This paper investigates the effects of foreign ownership on firm's capital structure. It is expected that there will be an increase in favor of more leverage with lower cost of debt due to the increased ability of firm's access to new external funds on more favorable terms after Foreign Direct Investment (FDI). The vast amount of studies in corporate governance literature mostly concentrates on the relationship between ownership structure and firm performance. However, this study contributes to the literature by examining the effects of ownership structure (more specifically foreign ownership) on capital structure which has well-proven determinants, such as tangibility or collateral values of assets, size, profitability, growth, earnings volatility, non-debt tax shield, uniqueness and industry classification. In this study, the authors test the determinants of capital structure in a developing country's conjecture with her different market imperfections and information asymmetries by using data of Turkish non-financial firms. A multivariate regression analysis is conducted applying step-wise regression for the model construction by using pooled data set of 143 non-financial firms listed in the Istanbul Stock Exchange (ISE) over the period from 2007 to 2008, consisting of 286 firm-year observations in total. It is found that foreign ownership is significantly negatively related to long-term leverage. The results show that size (sales), tangibility, capital expenditure ratio, profitability and liquidity are also significant determinants of long-term leverage.

This study empirically investigates the influence of foreign ownership on market and book leverages of 143 non-financial firms listed on Istanbul Stock Exchange (ISE) over the period from 2007 to 2008. There exists numerous studies explaining the relation between ownership structure and firm performance (Example: Morck et al., 1988; Mc Connel and Servaes, 1990; Jain and Kini, 1994; Holderness et al., 1999; and Himmelberg et al., 1999). But there are relatively limited studies on the relationship between ownership structure and firm's capital structure. The seminal paper by Brailsford et al. (2002) provides empirical support on the positive relation between the level of managerial ownership (insiders) and external block ownership and the leverage. Accordingly, the agency relationship between managers and shareholders has the potential to influence decision-making process in the firm which in turn potentially affects firm characteristics such as firm value and leverage.

The vast amount of empirical literature on capital structure which are mostly tested for developed markets, provides conventional determinants such as tangibility or collateral values of assets, size, profitability, growth, earnings volatility, non-debt tax shield, uniqueness and industry classification (Titman and Wessels, 1988; Harris and Raviv, 1991; and Frank and Goyal, 2009). There is indeed a gap in literature for testing the observed outcomes in different country settings. Hence, the testing of traditional capital structure variables for a developing country's conjecture with different market imperfections, information asymmetries and ownership structures (institutional and managerial differences) is a promising research area. In this paper, besides traditional capital structure variables, an institutional variable (foreign ownership), an important corporate governance variable, are added and an attempt has been made to explain the influence of foreign ownership on capital structures of ISE listed firms.

Corporate Governance Journal, Foreign Ownership, Non-Financial Firms, Istanbul Stock Exchange, Multivariate Regression Analysis, Foreign Direct Investment, Decision Making Process, Information Asymmetries, Capital Investments, Multivariate Regression Model, Debt Financing, Domestic Firms.