The Impact Of The Proportion Of Independent Directors On The Optimization Of Capital Structure From The Perspective Of The Mediating Effect Of Internal Control Quality

Capital structure decision is an important part of enterprise financial management,and its reasonableness is related to whether the company can obtain financing at low cost.Besides,it plays a regulating role of financial leverage,which will have a direct impact on the company’s financial risk,profitability and long-term development.Companies have a defined target capital structure,but it is common for the actual capital structure to deviate from its defined target capital structure.Whether the capital structure is adjusted and how quickly it is adjusted depends in part on the willingness of management such as directors and officers.The percentage of independent directors in the composition of the board of directors may also change the dynamic adjustment behavior of the capital structure due to their positive impact on the corporate governance structure.Independent directors are able to mitigate the agency problem between shareholders and management,which is one of the causes of deviations in the capital structure of firms.Therefore,the research in this paper seeks to answer the following two questions:(1)Does the percentage of independent directors on the board of directors of listed companies have an impact on corporate capital structure and its speed of adjustment?(2)Does the improvement in the level of internal governance play a mediating role in this process? Therefore,the empirical model also focuses closely on the above two questions.First,the premise of exploring whether there is a dynamic adjustment behavior of the firm towards the target capital structure is to identify its optimal level.In this paper,we construct a model and perform a GMM2 S regression to linearly fit the target capital structure.The actual capital structure of the firm is examined from a static perspective to see if it is close to the fitted target capital structure.Question(1)is then answered by adding the interaction term of the proportion of independent directors and capital structure to the deformed capital structure local dynamic adjustment model.Then,the mediating effect of internal control quality is tested by referring to Zhonglin Wen’s test of mediating effect thus answering question(2).This paper concludes that: 1.the increase in the proportion of independent directors on the board of directors significantly increases the speed of capital structure adjustment.In other words,independent directors promote the dynamic adjustment of capitals structure toward its target level;2.The proportion of independent directors increases the level of internal control of the firm,which in turn accelerates the speed of capital structure adjustment.Moreover,this facilitation effect is significant only in non-state-owned enterprises,depending on the nature of the shareholding.In other words,the effect of independent directors in improving the level of internal control and thus speeding up the recapitalization of SOEs is limited.The regression results for the excess independent directors,net of the regulatory mandatory one-third requirement,are also significant,indicating that firms gain by hiring more than the required number of independent directors.The paper is divided into six chapters.Chapter 1 is the introduction,which briefly introduces the background,significance,methodology and possible innovations of the study;Chapter 2 is a briefly reviews of the literature,which compares the research results of domestic and foreign scholars on capital structure optimization,independent directorship and internal governance level;Chapter 3 is the theoretical analysis and the research hypothesis based on the read literature;Chapter 4 is the empirical research design,which constructs the required model based on the research questions and hypotheses;Chapter 5 is the empirical results,which are used to analyze the empirical findings;and Chapter 6 is the conclusion and recommendations.The main innovations of this paper are twofold: 1.Since capital structure decisions are essentially dynamic,they should be analyzed in a dynamic framework.Therefore,the study is expanded from the static capital structure field to the dynamic adjustment field,which can more accurately explain the actual capital structure decisions of enterprises;2.Previous literature only analyzes the relationship between independent directors and capital structure optimization,independent directors and internal control,and internal control and capital structure optimization,but does not link the three studies together.Therefore,this paper examines the process by which independent directors on the board of directors optimize the capital structure by improving the quality of internal control of the firm under the perspective of the mediating effect of the quality of internal control.It expands the field of dynamic capital structure research and enriches and develops the capital structure theory.