Theoretical arguments suggest that capital structure will adjust to the dynamics of the corporate governance environment. In line with this prediction, we examine the impact of board characteristics on capital structure dynamics and the speed of adjustment. Using 2690 firm‐year observations for 2009–2018, we find that firms in a stakeholder‐oriented corporate governance environment adjust their leverage faster than those in a shareholder‐oriented environment. We also find that corporate board characteristics influence firms' capital structure and speed of adjustment towards target leverage. Our findings are robust to alternative measures of leverage and endogeneity. The overall evidence supports the relevance of the corporate board's composition in both shareholder‐oriented and stakeholder‐oriented corporate governanc (CG) environments. We conclude that board composition mitigates agency conflict.

We examine the impact of board characteristics on the speed of adjustment and the capital structure dynamics of firms in bank-based economies. Using 3927 firm-year observations over a 10-year (2009–2019), we find that board characteristic influences firms' speed of adjustment in a bank-based (stakeholder-oriented) system. We also find some evidence that board characteristics have varying impacts on the capital structure of Japanese, French and German firms. We conclude that firms' capital structure reflects the corporate governance environment they operate. Our results are robust to accounting for endogeneity and alternative leverage measure.