Corporate Governance, Internal Control and Leverage: Are We There Yet?

Abstract

Corporate governance serves as a robust internal control mechanism. Literature has established that strong corporate governance improves oversight, accountability, and transparency. In the governance and leverage literature, agency theory and pecking order theory suggest that strong governance mechanisms reduce leverage, as stronger governance provides good internal control to check managerial opportunistic behaviors, preventing overinvestment and other entrenchment practices through excessive borrowing. However, leverage may itself act as an external disciplinary mechanism, thereby substituting the need for strong internal governance. Almost two decades of studies exist investigating the relationship between corporate governance and leverage without a clear direction. Furthermore, we investigate the relationship between corporate governance and the speed of leverage adjustment, revealing a consensus among many studies that firms subject to strong governance adjust their leverage more expeditiously than those under weak governance. Our current study synthesizes prior research and points toward the direction of improvement.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author(s).

DATA AVAILABILITY STATEMENT

Data are available from the public sources cited in the text.

ETHICAL STATEMENT

We note that no human subjects were involved in the research conducted for this paper.

Additional information

Notes on contributors

Emmanuel Mwaungulu

Emmanuel Mwaungulu is a dedicated accounting faculty member in the Department of Accounting at Palm Beach Atlantic University. With a passion for accounting education, he actively engages with students to enhance their understanding of key concepts. His commitment to academic excellence is evident in his teaching methods and significant contributions to the department.

Michelle Li-Kuehne

Michelle Li-Kuehne is a faculty member in the School of Business at Whitworth University. With a wealth of accounting experience, she brings a unique perspective to the field of accounting research and education. Michelle is renowned for her innovative teaching methods and dedication to preparing students for success in the business world.

Meena Subedi

Meena Subedi is a faculty member in the Department of Accounting at the University of Wisconsin-Whitewater. Meena’s research interests encompass financial reporting quality and corporate governance. She teaches financial accounting and managerial accounting at the University of Wisconsin-Whitewater.