Introduction
This paper responds to relationship between finance and governance by evaluating how financial decisions are connected to corporate governance. In the rise of limited exceptions to corporate governance and finance seem to have natural tension, if there is no direct opposition. The polarity between finance and governance are two research areas that have been studied separately. It is essential to understand why these two areas function individually and separately. Certainly, the connection between financial decisions and governance are largely unmapped. The most relevant area relates to capital structure decision and their implications in creating a company’s value. Capital structure involves how a company funds its overall activities and growth by the use of the different sources of capital in the company. Bonds and notes usually record the company debts. (Kumar, 2015). Common stock, preferred stock, and different retained earnings are usually records of the company's equity. In analyzing the capital structure in a company, the proportion of the companies’ long and short-term debt is considered.
Corporate governance is the technique and a model of different rules, practices and methods by which a company acquires regulation. It involves the ways by which the governance process of the company incorporates the interests of the stakeholders of the particular company. The stakeholders of a given company include the management, the employees, customers, suppliers, the government of the country and the entire society where the given company has its location (Morellec, 2012). Corporate governance is, therefore, a tool by which the company ensures the achievement of the objectives of the company
In general, the literature on finance and governance analyzes how strategic actions of key players such as managers, shareholders and debt holders influence the company’s value and allocation of finances to claimholders.
Problem of statement
This study aims to find out the relationship between capital structure and the corporate governance in a company. These two phenomena are critical factors affecting the operations of different companies globally. This study, therefore, aims to provide the reasons two factors have affected the operation of the various corporations in the United States of America. Every company in the United States of America has a primary objective of maximizing the profits in the corporation. This study, therefore, uses various qualitative and quantitative research methods to identify how different companies are affected in the economy of the United States of America. This study uses different other research samples done by other various researchers on the same topic of capital structure and corporate governance. Various research studies on the different factors that affect the operations of the companies in the United States of America have been successfully studied. Factors affecting the profit formation process of the various corporations in the United States received consideration in the research (Jiraporn, et al. 2012). This is to facilitate the research to attain the fundamental objective of identifying the ways in which capital structure and corporate governance in the various companies in the United States of America are related.
Purpose of the study
The purpose of the study is to provide various solutions to the different companies in the United States on how to handle the capital structure and the corporate governance in the company. The study uses various data from the various companies in the United States of America to calculate the reasons for the positive and adverse relationship between the capital structure and the corporate governance in the companies in the United States of America. This study, therefore, provides various recommendations to the companies in the United States of America. The main aim of the research is to provide the most appropriate recommendations to the companies on how to handle the different equities and risks in a company (Harford, 2012). This study, therefore, provides the companies with the best ways to handle to ensure the company maximizes its profits in the market.
Research questions
This study is to carry out different studies in the companies to achieve its objectives. This research conducted by these companies is guided by the following research questions:
a) What is the relationship between the capital structure and corporate governance in the company?
b) How does equity and risk ratio in a company affect both capital structure and the corporate governance in a company?
c) What are the primary methods of collecting the data in the different?
Main body
Concepts and Strategies
Different articles and journals of different companies in the United States have been accessed by the research. These journals include strategic management journal, Journal of operation management, Harvard Business Review, California Management review and Sloan management review. Most of these research articles about capital structure and corporate governance indicate that capital structure of a company is given by the sum of the cost of corporate governance and the various global variables (Ahmed, 2012).These articles stipulate that the companies profit formation is affected by various factors such as equity ratio, availability of risk and the corporate governance process of the company. These research also postulate that a better corporate governance of a given company ensures a higher profit formation by the company.
Literature Review
Theoretical Framework
Relationship between capital structure and corporate governance
The relationship between the capital structure and the corporate governance is very significant to the profit maximization process of the company. The following factors determine the extent of the relationship between the capital structure and the corporate governance:
a) Size of the board
Companies controlled by boards of larger sizes prefer the use of higher equity stalk in the company than using more debt funding in the capital structure. This increases the number of board members and thus strengthens the capital structure. Companies with fewer board members employ more debt financing compared to the equity in the capital structure (Tricker, 2015).This therefore greatly affect the relationship between the capital structure and the corporate governance.
b) Remuneration of the CEO and senior managers
The decision-making process in the organization is done by the CEO and the senior managers at the business. The success of the business therefore significantly depends on these groups of individuals. Both CEO and the senior managers in an organization are promoted based on the success of the company applying the decisions they make.
The remuneration contains some basic principles, salaries, bonus, non-monetary benefits, and different resolution regarding compensation. This part is quite important in the capital structure as it involves different types of financial transactions as well as it offers some form of corporate governance that defines the roles of CEO and other employees as well as the way those employees contribute on the business to gain profit or loss.
Organizations, where CEO and other senior members are reimbursed with stock option plans, tend to prefer more equity stake into the business in comparison to those companies where such stock option plans are absent (Joseph, et al. 2014).
Businesses, where CEOs are paid with equity shares, are more likely to prefer pursuits of the risky project whether they create or damage firm’s value. This affects the relationship between capital structure and corporate governance in the company.
c) Growth rate & market conditions:
The business has different stages throughout the lifecycle. The growth rate of the companies has lots of impact on its structure, governance and workflow. The businesses that are new depends on borrowing money or other financial sources in the growth stage to grow faster. The growing firms are facing unstable and unproven growth rate that is not appropriate. The stable business is well financed and they depend less on outside funding. The stable business has stable growth ratio and enough funds available to move further with any objectives. (Liao, Mukherjee, & Wang, 2015). The strategy varies a lot based on the current stage of a business and plays important roles on it.
The market conditions are another important element that has an impact on the capital structure of the company. The investment of business in different areas at different market conditions brings the profit and loss for a business. The appropriate investment provides better structure and opportunities while wrong investment introduces different worst scenarios.
Empirical Framework
Selection of indicators
The indicators of performance of a corporation comprises of both financial and non-financial indicators. Financial indicators have always been adopted and will continue to be adopted in future since company’s long term goals is financial in nature. Financial performance assessments directly relate to firm’s financial objectives. The main factors involved in performance include;
1. Profitability which includes the ROE, total assets and sales margin.
2. Operating capacity which includes equity turnover and mobile asset turnover.
3. Solvency which includes current ratio and equity debt.
4. Growth which includes growth rate of total assets and rate of capital accumulation
5. R & D capabilities which includes intangible assets and expenditure revenue.
6. Product uniqueness which includes operating costs revenue.
Hypotheses
This research, therefore, finds out that the following hypotheses affect the capital structure, corporate governance and the entire profit formation process in a company.
There is negative correlation relationship between company’s capital structure and profitability
There is positive correlation between firm’s capital structure and growth.
Negative correlation exists between capital structure of the company and R & D capabilities.
Methodology
Data collection
This research uses the qualitative and quantitative methods of data collection to understand how capital structure and corporate governance are related in different companies. Methods such as interviews, questionnaires and observation are employed in the companies. Sampling is also exploited in the process of data collection in the company.
Sample selection
Sample period
The study is set to collect the data by the use of the sampling technique for the duration of two years. This will enable the study to be carried out with a lot of expertise and professionalism. This will also give the research enough time to analyses the collected data and determine the relationship between the capital structure and corporate capital and the factors that determine the relationship. This duration will also enable the study to give a well-elaborated recommendation on the relationship.
Data analysis technique
Data collected from the companies will be used to provide recommendations on the relationship between capital structure and corporate governance. This requires a well-conducted analysis of the data (Ahmed, 2012).The research will therefore using the regression analysis for the six composite indicators identified in empirical framework. The regression analysis is founded on six composite indicators and capital structure. The model is viewed as follows;
Y=β0+β1X1+β2X2+···βiXi+ξ
Y represents capital structure while β1 represents the coefficients (i= 1 to 6)
This paper used the indicators with compatible hypotheses. Positive correlation is evident between the indicator and capital structure.
Results
Overall results indicate that the company’s development from those indicators is influential to the capital structure.
Conclusion
Capital structure and corporate governance are growing closer together. It is essential to match capital structure and corporate governance plans by meeting the financing requirements, ensuring there is complementing external sources of finance to ensure there is corporate development. With this important relationship, a competitive weapon is born. The relationship between financing and actual decisions makes a situation in which high or debt can hinder the company’s ability to take advantage of financing options. Generally, capital structure and corporate governance are the main factors that affect this in an organization. It is, therefore, important to regulate these factors in the market. It is, therefore, important to regulate the equity ratio of the company, the risks the company's face and the remuneration process of the CEO’s and the senior managers in the corporation. These determine the relationship between capital structure and corporate governance in a company which is the key to the profit creation process in an organization.
References
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Ahmed Sheikh, N., & Wang, Z. (2012). Effects of corporate governance on capital structure: empirical evidence from Pakistan. Corporate Governance: The international journal of business in society, 12(5), 629-641.
Ahmed Sheikh, N., & Wang, Z. (2012). Effects of corporate governance on capital structure: empirical evidence from Pakistan. Corporate Governance: The international journal of business in society, 12(5), 629-641.
Harford, J., Mansi, S. A., & Maxwell, W. F. (2012). Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.
Jiraporn, P., Kim, J. C., Kim, Y. S., & Kitsabunnarat, P. (2012). Capital structure and corporate governance quality: Evidence from the Institutional Shareholder Services (ISS). International Review of Economics & Finance,22(1), 208-221.
Joseph, J., Ocasio, W., & McDonnell, M. H. (2014). The structural elaboration of board independence: Executive power, institutional logics, and the adoption of CEO-only board structures in US corporate governance. Academy of Management Journal, 57(6), 1834-1858.
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McCahery, J. A., Sautner, Z., & Starks, L. T. (2015). Behind the scenes: The corporate governance preferences of institutional investors. Journal of Finance, forthcoming.
Morellec, E., Nikolov, B., & Schürhoff, N. (2012). Corporate governance and capital structure dynamics. The Journal of Finance, 67(3), 803-848.
Tricker, R. B. (2015). Corporate governance: Principles, policies, and practices. OUP Oxford.
Liao, L., Mukherjee, T., & Wang, W. (2015). CORPORATE GOVERNANCE AND CAPITAL STRUCTURE DYNAMICS: AN EMPIRICAL STUDY. The Journal Of Financial Research, 38(2), 169-192. http://dx.doi.org/10.1111/jfir.12057
