Corporate governance and capital structure: dynamic panel threshold analysis

This paper examines the nonlinear connection between corporate governance (CG) and corporate leverage. Our study applied the dynamic panel threshold model (DPTM) to facilitate the capture of the nonlinear effect of CG on a firm’s leverage for Japanese listed companies. Additionally, our study sought to demonstrate the linkage between CG and the speed of adjustment (SOA), particularly following the reforms in Japan’s CG system, to reach a targeted level of leverage. The empirical findings confirm the presence of the threshold influence of managerial ownership and board size, thus confirming their nonlinear impact on capital structure. Moreover, at a low level of managerial ownership, the SOA for firms to achieve the optimal level of leverage is faster than it is for firms with a high level of managerial ownership (MO), while firms with a larger board achieve their targeted level of leverage quicker than firms with a smaller board. Our findings indicate that recent reforms in Japan’s CG system seem to have been inefficient, with no positive effect on corporate leverage.