Finance, Accounting and Business Analysis

Volume 8 Issue 1, 2026

http://faba.bg/

ISSN 2603-5324

DOI:

https://doi.org/10.37075/FABA.2026.1.02

The Influence of Ownership Structure on Capital Structure: A

Systematic Literature Review

Rehan Zahid

Meezan Bank Limited, Pakistan

Info Articles

Abstract

History Article:

Submitted 1 June 2025

Revised 30 November 2025

Accepted 14 February 2026

Purpose: This research has been conducted to find the influence of

ownership structure on capital structure and how ownership structure

influences the firm's capital structure decisions.

Design/Methodology/Approach: This research follows a systematic

literature review design, and the PRISMA Model has been applied. It

includes an examination of the existing literature on the mechanisms of

ownership structure and capital structure, along with the theories that

underpin them. Databases used for literature include JSTOR, Google

Scholar, Science Direct and Scopus.

Findings: Ownership concentration is positively related to capital

structure, which ultimately reduces the opportunistic behaviour of

managers. Government ownership is positively associated with capital

structure because the government can take debt easily, and foreign

ownership, managerial ownership and institutional ownership have an

inverse association with capital structure. The inverse relationship

between foreign ownership and capital structure is due to foreign

investors' behaviour regarding debt financing.

Practical Implications: The market may value firms differently

depending on their ownership structures and capital structures.

Countries with weak investor protection have highly influential

ownership structures, which, in turn, influence capital structure.

Originality/Value: This study describes how ownership structure

influences firms' capital structure and how debt and equity financing

play roles in this relationship.

Paper Type: Review Paper

Keywords:

Capital structure;

Institutional ownership;

Foreign ownership;

Managerial ownership;

Ownership Structure

JEL: M41, M20, G32.

Address Correspondence:

E-mail: rehanzahid333@gmail.com

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

INTRODUCTION

Corporate governance is considered an essential topic following the manipulation of major

corporations such as WorldCom and Enron. Corporate governance concerns the supervisory system of firms

and the legal framework governing interactions among managers and shareholders (Alghadi and Aizyadat

2021). Capital structure and corporate governance have attracted the attention of many researchers over the

last two decades. Ownership structure mechanisms include managerial ownership, institutional

shareholders, state ownership, and foreign shareholders (Fayez et al. 2019).

Agyei and Owusu (2014) defined the ownership structure as a "committee of shareholders" that

consists of individuals and institutions with different investment horizons and capabilities. Shareholders

influence the firm's activities, including the election of directors and the nomination of the auditor. Mukonyi

et al. (2016) defined the ownership structure as the allocation of shares among shareholders. Financial

leverage influences agency cost and firm performance. Shareholders of the firm increase debt levels to

decrease agency costs. The ownership structure is a significant corporate governance mechanism influencing

capital structure decisions. Capital structure can be interpreted as how firms capitalize their various sources,

which are equity and debt. (Bruslerie and Latrous 2012). Debt comprises bonds and notes payable, while

equity comprises common stock and preferred stock (Alipour et al. 2015).

Financial decisions are vital to a firm's management because they significantly influence its value.

The primary role of financial management is to increase shareholder wealth by aligning the benefits of both

managers and shareholders. The choice of capital structure is a controversial topic in financial management

(Masood 2014). Capital structure gained importance for its influence on a firm's value, increasing

shareholders' wealth and firm profitability. Financing decisions are among the most challenging in the

current era because they influence a firm's profitability and liquidity (Farhangdoust et al. 2020). The firm

needs funds to finance its operations and continue its day-to-day activities. Capital structure reduces firms'

cost of capital and provides substantial investment opportunities that enhance firm performance (Ahmed et

al. 2023).

The MM irrelevance theory explains the significance of capital structure in increasing shareholder

wealth; it posits that an appropriate capital structure is essential for achieving the objectives of financial

management. Agency theory posits that an optimal mix of equity and debt reduces agency costs. Trade-off

theory posits that an optimal capital structure can be achieved by using debt, as it provides tax-shield benefits

to firms. Pecking order theory posits that firms initially utilize internal funds and retained earnings, then

borrow, and, at last, prefer equity finance (Modigliani and Miller 1958).

Ahmad and Nawaz (2018) argued that equity position can be strengthened through the distribution

of common stock, retained stock, and retained earnings. The financial structure of firms is an integral matter

that requires close attention to the use of equity and debt. The main aim of financial managers is to decrease

the cost of capital and enhance shareholder wealth. Debt financing contains fixed costs; for this reason, it

is attractive for managers. Debt is cheaper because, if one aspect of debt financing is considered, it is a tax

saving. One disadvantage of debt financing is increasing financial risk (Masood 2014).

Previous research has been found on the topic of corporate governance and capital structure by using

various factors of corporate governance included Thakolwiroj and Sithipolvanichgul (2021), Damina et al.

(2022), Alnori and Shaddady (2019), Ezeani et al. (2022), Feng et al. (2020), Grabinska et al.

(2021), Abobakr and Elgiziry (2016) but very few research had been found on the topic of ownership

structure and capital structure, mainly factors of corporate governance include institutional ownership and

foreign ownership but this research consists of 5 types of ownership structure.

Research Question:

What is the effect of ownership structure on the capital structure?

Objective of the study:

To examine the influence of ownership structure on capital structure.

Problem Statement:

Efficient corporate governance is important for attracting capital from the market, and managers are

motivated to increase shareholder wealth under such practices (Sheikh and Wang 2012). The ownership

structure influences capital structure decisions because large shareholders effectively monitor managers'

opportunistic behaviour, and debt also mitigates the agency problem. Firms utilize debt because it enhances

firm value, and firms that have efficient external financing opportunities increase shareholder value

(Mukonyi et al. 2016). Numerous investigations have been conducted on the topics of ownership structure

and capital structure, but very few studies have been conducted in developing economies like Pakistan. Most

Pakistani research has focused on managerial ownership and ownership concentration, such as Masood

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

(2014), Shahzad et al. (2017), Shoaib and Yasushi (2008), Ahmad and Nawaz (2018), Khan and Wasim

(2016), and Murtaza and Azam (2019). However, this study covers five major categories of ownership

structure to fill the existing gap.

LITERATURE REVIEW

Ownership Concentration and Capital Structure

Sheikh and Wang (2012) suggest that ownership concentration reduces agency problems between

managers and shareholders because block holders closely monitor managerial decisions. Block holders

demand high debt levels because debt is cheaper than equity. Rossi and Cebula (2016) found a positive

relationship between capital structure and ownership concentration. Paramananthama et al. (2018) found

an inverse relationship between capital structure and ownership concentration, as concentrated owners are

important players in the decision-making process. Sheikh and Wang (2012) found that ownership

concentration is significantly and positively associated with capital structure. This result suggests that block

holders can force managers to take on high debt to reduce managers' opportunistic behaviour. Farooq

(2015) found an inverse association between capital structure and ownership concentration. This outcome

is consistent with agency theory and information asymmetry because a high debt level increases the

monitoring by creditors to avoid it. Fayez et al. (2019) found that ownership structure has a significant

relation with capital structure. Feng et al. (2020) found a positive relationship between ownership

concentration and capital structure, as major shareholders play a significant role in alleviating agency

problems by using high debt levels, which supports agency theory.

Managerial Ownership and Capital Structure

Naseem et al. (2017) suggest that when managers have ownership in a firm, they are not involved in

obtaining personal benefits; managerial ownership mitigates agency conflict by aligning the interests of

managers and shareholders. Sheikh and Wang (2012) found an inverse association between capital structure

and managerial ownership. According to agency theory, this result suggests that higher managerial

ownership aligns the interests of shareholders and managers and that debt is a powerful tool to reduce the

agency problem. Naseem et al. (2017) found that managerial ownership is positively associated with capital

structure. This suggests that higher managerial ownership increases the debt-to-equity ratio and aligns

manager and shareholder interests. Agyei and Owusu (2014) found a positive association between capital

structure and managerial shareholding by decreasing agency costs and aligning interest of managers and

shareholders. Wellalage and Locke (2015) found an inverse association between capital structure and

managerial ownership. Managerial ownership is an efficient tool to reduce agency conflict. Closely held

firms have lower debt levels than non-closely held firms. Fosberg (2004) found that managerial ownership

is inversely associated with capital structure, as it reduces agency costs. Phuong and Tannous (2016) found

a positive and significant association between managerial ownership and the debt ratio because managers

with firm shareholdings increase the firm's value by using a higher debt level, which in turn decreases agency

problems. Thakolwiroj and Sithhipolvanichgul (2021) found a positive relationship between capital structure

and managerial ownership, as managers with firm shareholdings use more debt to enhance firm value.

Institutional Ownership and Capital Structure

Fayez et al. (2019) suggest that institutional investors mitigate the agency problem by closely

monitoring managers and ensuring that managers act in shareholders' interests. Agyei and Owusu (2014)

found that institutional ownership is positively related to capital structure. Institutional shareholders

efficiently monitor the managerial opportunistic behaviour. Rossi and Cebula (2016) found an inverse

relation between institutional shareholders and capital structure. Mukonyi et al. (2016) found an

insignificant, positive relationship between institutional shareholdings and capital structure. Abdul-Qadir et

al. (2015) found an insignificant relationship between institutional shareholdings and capital structure

because institutional shareholders are unable to put pressure on managers. Michaely and Vincent (2012)

found a significant, inverse association between institutional shareholdings and capital structure because

institutional owners force managers to increase shareholder value rather than pursue their own self-interest;

this is known as the active monitoring hypothesis. Hussainey and Aljifri (2012) found that institutional

ownership is inversely related to capital structure and it is not associated with active monitoring hypothesis.

Abdoli et al. (2012) found a positive relationship between institutional ownership and capital structure, due

to its easier access to funding sources. El-Habashy (2018) found that institutional ownership is inversely

related to capital structure, supporting pecking order theory. Lotto (2013) found that an inverse statistically

significant association exists between institutional ownership and leverage. Firms having a large proportion

of shares held by institutions, on average, have low leverage ratios. This result supports the capital structure

theory, which predicts a substitute relationship between institutional holdings and leverage. Masood (2014)

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

found an insignificant relationship between capital structure and institutional ownership because

institutional investors do not play an active monitoring role.

State Ownership and Capital Structure

Abobakr and Elgiziry (2016) found that state ownership is positively associated with capital structure

because the government raises short-term debt. After all, it is easy to obtain. The negative relation suggests

state owners have not played their role to the maximum level, which influences managers' moral hazards

leading to low debt levels (Feng et al. 2020). Naidu (2024) found that state ownership positively related to

capital structure because of firms with high percentage of government shareholding, these firms can easily

borrow debt due to government support for those firms. State ownership is positively related to the debt ratio

because the government pressures lenders to lend to state-owned firms (Liu et al. 2011). Hafez (2017) found

an inverse and insignificant association between government ownership and capital structure because

government-owned firms are not very interested in using high debt levels. Grabinska et al. (2021) found that

government ownership is negatively related to capital structure because the government as a leading investor

is unwilling to take risks that is why the financing structure of those firms decreases.

Foreign Ownership and Capital Structure

Ahmad and Nawaz (2018) defined foreign ownership as foreign investors who are not residents of

the home country but who control the business in that country. Mukonyi et al. (2016) found an inverse

association between foreign ownership and capital structure. Ahmad and Nawaz (2018) found that foreign

ownership is negatively related to capital structure because foreign investors favour low debt levels,

consistent with the pecking order theory, which posits that firms utilize internal funds rather than debt and

equity financing. Thai (2017) found an inverted U-shaped association between foreign ownership and capital

structure because Vietnamese firms are predominantly owned by institutions rather than individuals. The

Vietnamese government imposes many restrictions on the voting rights of foreign investors, and also requires

foreign investors to purchase a minimum number of shares in a firm. Bokpin and Arko (2009) found that

foreign ownership is insignificantly associated with capital structure because role of foreign owners is limited

and firm level specific factors determine capital structure. Nguyen and Duong (2022) found an inverse

association between foreign ownership and capital structure because firms with high levels of foreign

ownership perform better than other firms. Sivathaasan (2013) found that foreign ownership is positively

related to capital structure because foreign ownership positively impact on debt financing of firms.

Agency Theory

Agency theory postulates that agents must act in shareholders' interests when making financial

decisions, and managers must choose optimal capital structures that enhance shareholder wealth. Agency

conflict influences capital structure decisions due to conflict of interest between managers and shareholders

(Jensen and Meckling 1976). Block-holders align the interests of managers and shareholders because block-

holders, they actively monitor managers' actions when choosing capital structure. The use of high debt in

the capital structure decreases agency costs by reducing the need for equity (Jensen 1986).

The principal-agent problem arises from the separation of control and ownership between managers

and shareholders. The Board of Directors is an essential mechanism for monitoring the management to

decrease the problem of shareholders. (Jensen and Meckling 1976). Three kinds of agency conflict exist, the

first is a separation of ownership and control among shareholders and managers, the second type is a conflict

of interest among minority and majority shareholders and the third type is a conflict of interest that exists

among employees, customers, creditors, etc. The first problem mostly exists because of a dispersed number

of shareholders and every shareholder is not able to actively participate in the management activities. The

conflict between shareholders and managers decreases with debt finance, but the conflict of interest between

debt holders and shareholders increases. Agency theory postulates that a firm's optimal capital structure is

determined by minimizing agency costs arising from conflicts among stakeholders and management (Jensen

1986).

METHODS

This section outlines the methodology employed to conduct a comprehensive literature review

regarding the relationship between ownership structure and capital structure. The literature search was

conducted across multiple academic databases, including Scopus, JSTOR, Google Scholar and Science

Direct and Keywords such as ("ownership structure" OR "ownership concentration" OR "managerial

ownership" foreign ownership" OR ""institutional ownership" OR" state ownership" AND ("capital

structure" OR "leverage" OR "debt") were utilized. The time frame of (2000-2024) has been efficiently

utilized. The search was limited to peer-reviewed English-language articles. Studies investigating the

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

relationship between corporate governance and capital structure were prioritized. A total of 110 articles were

identified through keyword searches. After screening titles and abstracts for their relevance to the research

focus, 70 articles were selected for a full-text review. In the end, 45 studies were included in the final review

based on their direct relevance to the relationship between ownership structure and capital structure.

Table 1. Inclusion and Exclusion Criteria of an article

Criteria for Acceptance

Criteria for Rejection

• Articles with title of ownership structure

and capital structure

• Articles from Scopus, Web of Science

indexed mostly focused

• Articles published only in English included

• Article with full length included

• Articles with empirical and theoretical

results included

• Quality articles have been selected

• Non-English language article were not included

• Review reports, books review, surveys and

conference papers were not included

• Unpublished work of authors not included

• Articles with missing records also excluded

• Articles with sufficient data has excluded

• Duplication of an article excluded

PRISMA

Flowchart

Steps included in literature review through PRISMA have been shown below

Figure 1. Flow chart represents extraction of data Source (Authors’ Own Compilation)

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

CONCLUSION

This research aimed to investigate how various aspects of ownership structure influence a firm's

capital structure decisions, and the results offer compelling evidence that ownership characteristics

significantly impact financing choices. In line with existing literature, the findings reveal that ownership

concentration and government ownership are positively correlated with capital structure. A greater level of

ownership concentration reduces managerial opportunism by enhancing oversight and aligning decision-

making with the interests of dominant shareholders, thereby promoting increased utilization of debt

financing. Likewise, the positive correlation between government ownership and capital structure highlights

the distinct advantages that government-linked firms possess—especially their improved capacity to access

debt markets due to perceived lower risk and more substantial financial support. On the other hand, the

study found that managerial, institutional, and foreign ownership are negatively correlated with capital

structure. The inverse relationship between managerial ownership and leverage indicates that when

managers hold equity stakes, their interests align more closely with those of shareholders, leading them to

prefer lower debt levels to minimize financial risk and safeguard firm value. The negative association

between foreign ownership and capital structure supports the idea that foreign investors are more risk-averse

and favour firms that emphasize internal financing and conservative leverage policies. Similarly,

institutional investors frequently advocate for strong governance practices and lower financial risk, which

may clarify their inclination towards reduced dependence on debt. In summary, these findings emphasize

the significance of ownership structure as a key factor in capital structure decisions. They highlight the need

for firms, policymakers, and investors to consider ownership composition when assessing financial strategies

and corporate governance frameworks.

GAP

Many theories argue that concentrated ownership leads to greater debt financing, while others argue

the opposite. This outcome needs to be clear. Emerging markets are not entirely focused; theories are based

on developed markets, and outcomes must be based on both emerging and developed markets for better

results. Macroeconomic variables and industry-specific characteristics were not discussed in the literature,

while the influence of ownership structure on capital structure was suggested. The literature has primarily

focused on large corporations, but small and medium-sized enterprises have been ignored. Research is

needed that focuses only on small and medium enterprises. Factors in regulatory changes have also been

ignored in the literature, which significantly influence firms' capital structures. Longitudinal changes need

to be consulted to determine regular changes in firms' capital structures.

LIMITATIONS

Country-specific factors have been ignored, including a country's legal system and investor protection

laws. Theories based on the law of developed countries do not apply to developing countries. Literature

mainly focused on static ownership structure, but the structure of a firm changes due to mergers and

acquisitions. Theories, including the entrenchment hypothesis, explain manager behaviour; this factor

weakens the theoretical amplifications.

RECOMMENDATIONS

Firms ought to provide comprehensive disclosures regarding ownership distributions (such as insider

versus institutional ownership) to facilitate effective capital structure analysis and strategic planning. They

should tailor their capital structure strategies, including the debt-equity ratio, to align with the objectives and

risk appetites of their primary stakeholders. It is advisable to promote a balanced concentration of ownership

alongside robust governance practices to guarantee that capital structure decisions benefit all shareholders

fairly. In firms characterized by inadequate oversight, such as those with widely dispersed ownership, it is

prudent to use debt to mitigate managerial self-interest. Ownership and financing strategies should be

tailored to the country's specific context, taking into account regulatory environments, enforcement strength,

and market maturity. Firms must routinely evaluate the impact of ownership on their capital structure and

modify their policies as necessary.

FUTURE INSIGHTS

Analyse the impact of various types of institutional investors, such as passive versus active and

domestic versus foreign, on leverage decisions and risk tolerance. Investigate how ownership concentration

interacts with macroeconomic factors such as inflation and recessions to shape capital structure. Examine

Rehan Zahid / Finance, Accounting and Business Analysis, Volume 8, Issue 1, 2026

the effects of ESG-focused ownership on the utilization of debt, green bonds, and other innovative financing

mechanisms. Assess how venture capital and private equity ownership influence capital structure decisions,

particularly in rapidly growing industries. Conduct comparative analyses of how different national

governance frameworks, including common law and civil law, affect the relationship between ownership

and capital structure. Evaluate the implications of decentralized ownership on debt issuance, investor

protections, and the overall cost of capital. Investigate the impact of inter-generational shifts in ownership

on preferences for debt versus equity. Consider how political factors and state ownership affect leverage

decisions, particularly in key strategic sectors. Utilize machine learning techniques to uncover underlying

patterns in ownership structures that may influence capital structure over time.

Acknowledgments

The author would like to thank the editorial team and all reviewers of the journal for their valuable time,

effort, and constructive feedback, which significantly contributed to improving the quality of this

manuscript.

Funding

This research received no external funding.

Data Availability Statement

Not applicable.

Conflict of Interest

The author declares no conflict of interest.

AI Tools Statement

All authors confirm that no AI tools were used in the preparation of this manuscript.

Author Contributions

The author confirms sole responsibility for all aspects of this work, including conceptualization,

methodology, software, validation, formal analysis, investigation, resources, data curation, writing—

original draft, writing—review and editing, visualization, supervision, project administration, and funding

acquisition.

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