0.0983 *** 0.162 *** 0.1405 ***
(0.0270) (0.0291) (0.0392) (0.0180)
Const 0.780 *** 0.707 *** 0.621 *** 0.2981 ***
(0.0799) (0.0457) (0.0535) (0.0945)
Sector Dummy Yes Yes Yes Yes
Year Dummy Yes Yes Yes Yes
Observations 967 860 990 2817
R-squared 0.739 0.677 0.267 0.5749
See Table 1 for definitions of the variables. All continuous explanatory variables are ‘mean-centered’. *** Significant
at 1%; ** significant at 5%; and * significant at 10%.

4.4. Endogeneity
As stated earlier, endogeneity can be a serious issue in governance studies. Thereby,
following prior studies (e.g., Zaid et al. 2020), to lessen the negative effects of any potential
endogeneity risk, this study reproduces the primary regression model with one-year lagged
values for all explanatory variables and uses dynamic panel data to run the generalized
method of moments (GMM) estimator as a model developed by Arellano and Bond (1991)
and Blundell and Bond (1998) to assuage the detrimental consequence of endogeneity.
The dynamic effects are investigated using the lagged value of the dependent variable
Liab2Assets(t-1) as an explanatory variable in the study’s econometric model. Comparing
the results of the lagged IV and GMM regression models with the results of the primary
model (see Table 6), it is found that endogeneity may not be a serious concern for this study.
Risks 2024, 12, 144 16 of 22

Table 6. Robust Results.

Variable Pooled OLS Lagged IV GMM

Liab2Assets(t-1) 0.810 ***
(0.0111)
BdSize 0.0061 * 0.0127 * 0.0021 *
(0.0282) (0.0075) (0.0012)
BdIndir 0.1966 ** −0.1060 * 0.0884 *
(0.0987) (0.0630) (0.0470)
D.BdFeml 0.0223 −0.0119 0.008
(0.0207) (0.0090) (0.0051)
D.OwnInside 0.0056 0.0337 0.0125
(0.0004) (0.0320) (0.0106)
BdSize *D.OwnInside 0.0039 *** −0.0356 *** 0.0257 *
(0.0012) (0.0135) (0.0155)
BdIndir *D.OwnInside 0.0029 *** 0.0022 *** 0.0317 **
(0.0004) (0.0003) −(0.0153)
D.BdFeml *D.OwnInside 0.0032 * 0.0012 *** 0.0719 ***
(0.0019) (0.0004) (0.0241)
LnAssets 0.0283 *** 0.0108 ** 0.0049 **
(0.0056) (0.0043) (0.0025)
Roa −1.1489 *** −1.196 *** −0.317 ***
(0.0942) (0.0987) (0.0570)
Age 0.0056 *** 0.0054 *** 0.00138 ***
(0.0007) (0.0007) (0.0004)
Book2Mkt −0.1374 *** −0.1360 *** −0.0322 ***
(0.0030) (0.0031) (0.0023)
Loss 0.1405 *** 0.1480 *** 0.0681 ***
(0.0180) (0.0189) (0.0107)
Const 0.2982 *** 0.4950 *** 0.989 ***
(0.0945) (0.0386) (0.166)
Sector Dummy Yes Yes Yes
Year Dummy Yes Yes Yes
Observations 2817 2497 2428
R-squared 0.5749 0.585 0.87
See Table 1 for definitions of the variables. All explanatory variables are ‘mean-centered’. *** Significant at 1%;
** significant at 5%; and * significant at 10%.

5. Conclusions
The association between board attributes and capital structure decisions has been
established both theoretically and empirically. However, prior studies have not yet shown
the interaction consequence of board characteristics on capital structure decisions of the
firms. Therefore, this study considers the interaction effect of board attributes to obtain a
better understanding, and accordingly, we divide between direct and indirect to analyze
the association between board attributes and a firm’s capital structure decision. More
particularly, the moderating effect of inside ownership on the association between board
attributes and a firm’s capital structure decisions has been investigated and provides new
insights compared to previous findings.
The stunning finding of the study is that insider ownership moderates the association
between board attributes (board size, board independence, and gender diversity) and a
firm’s debt level rather than having a substantial direct impact on the debt level. This study
also found that, in terms of the monitoring function, there may be a complementary or
substitution effect between inside ownership and corporate board characteristics. Moreover,
the outcomes reveal a positive and statistically significant impact of the interaction between
board size and inside ownership on financing decisions. This shows that the effect of board
size on the firm’s debt level will be more favorable as the percentage of inside ownership
rises. This finding may explain that companies with more inside ownership and larger
boards are more capable of raising funds at a lower cost and maximizing the value of
the firm. The findings also show that due to the introduction of the CG guidelines in
Risks 2024, 12, 144 17 of 22

2006, board size and independent directors became persuasive factors in firms’ financing
choices. In the pre-reform stage, female directors are found to have a detrimental impact
on financing decisions, but they are not found to have a noteworthy impact once the BSEC
introduces governance mechanisms.
This empirical study encompasses four possible contributions to the existing literature
by closely investigating how board composition affects a firm’s capital structure decisions
with the moderating effect of inside ownership. First, prior studies did not examine
the indirect relationship, such as moderating variables, and solely focused on the direct
relationship between board composition and capital structure, where they failed to give a
clear idea about the role of board composition on this issue. This is the only empirical study
that investigates the moderating effect of inside ownership on the relationship between
board composition and a firm’s capital structure decision. Second, ownership structure
and board composition may have a significant role in a firm’s financing decision. Thus,
this empirical study has a theoretical role to the outcome of board composition. Third,
this study swells the present argument about the relationship with an indirect method,
“moderating role of inside ownership,” to confirm the relationship between them. Moreover,
practically, the result of the study may be accommodating for policymakers and different
stakeholders in the financial market of emerging economies to see the moderating role of
inside ownership on the relationship between capital structure and CG. In this study, we
have not checked the managerial behavior of a firm when inside ownership is high, and
future research may see this area how the behavior of management is changed due to the
moderating effect of inside ownership on the relationship between capital structure and
characteristics of CG.

Author Contributions: All authors strongly believe that they have made equal and substantial
contributions to preparing this manuscript. Conceptualization, N.C.D., S.P.C. and R.A.; Methodology,
N.C.D., S.P.C., R.A. and N.A.; Software, N.C.D. and S.P.C.; Validation, N.C.D., S.P.C. and R.A.; Formal
Analysis, N.C.D., S.P.C. and R.A.; Investigation, N.C.D., S.P.C., R.B. and R.A.; Resources, N.C.D., S.P.C.,
R.A. and N.A.; Data Curation, N.C.D., S.P.C., R.A. and N.A.; Writing—Original Draft Preparation,
N.C.D., S.P.C. and R.A.; Writing—Review and Editing, N.C.D., S.P.C., R.B. and R.A.; Visualization,
N.C.D., S.P.C. and R.A.; Supervision, N.C.D., S.P.C., R.B. and R.A.; Project Administration, N.C.D.,
S.P.C. and R.A.; Funding Acquisition, N.C.D., S.P.C., R.B., R.A. and N.A. All authors have read and
agreed to the published version of the manuscript.
Funding: Funding agent: Association of Macao Characteristic Finance. Research Funding No.
ACFM-2023IS02. And BRAC University, Bangladesh.
Institutional Review Board Statement: Not applicable.
Informed Consent Statement: The article does not contain any studies with human participants or
animals performed by any authors.
Data Availability Statement: All data generated or analyzed during this study are included in the
published article.
Acknowledgments: The authors acknowledge the participatory contribution of all respondents to
this study.
Conflicts of Interest: The authors declare no conflicts of interest.

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