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Does the Internal Borrowing of the Pakistani Government affect Corporate Leverage?

Author

Listed:
  • Saeed Ahmad
  • Muhammad Aamir
  • Muhammad Umer Quddoos

    (Department of Management Sciences, COMSATS University Islamabad, Pakistan.)

Abstract

For the past few years, the government of Pakistan has increased its domestic borrowing to a record level. This increased government internal borrowing could have reduced funds for non-financial corporate sector. In this study, we empirically examined the influence of government domestic debts on corporate leverage in Pakistan. Thisstudy examined the data of 07 non-financial major sectors listed at Pakistan Stock Exchange from 2009 to 2018. The firm-level panel data was analyzed through the fixed-effect method. Results revealed that government domestic borrowings have a negative influence on corporate borrowings. Commercial banks in Pakistan have heavily invested in government debt securities which are the substitute for corporate debts due to the high rate of return and low risk of default. This study recommends that the government of Pakistan should strengthen Fiscal Responsibility & Debt Limitation Act 2005 to safeguard against the adverse effects of government internal borrowing on the financing of the corporate sector. Further, the government should prepare effective fiscal and monetary policies to promote the growth of corporate sector.

Suggested Citation

  • Saeed Ahmad & Muhammad Aamir & Muhammad Umer Quddoos, 2020. "Does the Internal Borrowing of the Pakistani Government affect Corporate Leverage?," Pakistan Journal of Economic Studies, Department of Economics, The Islamia University of Bahawalpur, Pakistan., vol. 3(2), pages 149-163, December.
    • Handle: RePEc:akw:iupjes:v:3:y:2020:i:2:p:149-163
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    File URL: https://journals.iub.edu.pk/index.php/pjes/article/view/409/89
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    File URL: https://journals.iub.edu.pk/index.php/pjes/article/view/409
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    Cited by:

    1. Ndonwabile Zimasa Mabandla & Godfrey Marozva, 2024. "Government Borrowing and South African Banks’ Capital Structure: A System GMM Approach," Risks, MDPI, vol. 12(7), pages 1-16, July.

    More about this item

    Keywords

    Capital structure; Corporate leverage; Crowding out; Deficit budget; Government domestic borrowing;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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