1082110

research-article20222022
SGOXXX10.1177/21582440221082110SAGE OpenAmin et al.

Original Research

SAGE Open

Corporate Governance and Capital

January-March 2022: 1­–17
© The Author(s) 2022
DOI: 10.1177/21582440221082110
https://doi.org/10.1177/21582440221082110

Structure: Moderating Effect of Gender journals.sagepub.com/home/sgo

Diversity

Ali Amin1 , Ramiz ur Rehman1,2 , Rizwan Ali1 ,

and Ridzwana Mohd Said3

Abstract
This paper investigates the effect of corporate governance on capital structure, and moderating impact of board gender
diversity on this nexus. Using a sample of 2062 firm-year observations of 226 non-financial firms listed on the Pakistan Stock
Exchange (PSX) from 2008 to 2019, we have conducted multiple regression analysis, and found that larger and independent
board positively affect firm leverage, whereas, the negative impact of CEO duality was observed on this relationship.
Moreover, we found that gender diversity is associated with better corporate governance quality and positively impact
firm’s leverage. Additionally, the Generalized Method of Moments (GMM) estimation was applied for the robustness and
the results obtained confirmed the main findings of the study. The study provides support for the mandatory placement
of female directors on the corporate board by Code of Corporate Governance (CCG) regulations Pakistan, and needs for
implementation of corporate governance mechanism in the listed firms to gain lender’s confidence.

Keywords
corporate governance, gender diversity, agency theory, Pakistan

Introduction In a similar manner, gender diversity is considered an

important characteristic of an effective board (Milliken &
The failure of Lehman Brothers, followed by the historical Martins, 1996). In contrast to males, female members on the
corruption scandals such as Maxwell, Enron, and Worldcom, board are found to be more independent, diligent, and respon-
elevated the concern among the investors and other stake- sible (Li & Li, 2020). Their presence increases the discussion
holders regarding governance mechanism, especially; the and exchange of ideas among the group (Schippers et al.,
functioning and composition of the corporate Board. The 2003). They dislike the fraud more than their male counter-
Sarbanes Oxley Act 2002, formulated for the protection of parts and do not like to be associated with firms with fraudu-
investors from the management fraudulent practices and lent practices (Gao et al., 2017). Due to their empathetic and
safeguard shareholder’s wealth, also turned the academic cooperative behavior, they are considered more effective
debate toward the demographics and other characteristics of leaders (Eagly et al., 2007). Prior research has found female
the Board composition (Wu et al., 2020). Advancing further, directors as an independent and tough monitor, and their
the composition of gender diverse board was made manda- presence ensures better attendance and low agency conflicts
tory by Norway, India, and Spain (Carter et al., 2003; (Adams et al., 2010; Carter et al., 2003). Collectively, these
Terjesen et al., 2009). Effective boards and board gender studies support that due to better decision making, effective
diversity are considered as a signal for a firm’s future perfor-
mance by investors (Aman & Nguyen, 2013). Additionally, 1
Lahore Business School, The University of Lahore, Punjab, Pakistan
they react positively to the independent and female directors’ 2
Faculty of Business, Sohar University, Sohar, Oman
inclusion on the board. Being a significant component of 3
Universiti Putra Malaysia, Serdang, Selangor, Malaysia
governance mechanism, the board of directors ensure that
Corresponding Authors:
interest of shareholders and managers are similarly aligned Rizwan Ali, Lahore Business School, The University of Lahore, 1 km
and agency problems are minimized (Barnhart et al., 1994). Defence Road, Lahore, Punjab 54000, Pakistan.
Consequently, an active board can mitigate the principal- Email: rizwan.ali@lbs.uol.edu.pk
agent conflict, through effective monitoring and communica- Ridzwana Mohd Said, School of Business and Economics, Universiti Putra
tion, and enhance the lender’s confidence (Easterbrook, Malaysia, Serdang, Selangor 43400, Malaysia.
1984; Jensen et al., 1992; La Porta et al., 2000). Email: ridzwana@upm.edu.my

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2 SAGE Open

communication skills, and their propensity to support the in Pakistan. We, therefore; consider it necessary to further
interest of shareholders, their inclusion in the board resolve investigate and explore the female’s role on the board of com-
the agency problems and effectively increases the investor’s panies. Similarly, the implications of agency theory on this
credence on the firm. nexus are the unexplored area, which this study attempts to
While, the extensive literature discussed corporate gov- address.
ernance and its impact on various dimensions such as; firm This study provides empirical evidence of the linkage
performance (Arora & Sharma, 2016; Bhagat & Bolton, between corporate governance, board gender diversity and
2019; Bhatt & Bhatt, 2017; Ciftci et al., 2019), risk taking capital structure in the case of non-financial firms listed on
(Abou-El-Sood, 2019; Koirala et al., 2020), and corporate PSX. We employed a panel regression analysis on our sam-
social responsibility (Lone et al., 2016; Ullah et al., 2019), ple consisting of 2062 firm-year observations over the
little empirical evidence is available on its effects on capital period 2008 to 2019 to test our hypotheses. Consistent with
structure. Similarly, the wide literature discussed the board the literature, we used leverage as a proxy for capital struc-
gender diversity and its impact on various dimensions such ture (Chow et al., 2018) and used board size, board indepen-
as firm performance (Adams & Ferreira, 2009; Al-Shaer & dence, and CEO duality as a proxy for corporate governance
Zaman, 2016; Usman et al., 2018), dividend payout (Chen (Haris et al., 2019; He & Luo, 2018). In line with the prior
et al., 2017; Ye et al., 2019), and corporate social responsi- studies, we measure gender diversity using the female direc-
bility (Al Fadli et al., 2019; Yang et al., 2019), but its impact tor’s proportion out of total directors on the board (Nekhili
on capital structure gained limited attention. We believe et al., 2020; Yang et al., 2019). The financial data was
that this study is the first in literature, which analyzes the extracted manually, from the financial statements of the
moderation impact of gender diversity on the linkage companies and the corporate data was obtained from the
between corporate governance and capital structure, in per- annual report of the respective company. Our findings sup-
spective of Pakistan. port the extant literature and indicate the positive relation-
Making headway, in line with the global efforts to ship between corporate governance and capital structure,
strengthen the corporate governance mechanism in Pakistan, and additionally; we found that the presence of females on
the best corporate governance practices were introduced by the corporate board positively moderates this relationship.
the Securities and Exchange Commission of Pakistan (SECP) Our results are consistent with the prior literature (Bokpin &
through the promulgation of Code of Corporate Governance Arko, 2009; Kyereboah-Coleman & Biekpe, 2006; Zaid
(CCG) 2012 (Tariq & Abbas, 2013). The regulations paved et al., 2020) in this context.
the way for the implementation of a strict governance mech- This study extends contribution to the literature in follow-
anism by introducing provisions regarding board size, inde- ing ways. First, the study responds to the future directions
pendent directors, CEO duality, female directors, board call by Zaid et al. (2020). The author mentioned the need to
meetings, etc., and encouraged the companies to have a bal- examine the impact of corporate governance mechanism on
anced board composition (Wang et al., 2019). The Code capital structure in the context of emerging economies. This
mandated the firms to have at least one independent director study, therefore; analyzes this relationship in the perspective
and restricted the maximum number of executive directors to of Pakistan, which is an emerging economy. Second, our
one-third of elected directors including the CEO. In addition, study extends the work of Sheikh and Wang (2012) in con-
the Code required that the Chairman and the CEO shall not text of PSX listed firm by exploring the moderating impact
be the same persons (SECP, 2014). Later, the CCG 2017 and of gender diversity on this nexus and by using a larger sam-
CCG 2019, increased the minimum requirement of indepen- ple for the increased time period 2008 to 2019. Third, the
dent directors on the board to two members or one-third of study supports the reforms introduced by the CCG 2019 by
the total members of the board, whichever is higher. The making the placement of female director mandatory on the
mandatory requirement of having the maximum number of board. The formulation of gender diverse board has resulted
executive directors, one-third of the elected board, and in increased investor’s confidence and, hence, added to the
Chairman and CEO as separate person remain unchanged. more debt availability for non-financial listed firms. Finally,
Regarding gender diversity while, CCG 2012 does not men- it supports the empirical literature on corporate governance
tion the requirement of a female director’s placement on the by showing that female presence on the board mitigate
board, the CCG 2017 and CCG 2019, compel the listed firms agency conflict and result in wealth maximization of the
to appoint at least one female director on the Board (SECP, firm. Thus, our findings explain the potential benefits of the
2017, 2019). corporate governance mechanism and diverse boards in
Although, the mandatory application of inclusion of female improving the funds availability for the firms.
director on the board forced the listed companies to place The rest of the articles proceed in the following manner.
female director on their board, however, there is little empiri- Section 2 discusses the literature review and hypotheses
cal research concerning the corporate governance effects of development. Section 3 presents the research methodology.
the appointment of female directors on capital structure and Section 4 presents and discusses the results, while Section 5
reducing principal-agent conflict in non-financial listed firms concludes the study.
Amin et al. 3

Literature Review and Hypotheses The primary role of corporate governance is to resolve
Development agency issues between the shareholders and the managers,
arising from the separation of ownership and control of the
Agency Theory firm (Fama, 1980). Consistent with the literature (Chow
et al., 2018; Zaid et al., 2020), we consider the agency theory
Jensen and Meckling (1976) define an agency relationship
as the basic theory to discuss the nexus between corporate
“as a contract under which one or more persons (the
governance and capital structure and argue that effective cor-
principal(s)) engage another person (the agent) to perform
porate governance mechanism increases the firm’s ability to
some service on their behalf which involves delegating
acquire more debt.
some decision-making authority to the agent.” The maximi-
zation of interest by the managers at the expense of share-
holders due to separation of control and ownership give rise Board Size
to the agency problems (Fama & Jensen, 1983). While, the
The board of directors are considered an important tool of
owners are primarily concerned about diversifying away the
corporate governance mechanism for the alignment of inter-
firm specific risk, the managers, on the other hand, are more
est between shareholders and managers (Li et al., 2015).
inclined to pursue their personal interest which conflicts
Federo et al. (2020) grouped board functions into three main
with the stockholders’ interests (Crutchley & Hansen, 1989).
categories: monitoring, provision of resources, and strategic
Consequently, the managers opt for short run operating
involvement. In this context, the larger board size can
decisions, which benefit themselves without considering the enhance firm value and mitigate principal-agent conflict
high-risk appetite of shareholders, which may yield better through adequate monitoring and reduce the agency issues
profits and increase shareholders wealth. Hence, giving rise (Easterbrook, 1984; Jensen et al., 1992; La Porta et al., 2000;
to principal-agent conflict and agency cost (Berger & Di Said et al., 2009). Relatedly, Alves et al. (2015) mentioned
Patti, 2006). that managers of the firms that generate substantial cash-
The agency cost can be reduced in different ways under flows are more likely to maximize their personal objectives,
the framework of agency theory. One of them being the such as high salaries and bonuses, and focus on short-run
choice of capital structure (Kester, 1986). The theory postu- profits instead of undertaking the high return seeking long-
lates that the choice of capital structure may help in reducing term projects, desired by shareholders. The stringent moni-
this cost (Jensen, 1986). The theory mentions that the high toring and alleviation of information asymmetry by the larger
agency cost of outside equity can be reduced through high board, therefore; facilitate the firm to use more debt and
leverage or low equity ratio, as the managers are forced to act choose the best possible options in line with the interest of
in the interest of shareholders, resulting the increase in firm shareholders by influencing the manager’s decisions, and
value. The increase in debt level reduces the cash flow avail- ties managers to pay out future cash flows, reducing the cash
ability for the managers and increase the risk of bankruptcy flow available for spending at their discretion which ulti-
and job loss (Grossman & Hart, 1982). Further, the high debt mately increases firm value (Cheng & Courtenay, 2006).
level forces the managers to invest in profitable ventures to Similarly, Abor (2007) and Feng et al. (2020) mentioned that
ensure the sufficient cash flow for interest and principal large boards are well-anchored and through stringent surveil-
repayment (Vo & Nguyen, 2014). The increased debt, there- lance they tend to embrace a high debt policy to maximize
fore; reduces total equity financing, thus; reducing principal- the firm value. From the creditor’s perspective, the larger
agent conflict (Jensen & Meckling, 1976). board is considered an effective monitor of firms’ operations
Conversely, the adverse effects of high leverage are also and hence; increases the firms’ credibility and financial sta-
inevitable. The high leverage level increases the chances of bility in the eyes of debt providers (Zaid et al., 2020). The
financial distress and bankruptcy, resulting in the higher increased credibility, thus; assures the debtholders for the
agency cost to minimize the conflict between shareholders safety of principal and interest payment, which result in
and debtholders (Berger & Di Patti, 2006). The optimal smooth flow of debt to the firm and resultantly; the firm
leverage level is, therefore; desirable to reduce agency cost enjoy a lower cost of debt financing (Anderson et al., 2004).
and enhance firm value. In a similar manner, Bajagai et al. Moving ahead, the empirical literature argues that the
(2019) argued that corporate governance variables such as; larger board may result in increased monitoring cost in listed
board size, board independence, and CEO duality directly firms (Raheja, 2005) and may outweigh the benefits of strin-
affect the firm’s capital structure decision. Relatedly, the gent monitoring (Reddy et al., 2013). In a charitable organi-
effective corporate governance mechanism increases the zation, the directors are rarely paid and their voluntary
investor’s confidence, resulting in more debt availability for participation on the board mitigates this problem (Fontes-
the firm (Chow et al., 2018). The presence of effective board Filho & Bronstein, 2016). The larger board in such firms
guarantees the lenders about the safety of their investment tend to become symbolic and a source of social interaction
and cash flows, as they consider such firms financially stable which ultimately results in larger charitable contributions for
and worthy of advancing credit (Chen & Hsu, 2009). the organization (Brown et al., 2006). In this context, Naciti
4 SAGE Open

(2019) also reported positive relation between board size and higher (SECP, 2017, 2019). The change in the number of
the social objectives such as community, diversity, environ- independent directors suggests that policy makers and regu-
ment, etc., that a firm pursues. lators are well aware of the importance of independent direc-
The literature provides mixed results on linkage between tors which not only bring the fresh perspective and resources
board size and capital structure. Some studies (Abobakr & for the firm but also reduce the power of executive directors
Elgiziry, 2016; Berger et al., 1997; Butt & Hasan, 2009; and increase the board’s independence.
Meah, 2019) mentioned the negative impact of board size on Like other emerging and developing countries, most of
capital structure and argued that the larger board reduces the the non-financial firms listed on PSX are owned and con-
decision-making power of managers and prefer to include trolled by families (Yasser & Mamun, 2017). The concentra-
more equity in firm’s capital than debt, resulting in low tion of ownership provides the incentive for management
leverage and reduced default risk in future. On the other monitoring, but it may also result in the owners extracting
hand, some studies highlighted that larger board prefer private benefits at the expense of minority shareholders,
higher debt level (Gill et al., 2012; Saad, 2010). We argue especially; in a country with weak investor’s regulations
that the presence of large number of directors on the board (Purkayastha et al., 2019). The appointment of independent
provide a better surveillance of firm operations, which directors by the controlling shareholders, in the former case,
increase the financial stability and credibility of the firm in may result in better firm value and low agency conflicts
the eyes of debtholders, thus; resulting in more inflow of (Nadeem, 2020). From the steward’s theory perspective, the
debt for the firm. We, therefore; hypothesize that: controlling function in the hands of family owners in the
family firms results in the economic benefits for the firm
Hypothesis 1: Larger board size is positively related to since, they intend to identify themselves with the organiza-
firm’s leverage level tion and are more inclined toward the objectives of the firm
rather than maximization of their personal interest at the
expense of minority shareholders (Davis et al., 2018). Their
Board Independence pro-organizational behavior results in the alignment of inter-
Considering agency theory perspective, the presence of est, which further lead to lower agency conflicts and wealth
independent directors on corporate board is considered an maximization (Corbetta & Salvata, 2004).
effective corporate governance mechanism (Fan et al., Overall, the presence of independent directors in the fam-
2019) and their knowledge, broad vision, and independence ily owned and controlled firm strengthen the corporate gov-
from management enable them to rigorously monitor the ernance mechanism and reduce agency conflict (Altaf &
top management actions in order to take effective gover- Shah, 2018). Relatedly, the academic literature presents the
nance decisions (Weisbach, 1988). Moreover, their pres- positive effects of female presence on the corporate board in
ence on the board reduces the information asymmetry, and terms of better control and enhancement of board’s decision-
enhances the quality and the frequency of public informa- making process (Ararat et al., 2015). The gender diverse
tion released by the executive management (Kanagaretnam board in family-owned firms, therefore; improve the credi-
et al., 2007). Similarly, the independent board increases the bility of firm and provide better monitoring (Milliken &
financial transparency, which results in more capital avail- Martins, 1996). From the lender’s perspective, the debt hold-
ability for the firm due to higher credit rating (Chen & Hsu, ers may view family ownership as protective of their inter-
2009) and also serves as a guarantee that debtholders inter- ests by ensuring continuity and stability (Ramalho et al.,
est will be protected (Zaid et al., 2020). Consequently, the 2018). The concern exhibited by family owners about firm
dominating role of independent directors in monitoring top due to commitment and family reputation is positively rec-
management improves the confidence of lenders regarding ognized by banks and other lending institutions, and there-
the safety of their principal and interest amount, and thus; fore, result in more favorable lending to the firm. In this
result in the uninterrupted supply of debt to the firm (Bokpin scenario, Crespí-Cladera and Martín-Oliver (2015) provides
& Arko, 2009). evidence that family ownership is associated with greater
Contextually, the Cadbury (1992) report recommends that availability of credit and Anderson et al. (2003) and Ma et al.
the board of directors should include at least two indepen- (2017) found a lower cost of debt financing for family firms.
dent directors who are able to influence the board’s decision. The empirical literature provides mixed results on the
In line with the global initiatives aimed at reforming corpo- relationship between board independence and firm leverage.
rate governance mechanism, the best corporate governance Berger et al. (1997) found low debt level in firms with less
practices were introduced by the SECP through the promul- independent directors on the board. Some studies (Abor,
gation of CCG 2012. While, the CCG 2012 recommend the 2007; Bokpin & Arko, 2009) reported a positive impact of
listed firms to have at least one independent director, the board size on leverage level. Wen et al. (2002), on the other
CCG 2017 and CCG 2019 increased the minimum require- hand, reported negative relationship between the two vari-
ment of independent directors on the board to two members ables and argued that increased governance measures result
or one-third of the total members of the board, whichever is in managers opting for less leverage. We argue that due to
Amin et al. 5

tough and independent monitoring, the presence of indepen- members such that no individual should have “unfettered”
dent directors on the board increases the debt provider’s con- control of the decision-making process.
fidence and results in more debt availability for the firm. We, As a result, in Europe and UK listed companies, the chair-
therefore; hypothesize that: man led the board whereas the CEO leads the executive team
(Goyal et al., 2019). On the other hand, in USA, the CEO
Hypothesis 2: Greater proportion of independent direc- (usually also the company Chairman) enjoy excessive power
tors on board is positively related the firm’s leverage level and has ultimate control over decision making. Although, the
board of directors in USA are criticized for not attaining a
balance of power and reducing the board effectiveness, nev-
CEO Duality
ertheless; the appointment of senior independent directors, in
Generally, CEO of the firm is entrusted with the task to man- the light of Sarbanes Oxley Act 2002, substitute for the split
age the business and handle day to day operations while, the roles to some extent on American boards (Solomon, 2020).
Chairman is responsible to steer the board and set the strate- The impact of CEO duality on firm leverage has been dis-
gic goals of the firm. CEO duality exists when the same per- cussed in the literature and produced mixed results. Abor
son is appointed as a chairman and CEO, simultaneously (2007) and Dimitropoulos (2014) mentioned that firms with
(Sheikh & Wang, 2012). The proponents of CEO duality CEO duality have high leverage. Kyereboah-Coleman and
argue that wider powers held by an individual are advanta- Biekpe (2006), on the other hand, found that in firms where
geous for the firm as they result in quick response to any CEO and Chairman are the same persons are less leveraged.
opportunity or threat (Salancik & Pfeffer, 1978). On the con- Consistent with the agency theory, we argue that firms with
trary, agency theory stresses the separation of both roles to CEO duality face agency issues and are considered riskier by
ensure effective corporate governance mechanism and the lenders, which result in less availability of debt to these
reduce agency problems (Fama & Jensen, 1983). The aca- firms. We, therefore; hypothesize that:
demic literature provides that the boards, which are indepen-
dent of CEO perform their monitoring task more effectively Hypothesis 3: CEO duality is negatively related to firm’s
(Goyal & Park, 2002). Moreover, due to withholding of key leverage level
information from other board members, the CEO duality
results in conflict of interest (Detthamrong et al., 2017) and
may lead to friction with outside parties (Cornett et al.,
Gender Diversity
2007). The clear separation between policy making and man- Among the other facets of corporate governance, the board
agement control is, therefore; desirable. of directors of the firm play a primary role in developing the
Additionally, the CEO duality reduces the monitoring mechanism to align the interest of owners and managers
power of the board, which may result in high agency costs (Weisbach, 1988). Gender diversity is considered as one of
(Dey et al., 2011) and result in ineffective corporate gover- the important characteristics of an effective board (Milliken
nance mechanisms (Simpson & Gleason, 1999). The delega- & Martins, 1996). In contrast to males, females on the board
tion of both tasks (decision making and operational) to a are found to be more independent, diligent, and responsible
single individual, may result in abuse of power, which nega- (Li & Li, 2020) and their presence increases the discussion
tively affects firm performance and consequently; debt pay- and exchange of ideas among the group (Schippers et al.,
ing capacity of the firm (Duru et al., 2016). Consequently, 2003). Bass (2019) mentioned that the female representation
the lenders hesitate to invest in the firm with CEO duality to in the top management team expands the collective knowl-
avoid the financial risk of their investment. The Maxwell edge of the group by reducing systematic biases, and offers
case in UK and the collapse of Enron in USA gained world- distinctive social networks and cultural experience by chal-
wide attention of the policy makers (Cohen et al., 2010). lenging the assumptions held by males. Prior research has
Several corporate governance problems emerged from the found that the female directors are independent and tough
wreckage of two giants. Unfettered power in the hand of monitors than their male counterparts, and their presence
Chief Executive was an obvious problem (Stiles & Taylor, ensure better attendance and low agency conflicts (Adams
1993). Soon after, in order to improve the shareholder’s con- et al., 2010; Carter et al., 2003). Similarly, Chen et al. (2017)
fidence and protect their interest, the Cadbury report (1992) mentioned that the active participation of female directors in
in UK and Sarbanes Oxley Act (2002) in USA provided vari- complex decisions evaluation provide more significant ben-
ous corporate governance mechanisms to safeguard the efits to shareholders. The effective monitoring of the gender
interests of shareholders (Solomon, 2020). While, the diverse board, therefore, mitigate principal-agent conflict
Cadbury report provides the need for the separation of role of and increase debtholders confidence.
Chairman and Chief Executive in UK, the separation of both The relationship between the gender diversity and capital
roles is not common in USA (Kakabadse et al., 2006). structure has been debated in the literature but provides con-
Relatedly, the Cadbury (1992) report recommended that tradictory findings. In this context, Maxfield et al. (2010)
there should be segregation of power between the board reported that women are more risk averse than men and their
6 SAGE Open

presence on the corporate board negatively affect the debt (2003) also found that the female directors are more indepen-
ratio. The author argued that women take low risk decisions dent and tough monitors, and their presence on the board
as compared to their male counterparts. In a similar vein, reduce agency conflict. The presence of females on the
Loukil et al. (2016) and Schicks (2014) also reported higher board, therefore; decreases the information asymmetry
risk taking by men resulting in using more debt. On the other between managers and investors and therefore, make it eas-
side, Virtanen (2012) mentioned that women take more ier for the firm to access more debt (Kanagaretnam et al.,
active role in decision making and influence decision mak- 2007). The agency theory suggests that the agency conflict
ing process in the board. Due to their active participation and between the shareholders and managers can be reduced if the
tough monitoring, their presence in the board room alleviates task for the decision making and controlling are entrusted to
the managerial opportunistic behavior and information different persons. In this context, the Cadbury report recom-
asymmetry (Usman et al., 2019). Consequently, their pres- mended that there should be a balance of power between
ence in the board provides positive signals to debt providers board members, with a clear division of responsibility at the
regarding the repayment of debt and interest, which ulti- top of the company, such that no individual could gain ‘unfet-
mately result in more availability of debt for the firm. tered’ control of the decision-making process. In this sce-
Since gender-diverse board is more conscious about nario, Klein (2002) mentioned that a board more independent
potential reputation risk (Bernardi & Threadgill, 2011; of CEO is more effective in monitoring the financial account-
Zhang et al., 2013), therefore; the presence of women on the ing process and reduce the information asymmetry.
board provides positive signals to debtholders (Kaur & On the contrary, the board with the same person as chair-
Singh, 2017). Similarly, Elmagrhi et al. (2018) argued that in man and CEO is considered less independent due to high
a bid to reduce the opportunistic behavior of managers that concentration of power and adverse conditions for outsiders
may arise due to weak monitoring, the firm with gender to effectively monitor the executive members (Coles et al.,
diverse boards use more debt to mitigate this behavior. From 2008). Relatedly, due to high independence (Adams et al.,
another perspective, the trade-off theory suggests that firms 2010) and better participation in decision making (Konrad
will target for an optimal level of mix between equity and et al., 2008) the presence of females on the board reduces
debt, which maximizes the difference between the benefits unfettered power in the hand of the CEO, and improve the
and costs of issuing debt (Adusei & Obeng, 2019). The ben- board independence and reduce agency conflicts, which ulti-
efit of debt is the tax advantage of interest payments to debt mately increase the investor’s credence on the firm. (Lucas-
holders (Miller, 1977; Modigliani & Miller, 1963). Therefore, Pérez et al., 2015). Considering Pakistan, the overall culture
the use of debt by the firm, in contrast to equity, provides the and corporate environment in Pakistan is significantly male
tax benefit to the firm, which ultimately result in higher firm dominated, which does not allow females to climb ladders to
value. Relatedly, in pursuance of their desire to increase the corporate boards and restricts their participation in decision-
firm value, the presence of female on the board, therefore; making (Mirza et al., 2012). Consistent with the global cor-
result in use of more debt by the firm (Dhaliwal et al., 2006; porate governance reforms and the efforts to reduce gender
Li & Zhang, 2019). From the agency theory perspective, the gap, CCG 2017 and CCG 2019 entailed the listed firms to
board is entrusted with the task to provide strategic direc- place at least one female director on corporate board (SECP,
tions and to monitor the managerial activities to safeguard 2017, 2019). Pakistan is an emerging economy with a weak
the interest of shareholders and enhance firm value. governance structure and ownership concentration as the
Contextually, a larger board can provide better monitoring of majority of listed firms are family owned (Shahzad et al.,
management action and better expertise (Said et al., 2009). 2018). The literature in this context suggested that family
Relatedly, a more diverse board is considered an effective control firms in emerging economies, characterized by the
monitor of management’s action by creditors and such com- weak investor’s regulations, is associated with the misuse of
panies are perceived as more financially stable and worthy of firm assets, extraction of private benefits, and avoidance of
investment due to better monitoring and low agency con- internal controls (Morck et al., 2005). On the contrary, expe-
flicts (Zaid et al., 2020). rience and commitment of family owners along with their
Therefore, the board characteristics are considered as an appetite for long term wealth maximization may result in
important determinant of a firm’s capital structure and a better monitoring and low agency conflicts (Chen et al.,
larger board with female representation result in the avail- 2014).
ability of more debt to the firm (Sheikh & Wang, 2012). In a The independent board can ensure transparency and face
similar manner, the presence of independent directors, not undue management pressure, as they are more cautious about
related to managers, is considered effective in reducing the their reputation and prestige (Nadeem, 2020). Relatedly, due
agency conflict between shareholders and managers. Under to better monitoring, high independence, and diligence (Li &
the framework of agency theory, a gender diverse board is Li, 2020) the females’ presence on the board increases the
considered more independent as it provides better monitor- discussion and exchange of ideas among the board members
ing of management’s action (Carter et al., 2010). The prior (Schippers et al., 2003), and their inclusion in the top man-
studies, for example, Adams et al. (2010) and Carter et al. agement team reduces systematic biases and extend social
Amin et al. 7

networks (Bass, 2019). Empirical literature provided contra- Table 1.  Sample Description.
dictory results on the moderating effects of gender diversity
Panel A: Selection procedure  
in family-owned firms. While, Ararat et al. (2015), for exam-
Initial observations of all listed firms for the 5,952
ple, reported positive effect of gender diversity on board period 2008 to 2019
monitoring in family-owned firms. Adams and Ferreira Less: Firm observations of financial 1,344
(2009), on the contrary, mentioned that if boards are already firms
good monitors, the female presence on board may not result Less: number of firm-year with 2,546
in better monitoring. Overall, we consider the presence of missing observations
women beneficial in strengthening the corporate governance Final sample 2,062
mechanism in the presence of family owners. Panel B: Industry-wise composition Number Percentage
On the basis of these arguments, we argue that due to Automobile assembler 125 6.06
high independence and better monitoring of management’s Automobile parts and accessories 67 3.25
action, the presence of female directors on board, meet the Cable and Electrical goods 57 2.76
desired level of governance and supplement the board char- Cement 184 8.92
acteristics, which increase the debtholders confidence and Chemical 208 10.09
consequently; increase the debt availability to the firm. We, Engineering 100 4.85
therefore; hypothesize that: Fertilizer 64 3.10
Food and personal care products 161 7.81
Hypothesis 4: The relationship between board size and Glass and ceramics 37 1.79
firm’s leverage level (Ha), board independence and firm’s Leather and tanneries 20 0.97
leverage level (Hb), CEO duality and firm’s leverage Miscellaneous 98 4.75
level (Hc) is stronger in firms with female presence on Oil and gas exploration companies 44 2.13
the board. Oil and gas marketing companies 80 3.88
Paper and board 65 3.15
Pharmaceuticals 81 3.93
Research Methodology
Power generation and distribution 116 5.63
Sample Real estate investment trust 4 0.19
Refinery 48 2.33
To construct our sample, we gathered the data from different
Sugar and allied industries 148 7.18
sections of the published annual reports of the companies
Synthetic and rayon 32 1.55
available on PSX website and the respective websites of the
Technology and communication 114 5.53
companies. Our initial sample consists of 5,952 firm-year
Textile composite 92 4.46
observations from 2008 to 2019. Firms from the financial
Textile spinning 28 1.36
industry are excluded from the sample because these firms
Textile weaving 8 0.39
are subject to different regulations that affect their financial
Tobacco 23 1.12
characteristics. After excluding the financial firms and firms
Transport 41 1.99
with missing information the final sample consists of unbal-
Vanaspati and allied industries 10 0.48
anced panel data of 226 firms and 2062 firm-year observa-
Woollen 7 0.34
tions. Table 1, depicts the summarized information of the
Total 2062  100
sample selection procedure.
Year-wise composition Number Percentage
2008 116 5.63
Variable Measurement 2009 159 7.71
2010 157 7.61
Based on the hypotheses, capital structure is a dependent
2011 164 7.95
variable in our study. Consistent with the prior literature, we
2012 175 8.49
used leverage as a proxy to measure capital structure (Chow
2013 178 8.63
et al., 2018). The leverage is calculated as ratio of total debt
2014 178 8.63
to total assets of a company. In order to determine the effect
2015 182 8.83
of corporate governance, following Haris et al. (2019) and
2016 196 9.51
He and Luo (2018), we used three proxies: Board Size, Board
2017 206 9.99
independence, and CEO duality. Board Size is measured as
2018 204 9.89
the total number of directors on the board. Board indepen-
2019 147 7.13
dence is measured using the total number of independent
Total 2062  100
directors on the board divided by total number of directors
8 SAGE Open

Table 2.  Variable Measurement and Definition.

Nature Variable Symbol Expected sign Measure Source

Dependent variable Leverage Lev ± Total debt/total assets Chow et al. (2018)
Independent variable Board size BS + Number of directors on the Haris et al. (2019)
board
  Board independence PID_BD + Independent director on He and Luo (2018)
the board divided by total
directors on the board
  CEO duality CEO_DUAL + Dummy variable, 1 if CEO He and Luo (2018)
is also a chairman, 0
otherwise
Moderator Proportion of FD_PBD + Number of female directors Nekhili et al. (2020)
female director on on the board divided by
board total board size
Control variable Firm size BS + Number of directors on the Chow et al. (2018)
Board
  Firm age F_AGE + Number of years since the Chow et al. (2018)
firm is listed on Stock
Exchange
  Return on assets ROA + Net income/total assets Chow et al. (2018)

Note. The table reports nature, symbol, expected sign, measurement, and source of all the variables used in the study.

on the board. CEO duality is a dummy variable coded 1 if the female directors on board (FD_PBD) is a proxy for modera-
chairman also holds the position of CEO, 0 otherwise. tor, gender diversity, and β4 is its regression coefficient. FD_
Consistent with the study of Nekhili et al. (2020) and Yang PBD*CG is the interaction term and β5 is its regression
et al. (2019) we measure gender diversity, our moderator, coefficient. The study also includes control variables: Firm
using the proportion of female directors on the board. Size (FS), Firm Age (F_AGE), and Return on Assets (ROA).
In order to address the endogeneity problem that might β6–8 are the regression coefficients of the control variables.
lead to biased results, in line with the study of Chow et al. To study the industry and year effect, industry and year
(2018), we employed three control variables: Firm size, firm dummy variables are added to the models. β9 is the coeffi-
age, and return on assets. Firm size is measured as a log of cient of industry and β10 is the coefficient of year. ε is the
total assets of the firm, firm age is considered as the time error term whereas i represents the firm. In order to decide
period since, the firm is listed on stock exchange, and return the appropriateness between fixed effects and random effects
on assets is measured as percentage of net income to total models, Hausman (1978) test was conducted. In all the cases
assets. Table 2, depicts the nature, symbol, expected sign, the p-value was significant (p < .05), therefore, fixed effects
measurement, and source of all variables used in the study. model was used. The panel data regression was run in Stata
15 using fixed effects to obtain the results.
Econometric Model
Empirical Results
In accordance with the hypotheses, we developed the follow-
ing model: Descriptive Statistics
Levit = α + β1 BSit + β 2 PID _ BDit The data was analyzed and descriptive statistics were
+ β 3CEO _ DUALit + β 4 FD _ PBDit obtained as depicted in Table 3. The table shows the number
of observations (N), mean (M), standard deviation (SD),
+ β 5 FD _ PBDit *CGit
minimum (Min), and maximum (Max) for all the variables.
+ β 6 FSit + β 7 F _ AGEit + β 8 ROAit The table depicts that mean of leverage (Lev) is 21.10%. It
+ β 9 industrydummy + β10 yeardummy + ε it is noteworthy that leverage fluctuates greatly between the
firms as the minimum leverage is 3% and maximum is 58%.
Leverage (Lev) is the proxy for our dependent variable, capi- The high variation represents that some firms are much hesi-
tal structure. The proxies for the explanatory variable tant to include debt in their capital structure. The Board size
Corporate Governance (CG) are Board Size (BS), Board (BS) fluctuates between 7 and 13 with a mean of 8. Board
Independence (PID_BD), and CEO Duality (CEO_DUAL). Independence (PID_BD) has a mean of 11.45%, which
β1 is the coefficient of BS, β2 is the coefficient of PID_BD, shows that independent directors hold approximately 11%
and β3 is the coefficient of CEO_DUAL. Proportion of of the proportion on the board. CEO duality (CEO_DUAL),
Amin et al. 9

Table 3.  Descriptive Statistics.

Variable N M SD Min Max

Lev (%) 2,062 21.102 17.51 3.200 58.261
BS (number of directors) 2,062 8.010 1.279 7.000 13.000
PID_BD (%) 2,062 11.450 14.64 0.000 56.100
CEO_DUAL (dummy) 2,062 0.016 0.126 0.000 1.000
FD_PBD (%) 2,062 8.165 5.780 0.000 37.500
FS (log of total assets) 2,062 22.881 1.541 19.03 26.560
Firm_age (number of years) 2,062 26.389 15.967 1.000 70.000
ROA (%) 2,062 6.510 3.041 −28.510 36.140

Note. The table reports number of observations (N), mean (M), standard deviation (SD), minimum (Min), and maximum (Max) of all the observations used
in the study.

Table 4.  Pearson Correlation Matrix.

Lev BS PID_BD CEO_DUAL FD_PBD FS Firm_Age ROA

Lev 1  
BS 0.037* 1  
PID_BD 0.117*** 0.135* 1  
CEO_DUAL −0.081*** −0.051* −0.039 1  
FD_PBD 0.075*** 0.226** 0.266** −0.013* 1  
FS 0.074* 0.040 0.036 0.064* 0.019 1  
Firm_age 0.022 0.011 0.071** 0.045* 0.119* 0.072** 1  
ROA 0.054* 0.002 0.011 0.001 0.089* 0.103** 0.020 1

Note. *, **, and *** indicate significance at the 10%, 5%, and 1% level, respectively.

our dummy variable has a mean of 0.016, which shows that method is the absence of a strong relationship between inde-
in some companies the same person serves as CEO and pendent variables. The presence of multicollinearity makes
chair, simultaneously. The proportion of female directors on the model to have a large variant, which may result in the
the board (FD_PBD) range between 0% and 38%, which spurious regression (Sheikh & Wang, 2012). In this context,
shows that few companies in our sample do not have any Gujarati (2009) mentioned that if the correlation coefficient
females on their board and some companies have approxi- is >.8, then it is suspected that multicollinearity occurred in
mately 38% female representation on their board. Since, our the model. Since all the correlation coefficients were below
sample includes the firms’ data before the introduction of this level, therefore; this problem did not exist in our data.
mandatory provision of placement of female directors on
the board, by CCG 2017, therefore; non-availability of even
a single female director on the corporate board is not sur-
Regression Analysis
prising. The mean of Firm size (FS), Firm age (F_AGE), Table 5, depicts the regression results of our hypotheses H1,
and Return on Assets (ROA), are 22.881%, 26.389%, and H2, and H3. In line with our hypotheses, we take BS, PID_
6.51%, respectively. BD, and CEO_DUAL as our independent variables. The
results show a significant positive relation between BS and
Lev (.148), and PID_BD and Lev (.141). Additionally, we
Correlation Matrix found a significant negative association between CEO_
Table 4, shows the Pearson correlation analysis of all the DUAL and Lev (−.181). All the results were significant at
variables. The table depicts various degrees of correlation 1% and 5% level of significance, which shows that our
among different variables. In line with our hypothesis, a sta- hypotheses H1, H2, and H3 are supported.
tistically significant positive correlation (.037) was found We argued that larger board and placement of indepen-
between Lev and BS. Similar results were found in the case dent directors on the board increases the confidence of debt
of Lev and PID_BD (.117). As expected, we found a signifi- providers and, therefore; result in more leverage for the firm.
cant negative correlation in the case of Lev and CEO_DUAL We further, argued that CEO duality is considered as a risk
(−.081). We also found significant positive correlation in by stakeholders and result in low availability of debt for the
case of FD_PBD in conformity with our hypothesis. One of business. The results provide theoretical support for our
the assumptions used in ordinary least squares regression arguments as we found significant positive association in
10 SAGE Open

Table 5.  Regression Estimates of Corporate Governance and Capital Structure.

Leverage

Variables Model 1 Model 2 Model 3

BS 0.148*** (0.018)  
PID_BD 0.141*** (0.041)  
CEO_DUAL −0.181** (0.068)
Firm size 0.021 (0.013) 0.020 (0.014) 0.020 (0.013)
Firm_Age 0.003 (0.003) 0.002 (0.002) 0.003 (0.002)
ROA 0.006 (0.001) 0.004 (0.002) 0.007 (0.002)
Constant 0.968* (0.335) * 1.233 (0.296) * 1.387* (0.298) *
Year effect Yes Yes Yes
Industry effect Yes Yes Yes
Observations 2,062 2,062 2,062
Adjusted R2 .281 .265 .255
F-statistics 13.42 12.49 17.25
Hausman χ2 18.12 16.27 15.24

Note. *, **, and *** indicate significance at the 10%, 5%, and 1% level, respectively. Robust standard errors in parenthesis.

Table 6.  Impact of Corporate Governance on Capital Structure—Moderating Role of Gender Diversity.

Leverage

Variables Model 4 Model 5 Model 6

BS 0.146** (0.022)  
PID_BD 0.183* (0.024)  
CEO_DUAL −0.129* (0.015)
FD_PBD 0.204* (0.018) 0.189* (0.021) 0.115*** (0.018)
BS*FD_PBD 0.222* (0.064)  
PID_BD*FD_PBD 0.152*** (0.103)  
CEO_DUAL*FD_PBD 0.179* (0.046)
Firm size 0.018 (0.013) 0.021 (0.013) 0.019 (0.013)
Firm_Age 0.013 (0.002) 0.012 (0.002) 0.012 (0.002)
ROA 0.017 (0.002) 0.016 (0.002) 0.017 (0.002)
Constant 0.794** (0.065) 1.230** (0.047) 1.321** (0.018)
Year effect Yes Yes Yes
Industry effect Yes Yes Yes
Observations 2,062 2,062 2,062
Adjusted R2 .254 .312 .298
F-statistics 22.15 25.27 23.57
Hausman χ2 18.21 20.54 19.27

Note. *, **, and *** indicate significance at the 10%, 5%, and 1% level, respectively. Robust standard errors in parenthesis.

case of our hypotheses H1 and H2, and negative association duality, and firm leverage. The results show that our hypoth-
in case of hypothesis H3. Empirically, our results are consis- eses H4a to H4c were supported, as we found significant
tent with the study of Alves et al. (2015) and Zaid et al. positive relationship in all cases. We argued that the presence
(2020) who mentioned that Board size and board indepen- of female on the board is considered an effective corporate
dence positively affect the firm leverage, whereas, the CEO governance measure by the stakeholders. The larger board
duality negatively impact the debt creation. with the diverse set of knowledge and skills, when supple-
In order to test our hypotheses H4a to H4c, we run the mented by creativity and new knowledge of female directors,
regression analysis using FD_PBD as a moderator. The esti- improve the confidence of lenders, resulting in more debt
mation results are depicted in Table 6. We hypothesize that creation. The results support our notion in this regard. The
gender diversity on board improves the association between results are consistent with the findings of Bokpin and Arko
board characteristics: board size, board independence, CEO (2009) and Zaid et al. (2020) who mentioned the positive
Amin et al. 11

Table 7.  The System GMM Regression Results.

Model 1 Model 2 Model 3

  BS PID_BD CEO_DUAL

Variables Coefficient t-test Coefficient t-test Coefficient t-test

Lag Lev 0.417*** 8.31 0.482*** 9.41 −0.515*** −10.08
BS 0.051 0.62  
PID_BD 0.422* 1.46  
CEO_DUAL −0.628*** −8.61
Firm size 0.140 1.52 0.116 2.08 0.011 −0.6
Firm_Age 0.014 0.65 0.016 1.61 0.013 1.03
ROA 0.013 0.44 0.011 1.31 0.018 1.48
Constant 3.401* 1.63 8.025** 2.10 1.101** 3.27
Industry effects Yes Yes Yes  
Observations 1,828 1,828 1,828  
F-statistics 28.75 30.74 31.23  
Arellano-Bond test AR (1) (z, p-value) −3.25 (0.000) −3.14 (0.000) −3.95 (0.000)  
Arellano-Bond test AR (2) (z, p-value) 1.45 (0.147) 1.35 (0.184) 1.48 (0.138)  
Sargan test (χ2, p-value) 46.43 (0.105) 38.53 (0.355) 44.52 (0.421)  
Hansen test (χ2, p-value) 43.78 (0.321) 39.18 (0.156) 41.27 (0.116)  

“Note. *, **, and *** indicate significance at the 10%, 5%, and 1% level, respectively. Robust standard errors in parenthesis.”

association between board size and firm leverage, and posi- Robustness Tests
tive moderation effect of board gender diversity.
Similarly, we argued that the presence of independent In order to check for the robustness of our results, we used
directors on the corporate board are considered as a sign of one step generalized method of moments (GMM) to exam-
transparency and tough monitoring by the outsiders. The ine our model. Table 7, depicts the results of the effect of
inclusion of female directors further strengthens the lender’s corporate governance on capital structure, whereas; Table 8
confidence and result in more debt availability for the firm. shows the interaction effect of gender diversity on our
Our argument was supported as we found significant results model. Our findings remain the same even after controlling
of gender diversity on board independence and firm lever- for the endogeneity issues. We found positive association in
age. The results are in line with the study of Alves et al. case of board size and board independence, and negative
(2015) and Zaid et al. (2020) who reported the positive effect association in case of CEO duality. Similarly, consistent
of gender diversity on board independence and firm capital with earlier findings, we found positive impact of gender
structure. diversity on the nexus.
Moving ahead, the moderating effect of gender diversity
on our third measure of corporate governance, CEO duality,
Summary and Conclusion
was significant and positive. Our hypothesis H4c was sup-
ported. Although, we found negative association between This study attempt to investigate the effects of corporate
CEO duality and leverage under our hypothesis H3, how- governance on capital structure of the firm using the panel
ever; the interaction with FD_PBD revealed positive data comprising of 2062 firm-year observations for the
results. We argued that CEO duality, where same person is period 2008 to 2019. Contextually, we used three measures:
serving as a Chairman and CEO, is not desired by stake- board size, board independence, and CEO duality, as a proxy
holders as it may result in abuse of power. The undesirable for corporate governance, and firm leverage as a proxy for
effects of CEO duality are mitigated by the inclusion of capital structure. The study seeks to extend as well as make
female directors on the board, which is confirmed by the number of contributions to the extant literature. First,
change of sign from negative (in case of direct effects) to although most studies have investigated the impact of corpo-
positive (in case of indirect effects). The gender diversity, rate governance on firm performance, risk taking, and corpo-
therefore; improves the credibility of firm in the eyes of rate social responsibility, amongst others, our study adds to
lenders. Empirically, our results are consistent with the the limited literature on effects of corporate governance on
findings of Alves et al. (2015) and Zaid et al. (2020) who capital structure. Second, we respond to the call by Zaid
mentioned the positive impact of female presence on the et al. (2020) to analyze the association between corporate
CEO duality and capital structure. governance and capital structure by focusing on an emerging
12 SAGE Open

Table 8.  The System GMM Regression Results (Interaction Effect).

Model 4 Model 5 Model 6

  BS PID_BD CEO_DUAL

Variables Coefficient t-test Coefficient t-test Coefficient t-test

Lag Lev 0.454*** 8.15 0.472*** 8.96 −0.326*** −6.22
BS 0.070* 0.46  
BS × FD_PBD 0.204* 0.24  
PID_BD 1.240* 0.96  
PID_BD × FD_PBD 8.211* 1.32  
CEO_DUAL −0.461* −0.46
CEO_DUAL × FD_PBD 12.42** 1.37
FD_PBD 1.324* 0.17 1.058* 0.54 6.187** 2.66
Firm size 0.136 1.22 0.432* 1.87 0.013 0.47
Firm age 0.119 0.66 0.133 1.28 0.104 0.53
ROA 0.113 0.43 0.221 1.57 0.112 1.31
Constant 3.964* 1.86 9.713** 2.12 0.32 0.58
Industry effects Yes Yes Yes  
Observations 1,828 1,828 1,828  
F-statistics 17.85 18.25 70.09  
Arellano-Bond test AR (1) (z, p-value) –4.00 (0.000) –3.75 (0.000) –3.82 (0.000)  
Arellano-Bond test AR (2) (z, p-value) 1.39 (0.164) 1.31 (0.189) 1.28 (0.202)  
Sargan test (χ2, p-value) 55.17 (0.121) 35.49 (0.816) 58.03 (0.076)  
Hansen test (χ2, p-value) 41.79 (0.567) 47.80 (0.321) 33.61 (0.872)  

Note. *, **, and *** indicate significance at the 10%, 5%, and 1% level, respectively. Robust standard errors in parenthesis.

economy, and also extends the work of Sheikh and Wang individual, the lenders feel hesitant to invest in such firms.
(2012) in context of PSX listed firm by adding moderating Our hypotheses H1, H2, and H3 were supported showing
impact of gender diversity and including larger sample for the support for our argument. Our results are consistent with
the increased time period 2008 to 2019. the results of Alves et al. (2015) and Zaid et al. (2020) in this
Third, this research provides novel evidence of moderat- context.
ing impact of gender diversity on the linkage between corpo- Additionally, we hypothesize that due to strong monitor-
rate governance and capital structure in the perspective of ing skills, better decision making and effective leadership,
Pakistan. Fourth, the results contribute to the literature by the female presence serves as a guarantee for the lenders as
showing that gender-diverse boards improve the corporate to the safety of their investment, and result in more debt cre-
governance mechanism and therefore, result in availability ation for the firm. In this context, our hypotheses H4a to H4c
of more debt for the firm. Finally, the study supports the were supported, showing support for our argument, as we
CCG 2019 reforms by making the placement of female direc- found significant positive moderating impact of gender
tors’ mandatory on the corporate board by highlighting their diversity on board characteristics and capital structure. The
economic benefits for the listed firms. Overall, the results findings of our study is in line with the agency framework
suggest that gender-diversified boards benefit the firm by and also provide support for the prior studies (e.g., Abor,
improving the debt holder’s confidence and, therefore, facili- 2007; Alves et al., 2015; Anderson et al., 2004; Bokpin &
tate the firm in establishing an optimal capital structure. Arko, 2009; Zaid et al., 2020) who mentioned the positive
Based on agency theory, we hypothesized that better effect of gender diversity on this nexus. Further, we used
board characteristics result in increased debt creation. We GMM estimation approach to check for endogeneity and
hypothesized that larger and independent board positively robustness of our results, and found support for our earlier
influence the firm leverage level, and CEO duality nega- findings.
tively impacts on capital structure. We argued that, due to Pakistan is an emerging country with weak investor’s reg-
the diverse skills of majority directors, supplemented by ulations and mostly the firms listed on PSX are family owned
their independence, lender’s confidence is improved and, and controlled (Mirza et al., 2012). We based our notion on
therefore, more debt is available for the firm. Further, the the stewardship theory and argued that due to firm commit-
CEO duality is considered as a negative signal for the stake- ment and socio-emotional wealth attached, the owners’
holders and owing to the risk of abuse of power by a single exhibit steward’s behavior and consequently, their presence
Amin et al. 13

reduces the agency conflicts. Further, under the framework of The recent trends, however, highlight a significant change
tradeoff theory, we argue that due to tax advantages of the in the attitudes toward gender. With more women entrepre-
debt, the use of more debt by the firm result in higher firm neurs running businesses and majority of females employed
value. In pursuance of their desire to increase the firm value, in IT and large multinationals, the increased women empow-
the owners, therefore; in contrast to equity prefer more use of erment in Pakistan is observed. Similarly, while the CCG
debt in their capital structure (Alves et al., 2015). Our empiri- 2019 mandated the listed firms to place at least one female
cal results provide support for our argument and highlight that director on the board, the presence of 38% female directors
presence of family owners on the board of listed firms pro- on corporate boards in PSX listed firms shows the increased
vide better monitoring of management and result in wealth participation of females in corporate sector. Moreover, in
maximization. Their presence, therefore; provide positive order to address the concerns related to stereotypes associ-
signals to debt holders as to the safety of their investment and ated with gender, the fourth generation talent pool is being
interest payments. attracted by organizations by offering opportunities for
The global efforts to increase the women’s participation career progression, flexible work arrangements, and a cul-
and their appointment on the board of listed firms resulted ture of work life balance, and competitive pay (Flood, 2017).
in introduction of gender quotas for firms’ boards by differ- In addition, CCG 2019 recommended the listed companies to
ent countries (Amin et al., 2022; Terjesen et al., 2009). For arrange training for at least one female director every year
instance, federal legislation in Norway mandated the listed under the Directors’ Training program (SECP, 2019). Overall,
corporations to appoint not less than 40% of women as the organizational support and conducive environment for
directors on the board. In a similar vein, the French law career progression along with the professional training pro-
passed in 2011, demanded the presence of 40% female grams, result in the availability of qualified female director’s
directors on firm’s boards by 2017. Moreover, fair repre- pool for the firms.
sentation of women directors was also recommended by The study has some practical implications for investors.
National Association of Corporate Directors Blue Ribbon Pakistan is a developing country and challenged with politi-
Commission in USA. cal instability during the past. In order to gain the confi-
In line with the global efforts, in Pakistan, the CCG 2019 dence of investors and attract foreign investment, the
makes it mandatory for the listed firms to place at least one implications of corporate governance mechanism are inevi-
female director on their board (SECP, 2019). The major chal- table. The implementation of strict corporate governance
lenge in having women on boards include perceptions that measures in listed firms will help in improving the confi-
they lack business dynamics, are unable to achieve work-life dence of debt holders and guarantee the safety of their
balance, and possess aggressive and emotional attributes. On investment. In addition, the presence of a gender-diverse
the flip side, the biasness in favor of male exhibited by the board further increases the satisfaction level of investors
employers, lack of opportunities for career progression, and resulting in more funds availability for the firm. The find-
inequitable pay restrain the females from progressing their ings, thus; serve as a guidance for investors to evaluate bet-
career resulting in a dearth of professional female workforce. ter avenues for their investments.
Consequently, in most countries, women are underrepre- With respect to policy implications, the results of this
sented at different level in corporate sector. In order to bridge study provide insight into how firms can acquire more debt.
this gender gap, the executives are making efforts to make The results indicate that the presence of independent board
their business more attractive for female talent. Relatedly, and placement of female’s on boards result in the availability
the study made by Flood (2017) highlighted the perception of more debt supply for the firm due to improved confidence
of female talent from each of the four generations: Generation of debtholders. Moreover, the results suggest that firms with
Z, Millennials, Generation X, and Baby boomers. Overall, more independent directors are likely to issue more debt. The
their study reports that a significant thrust exists among both inclusion of independent directors on the firm board result in
employers and modern female workforce to drive change the strengthening of financial markets. In addition, the study
that fosters gender-inclusive recruitment. Since, female tal- confirms the reforms made by CCG 2019 by making the
ent is considered more valued and beneficial, therefore; once placement of female director mandatory on board. The study,
this talent has been hired, retaining this talent is even more therefore; indicates the need for undertaking further corpo-
critical. The cultural and corporate environment is signifi- rate governance reforms in this direction to reduce the agency
cantly dominated by male in Pakistan, which does not allow conflict and improve the investor’s confidence. Moreover,
females to climb the ladder on corporate boards (Mirza et al., the economic benefits of female in the top management team
2012). The disparity, therefore; exists between the male and urge the professional institutes and business schools to help
female reaching the highest echelons of the organization. women improve their professional skills and market them-
The achievement of a top position in firms by females, there- selves for these positions.
fore; by defying such biases, exhibits compelling evidence of Like other studies, this study is not without some limita-
their leadership capabilities in particularly challenging situa- tions. First, the study was restricted only to the firms listed
tions (Rosette & Tost, 2010). on PSX. The results, therefore, should be attributed to
14 SAGE Open

Pakistan’s business environment only. Future research can Altaf, N., & Shah, F. A. (2018). Ownership concentration and firm
focus on panel and time-series studies of other regions and performance in Indian firms: Does investor protection quality
countries. Second, we restrain our study to non-financial matter? Journal of Indian Business Research, 10(1), 33–52.
listed firms only. The study of this nexus in context of finan- Alves, P., Couto, E. B., & Francisco, P. M. (2015). Board of
directors’ composition and capital structure. Research in
cial firms is also an important gap that needs to be addressed.
International Business and Finance, 35, 1–32.
Third, the study only considered one characteristic of board
Aman, H., & Nguyen, P. (2013). Does good governance matter
diversity, that is, gender. The examination of other character- to debtholders? Evidence from the credit ratings of Japanese
istics of board diversity such as age, qualification, and eth- firms. Research in International Business and Finance, 29,
nicity of directors, on capital structure also serves as an 14–34.
important gap that future studies can address. Finally, future Amin, A., Ur Rehman, R., Ali, R., & Ntim, C. G. (2022). Does gen-
studies could analyze the moderating impact of other vari- der diversity on the board reduce agency cost? Evidence from
ables such as ownership concentration and foreign owner- Pakistan. Gender in Management, 37(2), 164–181. https://doi.
ship on this nexus. org/10.1108/GM-10-2020-0303
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding
Declaration of Conflicting Interests family ownership and the agency cost of debt. Journal of
Financial Economics, 68(2), 263–285.
The author(s) declared no potential conflicts of interest with respect
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board char-
to the research, authorship, and/or publication of this article.
acteristics, accounting report integrity, and the cost of debt.
Journal of Accounting and Economics, 37(3), 315–342.
Funding Ararat, M., Aksu, M., & Tansel Cetin, A. (2015). How board diver-
The author(s) received partially financial support for the research, sity affects firm performance in emerging markets: Evidence
authorship, and/or publication of this article. on channels in controlled firms. Corporate Governance: An
International Review, 23(2), 83–103.
ORCID iDs Arora, A., & Sharma, C. (2016). Corporate governance and firm
performance in developing countries: evidence from India.
Ali Amin https://orcid.org/0000-0002-1965-4042
Corporate Governance, 16(2), 420–436.
Ramiz ur Rehman https://orcid.org/0000-0001-6019-4781 Bajagai, R. K., Keshari, R. K., Bhetwal, P., Sah, R. S., & Jha, R.
Rizwan Ali https://orcid.org/0000-0002-4439-6815 N. (2019). Impact of ownership structure and corporate gov-
ernance on capital structure of Nepalese listed companies. In
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