Determinants of Capital Structure: Evidence from Pakistani Panel Data

Attaullah Shah · Safiullah Khan

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

Abstract

Using two variants of panel data analysis, we attempt to find the determinants of capital structure of KSE listed none-financial firms for the period 1994-2002. Pooled regression analysis was applied with the assumption that there were no industry or time effects. However, using fixed effect dummy variable regression, the coefficients for a number of industries were significant showing there were significant industry effects hence we accepted the later model for our analysis. We used six explanatory variables to measure their effect on leverage ratio. Three of our variables were significantly related to leverage ratio whereas the remaining three variables were not statistically significant in having relationship with the debt ratio. Our results approve the prediction of trade-off theory in case of tangibility variable whereas the earning volatility (EV), and depreciation (NDTS) variables fail to confirm to tradeoff theory. The growth (GT) variable confirms the agency theory hypothesis whereas profitability (PF) approves the predictions of pecking order theory. Size (SZ) variable neither confirms to the prediction of tradeoff theory nor to asymmetry of information 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 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 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 1977The Determination of Financial Structure: The Incentive-Signalling Approach 1990Managerial discretion and optimal financing policies

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