The Effect of Ownership Structure, Board Size and Firm Value on Corporate Financial Leverage and Dividends Policy: An Applied Study

Abstract

The paper aims to investigate the empirical linkage between the explanatory variables, ownership structure and one of the corporate governance mechanism namely board size and firm value on the most important corporate financial decisionsfinancial leverage and dividend policy in an emerging market, Egypt.To achieve the research objectives, we used a sample of 50 non-financial firms chosen from the more actively traded listed Egyptian firms on the Egyptian Stock Exchange (EGX) from 2015 to 2020. Measure of corporate financial leverage employed is the total debt/assets ratio. The measures of ownership structure include managerial ownership, institutional ownership, block holder's ownership and foreign ownership. The firm value is computed by contrasting the market value of equity (capital) with the adjusted value of equity. Similarly, the effect of some control variables like firm size, profitability and Tobin's Q has been also examined. The multiple regression models (OLS) were used to analyze the data and to test the research hypotheses using the published annual financial reports and other related data.Results show for the first hypothesis tested, that managerial ownership and block holder ownership are significantly positively related to corporate leverage, while institutional ownership and foreign ownership are significantly negatively related to corporate leverage, whereas board size is found to be insignificantly negatively correlated and firm value is positively correlated with financial leverage. Firm size used as a control variable is found to be significantly positively correlated with financial leverage, while profitability (ROA) is found to be negatively correlated. For the second hypothesis tested, results show that managerial ownership and foreign ownership are significantly positively related to corporate dividend policy, while block holder ownership and institutional ownership are negatively related to corporate dividend policy. Board size, firm value, all control variables (firm size, Tobin's Q and ROA) are found to be significantly positively correlated with dividend yield.The empirical findings suggest that board size and ownership structure playing an important role and influence their power in deciding the Egyptian corporate financial decisions regarding the financial leverage and dividend decisions.

The Implications of Ownership Structure and Audit Quality on Financial Reporting Quality: Evidence from Egypt

“…As a result, the value of the company is impacted by managerial ownership because the manager has a greater stake in the company through share ownership and will optimize his operations to increase the value of the stock and maximize his profits. As stated by Abdel Megeid (2021); equity shares owned by all board members and their families divided by the total number of shares outstanding at the end of the fiscal year is how to measure managerial ownership.…”

“…Abdel Megeid (2021) states that foreign ownership or control of companies with headquarters outside of the country of origin or of businesspeople who are not citizens of the country of origin. When multinational corporations with operations in several nations make substantial, long-term investments in a foreign nation, usually through foreign direct investment or acquisition, this is known as foreign ownership.…”

“…The term "foreign" describes stock in corporations that are held by residents of other nations. To capture majority ownership, a dummy variable is set to equal 1 if foreign investors hold more than 50% of the stock in an enterprise and 0 otherwise, this is the measurement of foreign ownership (Abdel Megeid, 2021). Regarding the family ownership; the role that family members play as controlling shareholders is subject to a variety of defenses.…”

“…Institutional investors' preference is likely larger than individual investors for those companies. As stated by Abdel Megeid (2021), institutional ownership is measured by the amount of share capital held by investment firms in a company at the end of its fiscal year. Wahdana, et al (2022) study 90 Indonesian state-owned companies to study the effect of stock ownership, characteristics of the audit committee, and independent board of commissioners on creative accounting practices from 2016-2020 period.…”