Pakistan’s economy faces challenges of capital structure (CS), such as high debt levels, economic instability, regulatory changes and industry issues. These issues can be resolved through an effective governance structure. So, the purpose of this study is to investigate the impact of diversity in the board of directors of firms on CS.
Board diversity (BD) is measured through the women’s board member ratio, foreign directors’ ratio and board independence, while CS is measured through the total debt ratio. Secondary data is collected from annual reports of 190 listed firms at the Pakistan Stock Exchange from 2019 to 2023. The generalized method of moments is used for analyses, while for robustness, the robust least squares method is used.
The study found a significant negative effect of BD on CS. Findings are aligned with agency theory, resource dependency theory and stakeholder theories because this study suggests that BD, through mechanisms such as improved monitoring and reduced agency issues, can lead to more careful financial decisions, including lower dependence on debt.
This study extends distinct practical implications to stakeholders. It improves the recognition of how BD affects CS in developing economies. Policymakers and business managers, through effective corporate governance (CG) frameworks, lower the risk of default in firms by encouraging more diverse and independent boards.
It is a pioneer study conducted on the impact of diversity in the board on the CS and based on CG codes 2017 and 2019.
