Interaction Board of Directors - Capital Structure: Integrating skills and networks

    12. Juni 2013 von Inès Chaabouni, Anis Jarbouri

    This study investigates the relationship between board of directors and company’s capital structure in context of Tunisian firms. Our research paper covers information about 73 public limited companies for the fiscal year 2010. A multiple regression analysis has been used to examine the linkage between the level of debt and board of directors traditional features on the one hand and its competencies and skills on the other hand. Measures of board’s traditional characteristics employed are size of the board, its independence and duality of leadership. However, skills of the board were measured by competencies of directors, its relational network and presence of bankers in the board. Results reveal that the size of the board and its independence positively and significantly affect the level of debt. However, the variability of that is better explained by cognitive dimension of board than by its disciplinary perspective. In fact, there is a positive relationship between the level of debt and its skills and network.


    The capital structure is one of the three financial decisions considered as drivers of firms added value, namely the investment decision, the financing decision and dividend decision. The emphasis on the financing decision is explained, firstly, by its direct relation to business continuity and secondly through its effect on the ability of the firm to deal with its competitors (Heng and Azrabijani, 2012). Thus, leaders must do their best to choose the capital structure that maximizes the value of the firm as well as its stakeholders.

    It is in this context that arises our study of the relationship between the board and the capital structure of Tunisian firms. The contribution of our research lies in the integration of new determinants related to the cognitive paradigm of directors.

    1. Characteristics of Board directors: "traditional" determinants of capital structure

    In terms of characteristics of board directors, previous studies were limited to objective measurable variables from secondary data. Board size, the fraction of outside directors and / or independent and the duality of leadership seem to be the key variables, mobilized by researchers to characterize the composition of the board.

    The empirical evidence on the relationship between corporate governance and capital structure turns out to be varied and heterogeneous. If Pfeffer and Salancick (1978) and Lipton and Lorsch (1992) found a positive relationship between the size of the board of directors and capital structure, Berger et al. (1997) and Abor and Biekpe (2006) stressed that firms with a large number of administrators have a low debt ratio. These authors pointed out that firms with large boards prefer to be financed by equity and not by debt. In addition, they assumed that the large size of the board results in a significant pressure by this mechanism to push the leader to have a low level of debt which involves enhancing value of the firm.

    The resource dependence approach developed by Pfeffer and Salancick (1978) emphasizes the fact that outside directors the company's ability to protect against external environment reduces uncertainty and capture resources that increase the funds of the company or improve its reputation. Therefore, an increase in the proportion of outside directors appears to be positively associated with a high level of debt (Jensen, 1986; Berger and al., 1997; Abor, 2007). Unlike, Wen and al. (2002) found that the number of outside directors negatively affects the level of debt. According to them, these directors tend to control effectively leaders and force them to reduce the debt to increase the value of the firm.

    The adoption of the dual structure, which means the separation between the management of the company and president of its board, is more effective to solve agency problems and improve the performance of company. Several researchers reported that the duality of leader influence not only the value of the company but also its financial decision. The results of Abor and Biepke (2006) show that the combination of leadership and presidency in the hands of one person influences positively and significantly the level of debt. In fact, Ghanaian SMEs which have the leader at the head of their board of directors have more debt than other SMEs. According to these researchers, the lack of independence of leadership causes difficulty for the Board to respond to bad decisions made by the leader. In this study 75% of firms have a cumulative structure of two functions. This is not surprising since the Ghanaian SMEs are adverse to control.

    H1: "Traditional characteristics" of the board affects the capital structure.
    H1a: The size of the board has a positive impact on the level of debt.
    H1b: The independence of board positively affects the level of debt.
    H1c: The duality of leadership positively influences the level of debt.

    2. Skills and networks of board directors: new determinants of capital structure

    As a central element of organizations, the Board of directors is reviewed in the light of his abilities, knowledge, expertise and relationships. Previous studies on the cognitive perspective have focused mainly on the impact of these skills on the value of the company. Moreover, Lynall and al (2003) argue that the recruitment of experienced administrators can compensate the lack managerial competence. In this context, the work of Sapienza and al. (1996) show that in some countries (the United States, Britain, France and Germany), the contributions of board are mainly based on the specific knowledge and skills of directors.

    While many countries prohibit the recruitment of administrators who work in a firm of the same industry, many companies prefer to recruit directors who have experience in the same industry as their skills in the field. These skills are necessary for effective decision making. In this context, Abor and Biepke (2006) find a positive and significant relationship between responsibilities of the Board and the debt ratio of Ghanaian SMEs. This means that firms with more experienced members of their boards use more debt in their capital structure.         

    The integration of the cognitive dimension in director’s board refers to the understanding of network administrators to highlight the role of relationships of these agents in facilitating knowledge exchange and providing information. These relations facilitate not only the strategic decision-making but also the creation of new strategic opportunities. In this context, the relational mechanisms allow, on the one hand the co-ordination between the directors and other officers and on the other hand to facilitate access to resources useful for decision making (Charreaux, 2003).

    H2 : The cognitive dimensions of the board affect the capital structure.
    H2a : The skills of Board have a positive impact on the level of debt.
    H2b : The board network positively affects the level of debt.

    3. The impact of the board on the capital structure: An empirical study

    Our target is to analyze the impact of the board on the capital structure of Tunisian companies, for this, we study the relationship between the level of debt of these firms, on the one hand, and "the traditional characteristics", skills and networks of their boards on the other hand. The necessary information for this study are collected from the website of the Tunisian Securities Exchange (Tunis Stock Exchange) and through the questionnaire distributed to managers of firms of our sample. Finally, it should be noted that the various data are related to the year 2010.

    3.1. Sample

    The determination of sample size is the result of a compromise between the need for a large sample to obtain statistically significant results and the need for detailed information on directors which implies work on a relatively small sample. Faced to these constraints, we decided to study listed and unlisted Tunisian public limited companies operating in various industries. The final sample was constituted of 73 companies,

    3.2. Measurement of dependent variable: the level of debt

    To study the impact of firm characteristics on the Malaysian capital structure, Suhaila and Mahmood (2008), used as a measure of the level of debt the ratio "total debt / total assets." This same measure is established by Wen et al. (2002) and Heng and Azrbaijani (2012). In pursuing these authors, we measure the level of debt of Tunisian firms by the ratio:

    Debt = Total debt / Total assets

    3.3. Measurements of independent variables

    Independent variables include 2 types: some are related to traditional features of the board, while others focus on the cognitive dimensions of Directors.

    3.3.1. Measurments of  ‘traditional’ characteristics of the Board
    • The size of the Board: the size of the board is given by the number of directors serving on the board of the company.(Berger and al., 1997; Anderson and al., 2004; ...).
    • Independence of the Board: This is a variable that measures the independence of the board. It is given by the percentage of board members classified as independent.
      The independent directors are neither shareholders nor managers in business or having family relationships with leaders and more generally do not have significant contractual relationship with the company (ElGaied and Rachhi; 2008).
    • Duality leadership: Biepke and Abor (2006) and Bodaghi and Ahmadpour (2010) measured the combined functions of leadership and presidency by a binary variable taking the value 1 if the CEO is also chairman of the board and 0 otherwise. We adopt the same measure to test our model.
    3.3.2. Measurements of knowledge dimensions of the Board

    Measurement of Human and relational capital of the board is based on a series of 9 questions, measured on Likert scale of 5 points, highlighting expertise and network of administrators and their impact on financial decision making (Table 4).

    Table 4: Items measuring the knowledge dimensions of the Board


    In order to determine the ideal level of debt, administrators rely on the advice of their social relations.

    Administrators often provide intermediation with certain actors in the external environment

    The relational network administrators with the company to receive more credit.

    Network administrators facilitate access to financial resources.

    Relations allow administrators to have credit at lower cost.

    The board is dominated by members with experience in management and general management.

    The board of directors is dominated by members with technical expertise

    The board of directors is dominated by members with financial expertise

    The board of directors is dominated by members with legal expertise

    To ensure the reliability of the measurements, we based on Cronbach's alpha (Renoui, 2009; Lepage, 2011). We were forced to remove a few items to get a Cronbach's alpha value (equal to 0.723) acceptable (> 0.7 as a conservative measure).

    In addition, through a principal component analysis, we provided two factorial axis representing the two types of cognitive contribution previously highlighted: network administrators (axis 1) and skills (axis 2). Table 5 below summarizes the factor scores on the two axes.


    Table 5: factorial Axes

    Axis 1

    Axis 2

    In order to determine the ideal level of debt, administrators rely on the advice of their social relations.



    Administrators often provide intermediation with certain actors in the external environment



    The relational network administrators with the company to receive more credit.



    Relations allow administrators to have credit at lower cost.



    The board is dominated by members with experience in management.



    The board of directors is dominated by members with technical expertise



    The board of directors is dominated by members with financial expertise



    Extraction Method: Principal Component Analysis. Rotation Method: Varmax with Kaiser Normalization. Rotation converged in 3 iterations

    3.4. Results interpretation

    We carried out bivariate analysis to determine a priori the relationship between the levels of debt on the one side and the characteristics of the board, its skills and networks.

    Table 6 : Correlation Matrix













    - 0,021





















    ** the correlation is significant at  0,01 (bilateral)

    According to the correlation matrix, we note that correlations between the explanatory variables are significant at the 1% level. However, these correlations do not set multicollinearity problems since they are less than 0.7 (Tybout and al., 2001).
    To test our hypotheses, we performed the test of 2 statistical models linking the level of debt and its determinants:

    • The first model tests the impact of the traditional features of the board on debt level.
    • The second model studies the effect of the characteristics of board and its interpersonal and human skills.
    Table 7 : Regression Results

    Model 1

    Model 1




    Size of the board



    Duality leadership



    Independence of the board










    • Based on these results, we can conclude that the disciplinary perspective of the Board explains only 19.8% of the variability in the level of debt. While it is best explained based on the cognitive dimension (31.2% explained using networks and skills). To determine their financial structure, Tunisian firms rely primarily on the advice and skills of administrators rather than on the characteristics of the disciplinary body.
    • By studying the Board in its traditional disciplinary component, we find that, as expected, the size of the board and its independence positively and significantly affect the level of debt, which amounts to retain the hypotheses H1a and H1b. These results are consistent with those of Abor (2007) who explains this relationship through that the board size is more subject to control by settlement bodies, thereby pushing directors to require a high levels of debt to enhance the value of their business.
    • The combined functions of management and chairman of the board of directors has no effect on the level of debt that is in agreement with the results found by Bodaghi and Ahmadpour (2010) in the context of Iranian listed firms.
    • The confirmation of the hypothesis H2, postulating the existence of a positive relationship between skills and networks of the board and the level of debt is an empirical argument in the direction of work of Charreaux (2003), Chhaochharia and Grinstein (2007) and Amaro De Matos and Ferreira (2010). These authors consider that one of the major contributions of the board is its ability to transmit information, to reduce asymmetry between agents and the market.


    Given the importance of the "Board of Directors", it seems that a single theory can not be sufficient to explain the impact of this organism on capital structure, in particular the level of debt.

    Based on agency theory, several studies (Pfeffer and Salancick 1978; Lipton and Lorsch, 1992; Berger et al. 1997) are interested in the effect of the traditional features of the Board in determining level of debt. According to cognitive theory, these attributes must be completed by cognitive contributions and relational network of administrators in the process of making financial decisions (Charreaux, 2003).

    In Tunisian context, these new determinants seem to affect positively financial decisions of public limited companies. First, we have shown that the characteristics of the board related to the size and composition explain only partially the level of debt. Thus, the analysis will go in the direction of the diversity of determinants of board involvement as defended by Abor and Biepke (2006) and more recently by Karoui and Khlif (2010) and Jhonson and al. (2012).

    Consequently, the role of the Board of Tunisian firms is no longer limited to the reduction of information asymmetry thanks to its independence and its size but we should emphasize its cognitive contribution via human skills and relational networks of its members. Thus, the establishment of a high level of debt cannot be explained by selfishness of directors seeking to maximize their value but by their knowledge, expertise and advice provided by their relational networks.


    Abor, 2007, «Corporate governance and financing decisions of Ghanaian listed firms», Corporate Governance, 7, n°1.

    Abor and Biepke, 2006, « Does board caracteristics affect the capital structure decisions of Ghanian firms », Corporate ownership and control, 4, n°1, 113-118.

    Amaro de Matos and Feirrera, 2010, « The network centrality of influential bankers: a new capital structure determinant », working paper, Marshell School Business.

    Anderson and Reek, 2004, « Board composition, balancing family influence in S&P 500 firms», Administrative Science Quaterly, 49, 209-237.

    Berger, Ofek and Yermarck, 1997, «Managerial entrenchment and capital structure decisions», Journal of Finance, 52, n°4, 1411-1438.

    Bodaghi and Ahmedpour, 2010, « The effect of corporate governance and ownership structure on capital structure of Iranian listed companies », 7th International Conference on enterprise system Accounting and Logistics, Island, Greece.

    Charreaux G., 2003, « Le point sur les réseaux d’administrateurs et de dirigeants », Cahier de FARGO, n° 1030801.

    Chhaochharia and Grinstein, 2007, « The changing structure of US corporate boards: 1997-2003», Corporate Governance, 15, 1215-1223.

    ElGaied and Rachhi, 2009, « L’impact de l’indépendance et de la dualité du conseil d’administration sur la performance des enterprises: Application au contexte américain », Revue Libanaise de Gestion et d’Economie, n°3.

    Heng and Azrabajani, 2012, «Board of directors and capital structure: Evidence from leading Malaysian companies », Easian Social Science, 8, n°3, 123-136.

    Jensen and Zajac, 2004, « Corporate elites and corporate strategy: How demographic preferences and structural position shape the scope of the firm», Strategic Management Journal, 25, 507-524.

    Jhonson, Schnatcerly and Hitt, 2012, « Board composition beyond independence: Social capital, human capital and demographics », Journal of Management, forthecoming.

    Karoui and Khlif, 2010, « Les determinants traditionnels de la performance des conseils d’administration ont-ils encore de sens dans les PME: une étude exploratoire dans le contexte français », halshs, n°00460409, 1st version.

    Lepage Fanny, 2011, « Application de la gouvernance élargie dans les très petites enterprises: Analyse comparative des exploitations laitières France/Québec », Doctoral Thesis in Management Sciences, Université of Montpellier.

    Lipton and Lorsh, 1992, « A modest proposal for improved corporate governance », Business Lawyer, 59, 59-77.

    Lynall, Golden and Hillman , 2003, « Board Composition From Adolescence To Maturity: A Multi-theoritic View », Academy of Management Review, 28, 416-431.

    Pfeffer J. and Salancik, 1978, « The external control of organization: A resource dependence perspective », Harper and Row.

    Renoui Fanny, 2009, « Opérations participatives des marques : Pourquoi et comment faire participer les consommateurs », Doctoral Thesis in Management Sciences.

    Sapienza, Manigart and Vermier, 1996, « Venture Capitalist Governance and Value Added in Four Countries », Journal of Business Venturing, 11, n°6, 439-469.

    Tybout, Sternthal, Keppel, Verducci, Meyers-Levy, Barnes, Maxwell, Allenby. et Steenkamp, 2001, «Analysis of variance», Journal of Consumer Psychology, 10, n° 1&2, 5-35

    Wen, Rewgasria and Belderbeek, 2002, «Corporate governance and capital structure decisions of the Chinese listed firms », Corporate Governance, 10, n°2.


Das Kommentarsystem ist zurzeit deaktiviert.


Dieser Beitrag ist den folgenden Schlagworten zugeordnet