Determinants of capital structure across selected manufacturing sectors of Pakistan

Talat Afza

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

The present study examines the industry specific attributes of firms in Automobile, Engineering, and Cable and Electrical Goods Sectors affecting the determinants of capital structure and validates the results with Booth et. al. (2001) and Rajan and Zingales (1995) .The study uses pooled data regression model on the sample of 22 Automobile, 7 Cable and Electrical Goods and 8 Engineering Firms to identify the determinants of capital structure. The debt to total assets ratio is used as a proxy for leverage and the impact of size, profitability, tangibility of assets, cost of debt, taxes, liquidity and non debt tax shield is analyzed on leverage. It is pertinent to report that the study uses liquidity, tax and cost of debt variables which were not used in the earlier studies conducted in Pakistan on industry specific attribute of capital structure and have significant influence on debt financing decisions. The empirical results reflects that firms of these three sectors with good liquidity position and large depreciation allowances use retained earnings, followed by debt financing for growth and smooth operations and equity financing is considered as a last resort. The results supported the Static Tradeoff Theory and Pecking Order Theory.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1995What Do We Know about Capital Structure? Some Evidence from International Data 1988The Determinants of Capital Structure Choice 1991The Theory of Capital Structure 1980Optimal capital structure under corporate and personal taxation 2002Testing the pecking order theory of capital structure

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