Corporate governance and capital structure decision: insights from Oman

Queiri, Abdelbaset; Madbouly, Araby; Dwaikat, Nizar; Husain, Uvesh Article Corporate governance and capital structure decision: insights from Oman Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Queiri, Abdelbaset; Madbouly, Araby; Dwaikat, Nizar; Husain, Uvesh (2024) : Corporate governance and capital structure decision: insights from Oman, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-19, https://doi.org/10.1080/23311975.2023.2297463 This Version is available at: https://hdl.handle.net/10419/325957 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Corporate governance and capital structure decision: insights from Oman Abdelbaset Queiri, Araby Madbouly, Nizar Dwaikat & Uvesh Husain To cite this article: Abdelbaset Queiri, Araby Madbouly, Nizar Dwaikat & Uvesh Husain (2024) Corporate governance and capital structure decision: insights from Oman, Cogent Business & Management, 11:1, 2297463, DOI: 10.1080/23311975.2023.2297463 To link to this article: https://doi.org/10.1080/23311975.2023.2297463 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. Published online: 16 Feb 2024. Submit your article to this journal Article views: 2314 View related articles View Crossmark data Citing articles: 4 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Accounting, corporAte governAnce & Business ethics | reseArch Article Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2297463 Corporate governance and capital structure decision: insights from Oman Abdelbaset Queiria, Araby Madboulyb, nizar Dwaikatc and uvesh husaind aManagement Department, College of Commerce and Business administration, Dhofar university, salalah, sultanate of oman; bBusiness and accounting Department, Muscat College, Muscat, sultanate of oman; cFaculty of Business, arab open university – Palestine Branch, Ramallah, Palestine; deconomics and Business studies Department, Mazoon university College, Muscat, sultanate of oman ABSTRACT this study aims to explore the impact of various board composition elements (board size, board meeting frequency, multiple directorships, and board independence) on capital structure decisions within emerging markets, specifically focusing on the sultanate of oman. the study employs a sample of 14 non-financial firms listed on the MsM30 index over seven years (2009–2015). to address endogeneity between the interrelated variables of dividends and debt ratio, an endogeneity test is performed. given that the dividend per share is an endogenous variable, the two-stage least squares (2sls) method is used for data analysis. the findings of this study indicate positive associations between debt ratio and board size, board independence and multiple directorships but negative association with board meetings frequency. Board independence serves to support the active monitoring hypothesis, and debt acts as a complementary mechanism to mitigate agency issues, larger board size results in introducing more debts in the firm’s capital structure to offset decision making complexities. Furthermore, multiple directorships increase the use of debt ratio as disciplinary mechanism to offset the busyness of board members who have several multiple directorships. however, the frequency of board meetings was found to have a negative association with debt ratio. our findings are robust to alternative measures of leverage and endogeneity. this study concentrates on a limited set of factors related to board composition. the use of debt as a substitute mechanism suggests that the followed corporate governance practices are relatively weak and may benefit from further reforms. IMPACT STATEMENT this study offers to the readers a new insight from an emerging market on the impact of board composition on financing decision. the results are of particular importance to such market, since this market has distinctive characteristics of weak external law to protect investors and it is well known by using debt as substitute mechanism of corporate governance practices. 1. Introduction Board composition is considered a key mechanism in corporate governance. through its characteristics, robust monitoring of top-management levels can be achieved (Bazhair, 2023; Boateng et al., 2022). Building on this premise, board composition fulfills its role through various mechanisms, including board size, board meeting frequency, the proportion of independent directors, and the presence of directors occupying multiple seats. the focus of this study is to investigate the relationship between these mechanisms and capital structure decisions in the emerging securities market of oman, specifically the Muscat securities Market index (MsM30). the study aims to answer the following four research questions: i) What © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group. CONTACT abdelbaset Queiri [email protected] Management Department, College of Business and Commerce, Dhofar university, salalah, P.C.211, sultanate of oman https://doi.org/10.1080/23311975.2023.2297463 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY received 21 september 2023 revised 12 December 2023 Accepted 14 December 2023 JEL CLASSIFICATION g3; g32 KEYWORDS Board compensation; corporate governance; capital structure; sultanate of oman; MsM30 REVIEWING EDITOR collins ntim, university of southampton, united Kingdom of great Britain and northern ireland 2 A. Queiri etAl. is the impact of board size, board meeting frequency, multiple directorships, and board independence on the debt ratio for firms listed on the MsM30? Most of the existing studies on the subject in oman have focused on the relationship between conventional ‘firm-specific determinants’, such as risk, profitability, tangibility, firm size, and growth, and capital structure decisions (Al Ani & Al Amri, 2015; Fernández & Brown, 2013; Khaki & Akin, 2020; Mohammadi et al., 2020; singh, 2016). While corporate governance has received considerable attention in the omani context (Bawazir et al., 2021; Queiri et al., 2021; Yilmaz, 2018), research that directly explores how cg elements shape capital structure decisions in oman remains scarce. Despite extensive investigations into this area in the developed markets, a significant research gap still exists with regard to the influence of corporate governance on capital structure decisions in the omani context. this study contributes to the literature on both corporate governance and capital structure in several ways. First, the paper investigates the impact of different dimensions of corporate governance (board size, board meeting frequency, multiple directorships, and director independence) on capital structure in an emerging market. it offers in-depth insight into the formation of capital structure through the lens of corporate governance (cg) elements, going beyond the conventional factors that have already been extensively studied in the Muscat securities Market (MsM), which operates under a specific legal regime. second, while very few studies focus on the omani case, this research specifically addresses the omani context, conducting the analysis for non-financial firms listed in the MsM30 index. the study’s findings will provide evidence from oman on how board compositions can serve as effective corporate governance mechanisms to address the agency problem, utilizing debt as a disciplinary mechanism. therefore, this research extends the theoretical evidence into the uncharted territory of oman. third, the findings of this study aim to have a practical contribution by assisting policymakers in crafting appropriate corporate governance codes of conduct by elucidating the role that cg elements play in shaping capital structure decisions and, consequently, enhancing a firm’s financial performance. currently, oman is focusing on improving its financial stability and is keen to implement rigorous corporate governance practices, as these are seen as critical mechanisms for achieving such stability. in this context, shehata (2013) has recommended further reforms for the corporate governance codes of conduct in gcc countries, including oman. While most gcc codes are more comprehensive than those in other Middle east north Africa (MenA) countries, there remains room for improvement. With this backdrop, this study aims to investigate the relationship between cg elements and capital structure decisions. the remainder of this study is organized as follows; First, a literature review provides insights into the MsM30, capital structure theories, and corporate governance in the omani context. Following this, there is a review of previous studies and the development of hypotheses. lastly, the paper presents the results along with a discussion and offers practical implications for corporate governance mechanisms and their relevance to capital structure decisions. 2. Background Beyond the influence of conventional factors on a firm’s performance and other important corporate finance decisions such as investment and capital structure decisions, there has recently been increased scholarly attention directed toward investigating the role of corporate governance elements. these elements have been examined for their relevance to firm performance, cash holding, cost of debt, and capital structure decisions (Dwaikat, 2023; hashim & Amrah, 2016; Júnior, 2022; Morellec et al., 2012; Queiri et al., 2021; Zaid etal., 2020). this focus is not new; the impact of corporate governance (cg) elements on capital structure decisions is well-documented in the literature (Feng et al., 2020; hussainey & Aljifri, 2012; Júnior, 2022; Mertzanis et al., 2023). the basis for such impact can be traced to the principle of Agency cost theory. According to Jensen and Meckling (1976), the separation between ownership and control encourages managers to act in their own best interests, leading them to shape capital structure decisions to maximize their own benefits. in this context, debt is often suggested as a mechanism to curb such opportunistic managerial behavior and to align it with shareholders’ objectives of wealth maximization. this rationale can be clarified in four ways. First, debt can act as a corporate governance mechanism grounded in the free cash flow hypothesis, where the obligation to pay fixed interest rates limits managerial discretion in spending (De la Bruslerie, 2016; Jensen, 1986; vijayakumaran & vijayakumaran, cogent Business & MAnAgeMent 3 2019). second, managers are more likely to align their behavior with shareholder interests when utilizing debt to avoid the potential risks of bankruptcy and the consequent loss of their reputations and jobs (Abor, 2008; grossman & hart, 1982). third, the scrutiny by debt-holders and financial markets induces managers to act in the best interests of shareholders. therefore, there is academic consensus in the field of corporate Finance that the judicious use of debt can effectively mitigate agency problems and consequently increase firm value. Fourth, good corporate governance will maintain an optimal capital structure (Manu et al., 2019). in other words, effective corporate governance, including board compositions, could impact capital structure decisions, potentially resulting in lower costs of debt financing. this is because the cost of debt is inversely related to board independence and board size (ronald et al., 2004). however, empirical studies have reported mixed and inconsistent findings regarding how cg elements influence capital structure decisions. For example, to highlight a few inconsistencies, Júnior (2022), vijayakumaran and vijayakumaran (2019), and hussainey and Aljifri (2012) found that board composition has an insignificant influence on capital structure decisions for latin American, chinese, and uAe stock markets, respectively. these results contradict the findings of other studies, such as those by Florackis and ozkan (2009) and Berger and heath (2007), who concluded that board size is inversely related to debt. these inconclusive results underline the need for further investigation. the inconsistency in empirical results is attributed to deeper factors. According to Mitton (2004), these mixed findings hinge on variables at both the company and country levels. Aspects like common law versus civil law systems and variations in corporate and ownership structures can contribute to these mixed results (porta etal., 1998; Queiri etal., 2021). given this background, it is unrealistic to expect that emerging markets like oman will perfectly align with findings from more developed markets. therefore, the capital structure decisions for companies listed in oman may be influenced by cg elements in a different manner, making empirical validation necessary. 3.Theoretical literature review 3.1. Capital structure theories under certain assumptions, the seminal work of Modigliani and Miller (1958) concluded that the means of financing whether through debt or equity is irrelevant to a firm’s value. however, when these assumptions are relaxed to account for factors such as asymmetrical information, taxes, and bankruptcy costs, it becomes evident that capital structure is indeed a relevant factor in determining a firm’s value. consequently, the relevance proposition emerged. various theories have extensively discussed the mechanisms by which capital structure influences a firm’s value. these include the pecking order theory, agency cost theory, signaling theory, and trade-off theory. harris and raviv (1991) categorized these theories into two groups: tax-based and non-tax-based theories. the pecking order, signaling, and agency cost theories fall under the category of non-tax-based theories. on the other hand, the trade-off theory, which considers the benefits of tax shields against the costs of bankruptcy, is a tax-based theory. All these theories hold relevance in the omani context, given that corporate tax is levied at a rate of 15% and that there is a separation of ownership and management, as is the case in other jurisdictions. therefore, this paper reviews these pertinent capital structure theories, placing special emphasis on the agency cost theory. this serves as the theoretical foundation for examining the relationship between corporate governance elements and capital structure decisions. 3.1.1. Agency theory the agency relation is defined as ‘a contract under which one or more persons the principal(s) engage another person (the agent) to perform some service on their behalf (rashid, 2016; tega, 2017) which involves delegating some decision-making authority to the agent’ (Jensen & Meckling, 1976). the theory of agency cost is premised on the notion of interest divergence between principle and agent due to the ownership and management separation. Managers may engage in actions that serve their self-interests 4 A. Queiri etAl. and are not particularly in line with the shareholder’s interests. For instance, managers can make decisions about investments that are worthless to shareholder interests, but instead, such decisions may increase manager’s perks and provide job security. the agency problem results in a higher associated agency cost due to the asymmetric information and because of monitoring a manager’s behavior to be in line with shareholders’ interests. the complexity of the principal-agent relationship sheds light on the urgent need to implement a cg system that deals with agency problems in a manner that satisfies the maximum possible number of stakeholders (Madhani, 2017). Further, agency costs should be incorporated whenever deciding whether to fiance with debt or equity (Djohaputro, 2015). in response to the agency problem, Jensen (1986) argued that debt financing could act as a substitute corporate governance mechanism to align a manager’s behavior and limit the discretion of using free cash to build their own empire. hence, financing through debt becomes a relevant approach towards increasing the value of the firm, as it subsides the agency conflict (hussainey & Aljifri, 2012). 3.1.2. Signaling theory in the context of asymmetric information, where managers possess more information about the firm’s activities than shareholders do, capital structure becomes a signaling mechanism. specifically, a firm’s choice of financing through debt can indicate to external investors that it is capable of meeting its future debt obligations, thereby signaling its future earnings potential (connelly et al., 2011). Moreover, the ability to finance through debt can signal a firm’s capacity to pay dividends to shareholders (chang & rhee, 1990). consequently, changes in capital structure serve as indicators of a firm’s financial health, making capital structure decisions relevant to market value. 3.1.3. Pecking order theory pecking order theory argues that firms prioritize internal sources of financing, such as retained earnings, over external sources like debt and equity issuance. this preference for internal financing is due to the lower associated costs, which include the cost of issuing debt (‘cost of debt’) and the cost of providing adequate returns to shareholders via equity. When internal sources are not sufficient, firms are more likely to opt for debt financing as a secondary option and consider equity issuance as a last resort. the theory, formulated by Myers (1984) and Myers and Majluf (1984), implies that more profitable firms tend to have lower leverage ratios because they can fund themselves through internal sources. 3.1.4. Trade-off theory trade-off theory proposes that firms should aim for a balanced capital structure by weighing the advantages and disadvantages of debt versus equity financing. on one hand, debt financing provides certain benefits, such as the tax shield, which reduces the firm’s tax burden. on the other hand, overreliance on debt increases the risk of bankruptcy. the associated costs of bankruptcy could potentially negate the advantages offered by the tax shield. the theory posits that there exists an optimal leverage ratio, a point at which the incremental costs of bankruptcy are equal to the marginal tax benefits accrued from the use of debt (Dwaikat et al., 2014). 3.2. Omani context 3.2.1. Corporate governance and debt structure in Oman Firms in the MenA region heavily depend on debt to form their capital structure. however, oman reportedly has an average debt ratio of 47%, one of the highest in the MenA region (Mertzanis et al., 2023). the MenA region shares common characteristics that complicate the relationship between corporate governance and capital structure decisions (oehmichen, 2018). For instance, countries in the MenA region have weak corporate governance systems, making it difficult to secure property rights and financial contracts. these countries offer lenient guarantees and collateral against borrowing. the capital markets in these nations are less efficient, and information is generally more asymmetric compared to cogent Business & MAnAgeMent 5 developed markets (eldomiaty, 2007). these characteristics contribute to an unclear connection between governance and financing decisions in the MenA region (Mertzanis et al., 2023). Furthermore, Feng et al. (2020) argued that centralized ownership, coupled with a lack of external governance mechanisms, may result in an agency problem between major and minor shareholders. this issue becomes significant in financing decisions, as major shareholders may favor debt financing to use the borrowed resources for their own interests, regardless of the potential impact on minor shareholders (i.e. the cost of bankruptcy). omran etal. (2008) reported that Arab countries, including oman, are characterized by high ownership concentration and significant state ownership. in such a setting of highly concentrated ownership, the potential for agency problems increases. Major shareholders can use their voting rights to influence management’s decisions towards financing options that serve their own interests. Additionally, gcc countries, including oman, have a distinct ownership structure characterized by large state ownership (Al-saidi & Al-shammari, 2015). the average state ownership is estimated to be around 8%. According to institutional theory, the presence of large state ownership can mitigate agency problems, as it reduces asymmetric information and protects the rights of minor shareholders (pillai & Al-Malkawi, 2018). however, Micco et al. (2007) argued that state ownership could lead to conflicts of interest, political interference, and weak managerial oversight, which could exacerbate agency problems. Queiri etal. (2021) empirically substantiated the negative relationship between state ownership and firm performance for firms listed on MsM30. in relation to oman, the establishment of corporate governance codes dates back to the 2000s, with oman being the first country in the region to introduce such codes in 2002, followed by many other countries in the MenA region (Amico, 2014). in 2016, a new version of the ‘code of corporate governance for public listed Firms’ was issued by the omani capital Market Authority. the objective was to establish a binding and optimal framework for corporate governance to ensure fairness, transparency, and accountability in the capital market. this ultimately reduces agency problems and improves overall firm performance. in this regard, the revised code contains specific requirements for board composition. the selection of independent directors follows certain conditions, such as not being executive directors, not owning more than 10% of the firm’s shares (including parent, sister, and subsidiary firms), and representing more than one-third of the board with a minimum of two independent directors. they should also not be a director of the parent company or any subsidiary or associate companies, and should not have been a senior executive of the company or its affiliates during the two years preceding their candidacy or nomination to the board. the board of directors is required to conduct at least four meetings a year. unlike in Western and chinese contexts, the code specifies more stringent criteria regarding independent directors’ ownership: it should not exceed 1%, and they should not be among the top 10 shareholders (Feng etal., 2020). Moreover, the omani revised code does not specify board size requirements for listed companies, whereas board sizes in Western countries typically range from 5 to 19 members. 3.2.2. A Glance over MSM 30 the MsM30 index was established in 1992 as a benchmark for assessing the performance of other securities listed on the Muscat securities Market (MsM). the index comprises 30 firms from diverse industries, which can generally be categorized into financial and non-financial sectors. companies listed in MsM30 share several common attributes: they are considered to be among the most profitable, liquid, and well-capitalized compared to other firms in the market. the MsM authority follows specific inclusion criteria for firms to be indexed in MsM30. such firms should have a significant size, represented by a high market capitalization of no less than 40%. Additionally, these firms should demonstrate profitability of at least 15% and a liquidity indicator of 45% or higher (Queiri et al., 2021). over the years, several companies have maintained their listings on the MsM30, becoming primary targets for both local and international investors due to their strong market performance. 4. Empirical literature review and hypotheses development creating an effective board composition is crucial for mitigating agency problems. through its various mechanisms (i.e. board size, board meeting frequency, multiple directorships, and director 6 A. Queiri etAl. independence), the board can provide effective monitoring systems that enhance a firm’s financial performance, including capital structure decisions (Zaid etal., 2020). the following section reviews empirical results concerning board composition and a firm’s capital structure decisions. the following framework is proposed based on the notion of agency cost theory (Figure 1). 4.1. Board size Agency theory contends that firms suffer from fundamental agency conflicts between managers and shareholders due to the separation between ownership and control (Jensen & Meckling, 1976). in the same context, Jensen and Meckling (1976) provided further insight into this theory by defining agency relationships and identifying agency costs. According to this perspective, the board of directors, including board size decisions, can minimize manager-shareholder agency conflicts through its governance mechanisms. therefore, it would be theoretically expected that a larger board size uses less debt. nevertheless, Jensen (1993) argued that larger boards suffer from poor coordination and ineffective monitoring, and thus, firms should have a smaller board size. For a board to function effectively, its size matters. smaller boards are less likely to experience director free riding. lipton and lorsch (1992) and Jensen (1993) suggest that larger boards could be less effective than smaller boards because of coordination problems and director free riding. larger boards are associated with free-riding on fellow directors’ effort, and therefore, larger boards tend to use more debt to offset the free-riding issue. empirical studies investigating the influence of board size on debt ratios yield inconclusive results. in the literature. empirical studies support a positive relationship between board size and debt ratio (Abor, 2007; nguyen et al., 2017). these studies suggest that a larger board size complicates decision-making and increases agency costs. Due to the lack of consensus among large boards on capital structure decisions, firms tend to maintain a higher debt ratio to offset agency costs (Feng et al., 2020). Additionally, larger boards are associated with more agency problems that stem from issues related to ownership and corporate control. consequently, more debt is used to mitigate these agency problems (rehman et al., 2010). usman etal. (2019) report that a large board size is correlated with a high cost of debt. therefore, a conclusion can be drawn that the cost of ineffective communication associated with larger boards outweighs their benefits. other empirical studies support a negative relationship between board size and debt ratio (Bazhair, 2023; rehman et al., 2010; vakilifard et al., 2011). these studies draw upon resource dependence theory, suggesting that a larger board can serve as a resource pool that benefits firms, thus acting as a substitute for high debt ratios. in this way, larger boards can exercise more effective control and supervision, reducing the need for additional debt in the firm’s capital structure, and consequently lowering the cost of debt (rehman et al., 2010; vakilifard et al., 2011). some empirical evidence from the MenA region— including listed companies in oman, Bahrain, Qatar, Morocco, and the uAe—supports a negative relationship between board size and debt ratio (Mertzanis et al., 2023). similarly, Bazhair (2023) found a negative relationship in a sample of non-financial firms in saudi Arabia. these studies from the MenA region justify their findings through resource dependence theory. given these varying perspectives and drawing on agency theory, the following hypothesis is formulated: h1: Board size is associated with the debt ratio for firms listed on the MsM30. Figure 1. Proposed framework. cogent Business & MAnAgeMent 7 4.2. Board meeting frequency the agency theory posits that debt functions as a disciplinary measure to restrain managerial actions that deviate from the objective of maximizing shareholders’ wealth. the implementation of corporate governance mechanisms suggests that an increase in board meetings would lead to a rise in the utilization of debt in accordance with the disciplinary concept (Jensen, 1986). consequently, board meeting frequency is theoretically anticipated to have a positive correlation with the use of debt. however, the argument, drawn from foundational works by Jensen (1993) and vafeas (1999), asserts that frequent board meetings may not necessarily exert substantial control. this is because board directors are often too occupied to fully comprehend all the issues related to the firm, leading to a hesitancy in making decisions regarding increased debt issuance that could potentially benefit shareholders. therefore, these seminal works empirically found that the frequency of board meetings reduces a firm’s reliance on debt. it is noteworthy that chief executive officers typically set the agenda for board meetings (Jensen, 1993). Also, routine tasks absorb much of the meetings limiting opportunities for outside directors to exercise meaningful control over management. in line with this argument, ezeani et al. (2023), using samples from the uK, France, and germany, found a consistent negative relationship between board meeting frequency and debt ratio. Across all these countries, increased board meeting frequency was correlated with reduced usage of debt by firms. Another argument presented by conger et al. (1998; sharma et al., 2009) regarding the potential positive relationship between board meeting frequency and the use of debt is rooted in the idea of benefiting shareholders’ perspectives. According to this viewpoint, frequent board meetings are considered a means to effectively supervise managers, resulting in favorable outcomes for the firms’ shareholders. in the context of the Anglo-saxon corporate governance approach, it is expected that the frequency of board meetings will exhibit a positive correlation with leverage. specific to oman, board meeting should happen at least 4 times annually. But board members are often serve on multiple boards, as indicated by Al-Matari (2020) and Queiri et al. (2021). the revised corporate governance (cg) regulations neither specifically prohibit multiple directorships nor provide guidelines about them. Due to this business and multiple directorship, we expect similar to the seminal works of Jensen (1993) and vafeas (1999) that board meetings frequency is associated with the use of debt. given these contradictory findings, the following hypothesis, based on agency theory, will be tested for firms listed on the MsM30: h2: Board meeting frequency is associated with the debt ratio for firms listed on the MsM30. 4.3. Multiple directorship Jensen and Meckling (1976) argued that to curb agency conflict and to limit resultant agency costs, considerable focus is placed on the monitoring role of the board. Boards of directors are responsible for providing an effective monitoring mechanism over managers’ activities to mitigate consumption (trinh et al., 2020). the busyness hypothesis postulates that if directors become overcommitted, they might become less effective corporate monitors (clements et al., 2015). therefore, directors with multiple directorships are likely to employ more debts to offset their busyness and curb managerial activities through introducing debt as a disciplinary mechanism. on the other hand, Jensen (1993) and vafeas (1999), asserted that board directors are often too busy to fully understand all the firm’s related issues, which can result in a reluctance to make decisions about increasing debt issuance that would likely benefit the shareholders. instead, these seminal works empirically found that board meetings’ frequency reduces firms’ use of debt. Different from the notion of agency theory, another argument provided by Fama (1980), Fama and Jensen (1983) argued that a busy board that have a number of director memberships, can be an indication of his reputation as an effective monitoring of corporate managers. taking together, the managerial power theory with this positive view, we can theoretically expect a negative relationship between multiple directorships and the use of debt. stearns and Mizruchi (1993) posited those directors with multiple directorships often termed ‘board interlocking’—facilitate greater access to capital, especially when those directors also serve on the boards of financial institutions. As a result, such boards are more likely to employ debt, given their enhanced access to bank loans. From the ‘signaling quality’ hypothesis 14 A. Queiri etAl. Bazhair (2023), who observed a negative association between board size and debt ratio for a sample of non-financial firms in the MenA region and saudi Arabia. consequently, the resource dependence theory did not find support in the context of MsM30. instead, the results of this study are more aligned with agency theory. the agency theory contends that debt would act as a disciplinary mechanism to curb managerial activities that does not align with the concept of shareholders’ wealth maximization. the use of corporate governance mechanism indicates that board meeting will result in increasing the use of debt in line with notion of disciplinary mechanism (Jensen, 1986). therefore, board meeting frequency is theoretically expected to have a positive relationship with the use of debt. however, the argument developed based on seminal works by Jensen (1993) and vafeas (1999), asserted that frequent board meetings do not necessarily exert meaningful control. this is because board directors are often too busy to fully understand all the firm’s related issues, which can result in a reluctance to make decisions about increasing debt issuance that would likely benefit the shareholders. therefore, these seminal works empirically found that board meetings’ frequency reduces firms’ use of debt. chief executive officers almost always set the agenda for board meetings (Jensen, 1993). Moreover, routine tasks absorb much of the meetings limiting opportunities for outside directors to exercise meaningful control over management. in line with this argument, ezeani etal. (2023), using samples from the uK, France, and germany, found a consistent negative relationship between board meeting frequency and debt ratio. Across all these countries, increased board meeting frequency was correlated with reduced usage of debt by firms. the second hypothesis on the association between board meeting frequency and debt ratio received supports, our results indicate a negative association. this negative association is consistent with the findings of Jensen (1993), vafeas (1999), and ezeani etal. (2023). given this negative relationship, it could be argued that frequent board meetings are not an effective mechanism for meaningful control. rather, the results suggest that board members are often too busy to fully understand all the firm’s related issues and they become reluctant to make the decision on increasing the debt. the findings of this study contradict the findings of (1986) who argued that greater number of board meetings can increase the use of debt as an effective mechanism of corporate governance. Furthermore, ezeani et al. (2023) argued on the negative association between board meetings and debt that board meeting is an effective control mechanism within a stakeholder approach to corporate governance. therefore, firms in MsM30 may be less concerned with shareholder benefits and are less likely to issue more debt solely for shareholders’ benefit. in this respect, MsM30 shares characteristics with european countries like germany, France, and the uK, where a negative association between board meeting frequency and debt ratio has been observed. our third hypothesis was supported: there is a positive association between multiple directorships and debt ratio. this finding is in line with Jensen (1993) and vafeas (1999), trinh et al. (2020), and clements et al. (2015). the ‘busyness hypothesis’ could explain this positive relationship, suggesting that directors with multiple seats tend to issue more debt as a substitute mechanism to compensate for their limited availability and the potential agency problems arising from ineffective monitoring. oman does not have Table 9. 2sLs regression results. Model Model 1: L_D Model 2: s&t_D Variables Coef t P Coef t P DiV −3.0708** −2.39 0.017 −2.814 −1.47 0.14 inDP 0.0018** 2.44 0.015 0.002* 2.32 0.02* MDs 0.0031** 2.49 0.013 0.002 1.27 0.204 Bs 0.1041*** 4.65 0.002 0.064 2.23 0.026* BnM −0.035** −3.55 0.002 −0.033 −3.07 0.002** Roa 0.0089 1.21 0.227 0.005 0.47 0.64 Fsize 0.051** 2.87 0.004 0.094* 4.05 0.04* toBinQ −0.099 −1.11 0.268 −0.133 −1.05 0.294 sector Yes Yes Year Yes Yes R-squared 0.596 0.56 Constant −0.39 −1.3 0.19 Notes: *Relationship is significant at the 0.1 level (two-tailed). **Relationship is significant at the 0.05 level (two-tailed). ***Relationship is significant at the 0.1 level (two-tailed). cogent Business & MAnAgeMent 15 specific rules prohibiting multiple directorships, allowing directors to serve on multiple boards, which may increase their busyness. the fourth hypothesis was also supported, showing a positive association between the board independence ratio and the debt ratio. this finding is consistent with previous studies, such as those by Jensen and Meckling (1976), Bazhair (2023), Abor (2007), Kyriazopoulos (2017), and tarus and Ayabei (2016). the ‘active monitors’ hypothesis found support in the context of MsM30. independent directors, with their professional knowledge and experience, can effectively monitor managers and therefore make objective assessments of the firm’s policy decisions. such active monitoring encourages independent directors to opt for debt financing as a means to exert more disciplinary pressure on managers, as posited by agency theory. the omani corporate governance (cg) code places great emphasis on the selection of independent directors to enhance the board’s monitoring effectiveness and reduce agency conflicts. these selection criteria have contributed to improving the board’s efficacy in reducing conflicts of interest. 7. Summary and conclusion this study examined the association between board composition and capital structure decisions, grounded in the principles of agency theory. the assumption is that mechanisms like board size, board independence, board meeting frequency, and multiple directorships can effectively reduce agency problems by influencing debt levels to curb managerial tunneling activities. to some extent, our results confirm this assumption. Firstly, board independence serves as an effective tool for mitigating agency problems; a higher proportion of independent directors influences a firm’s decision to utilize more debt, thereby inducing managers to adhere to debt discipline. therefore, the emphasis on the role of independent directors in oman’s revised corporate governance (cg) code is warranted. secondly, board meeting frequency negatively associated with debt ratio, indicating that such meetings may not reduce agency problems between managers and shareholders. thirdly, a positive association between board size and debt ratio suggests that larger boards is associated with decision-making complexity, therefore, they employ debt as a disciplinary substitute, corroborating agency theory over resource dependence theory in the context of MsM30. Fourthly, directors with multiple seats are more likely to use debt as a disciplinary substitute, presumably to offset their lack of availability for effective monitoring ‘busy directors’. overall, this study validates agency theory in the context of MsM30. Firms listed on MsM30 frequently use debt as a substitute for mitigating various issues, including ‘director busyness’ and the complexities of large board sizes. there is evidence to suggest that weaker corporate governance practices necessitate greater use of debt as a disciplinary mechanism. in general, emerging markets in the MenA region are undergoing intensive reforms to align with developed countries. however, the inclusion of independent directors appears to be the most effective strategy for mitigating agency problems in MsM30, thanks to the principle of ‘active monitoring’. relying on debt as a disciplinary substitute should be minimized, with the primary focus shifted to effective board monitoring. policymakers might consider revising board size requirements and issuing guidelines on multiple directorships to foster more active monitoring and, thus more effective corporate governance. From a practical standpoint, this study supports strengthening oman’s cg code to enhance financial performance and minimize agency conflicts. While reforms were made in 2015, further improvements are needed. in response to this, a new corporate of governance code of conduct has been issued in 2021 for firms who have a government ownership. this new code of conduct is believed to strengthen the corporate governance mechanism, reducing agency problems and improve financial performance. this study comes with several limitations; first the empirical analysis has a sample size of 98 observations, which is considered relatively a small simple size. second, the effects of ownership structure on capital structure decision was not investigated in this study. third, robustness of our analysis against timing and non-linear effects were not investigated in this study. instead, we limit the robustness of our analysis against different estimators (ols vs. 2sls). Future studies on capital structure should incorporate more ownership structure variables and to increase the number of observations. in additions, future studies may address the impact of corporate governance variables on another important corporate financial decisions, including but not limited to dividends policy. other important area of research is the board diversity and how it effects corporate financial decision in omani 16 A. Queiri etAl. and gcc contexts. Moreover, there is a need to conduct further studies on how the macro-financial conditions and financial regulations impact on firms’ financing decision. Authors’ contributions All authors have contributed significantly to developing this manuscript in one way or another. Abdelbaset and nizar have contributed to the conception design of data. Baligh has contributed to critically reviewing the intellectual content of this manuscript and Araby has contributed to data interpretation and final approval of the version to be published. Disclosure statement no potential conflict of interest was reported by the author(s). About the authors Abdelbaset Queiri is an Assistant professor in college of commerce and Business Administration at Dhofar university. he has more than 30 published articles and sizable number of conference participation. his publications is indexed in scopus, proQuest and other reputable indexes. Araby Madbouly is the head of the Business and Accounting Department at Muscat college, since 2017. he is an external reviewer in the oman Authority of Academic Accreditation and Quality Assurance (oAAAQA). he was the Dean of Admission and registration at the uoJ-uAe. he holds a ph.D. degree in economics. Nizar Dwaikat works as an Associated professor in Arab open university and he is the Acting Director of Arab open university – palestine Branch. his interest covers research areas related to dividends policy, ip o firms, ownership structure and firms’ financial performance. Uvesh Husain currently working as an associate professor at Mazoon college, oman. he has ph.D. in commerce. Dr. uvesh has more than 20 publications in peer reviewed journals, and he has a special interest in microfinance, investment and international finance topics. Data availability statement the data of this article were extracted from the annual and financial reports which are available on the Muscat security Market website (https://www.msx.om/). the data is accessible from the website for the audience (open source). there is no privacy concern or restriction to share this data if it is requested. References Abor, J. (2007). corporate governance and financing decisions of ghanaian listed firms. 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