The study investigates the impact of multidimensional aspects of corporate governance on capital structure of manufacturing firms listed on the Karachi Stock Exchange (KSE), Pakistan during the period 2007-2012. All the manufacturing firms covered in KSE 100 index have been considered for analysis. The findings of the study suggest that the Corporate Governance Index (CGI) is statistically significant and negatively related to both measures of capital structure (i.e., total debt ratio and long-term debt ratio). This implies that sound corporate governance firms pursue lower leverage to avoid financial risk and dilution of powers. The findings of the study will help the firm managers in achieving an optimal level of capital structure. It also helps the regulatory authorities in making laws and providing institutional support to make corporate governance mechanisms more effective.

The capital structure (or financial structure) of a firm is a specific mixture of debt and equity that the firm uses to finance its operations (Abor, 2007). Capital structure decision is the essential one since the profitability of an enterprise is directly affected by such decisions (Kajananthan, 2012). The decision is important as it maximizes returns and also because of the impact it has on an organization’s ability to deal with its competitive environment (Abor and Biekpe, 2005). The firms have to decide the capital structure that will maintain sustainability and generate more wealth. According to Abor (2007), a firm can decide among many alternative capital structures. It can issue debt of a large or very less amount. It can arrange lease financing, use warrants, issue convertible bonds, sign forward contracts or trade bond swaps. In deciding a capital structure that maximizes the overall market value, firms do differ in the way they deal with the issue of optimizing capital structure requirements.

Corporate Governance Journal, Investigating, Karachi Stock Exchange (KSE), Corporate Governance Index (CGI), Securities and Exchange Commission of Pakistan (SECP), Pakistan Institute of Corporate Governance (PICG), Board Independence.