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Stock return volatility and capital structure measures of nonfinancial firms in a dynamic panel model: Evidence from Pakistan

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  • Zeeshan Ahmed
  • Daw Tin Hla

Abstract

We investigate the impact of stock return volatility on different capital structure measures of nonfinancial firms in a dynamic panel model. Two‐step system generalized method of moment dynamic panel estimator is applied to nonfinancial sector's data from Pakistan Stock Exchange over the period 2001–2014. The results imply that stock return volatility has a significant negative impact on book leverage and long‐term market leverage ratios. However, stock return volatility causes the increase in total market leverage ratios. Moreover, book leverage and long‐term market leverage of firms decrease as a result of an increase in stock return volatility in different classification of firms. Conversely, stock return volatility has a significant positive impact on total market leverage ratios in those classifications of firms. Capital structure decisions are more sensitive to stock return volatility as default risk increases. Firms significantly go for the reduction in their debt financing due to high stock returns volatility and to avoid from possible consequences of default. The results are robust to alternative measures such as cash flow volatility and earnings volatility.

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  • Zeeshan Ahmed & Daw Tin Hla, 2019. "Stock return volatility and capital structure measures of nonfinancial firms in a dynamic panel model: Evidence from Pakistan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 604-628, January.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:604-628
    DOI: 10.1002/ijfe.1682
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    1. Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Does proprietary day trading provide liquidity at a cost to investors?," International Review of Financial Analysis, Elsevier, vol. 68(C).
    2. Albert Danso & Samuel Fosu & Samuel Owusu‐Agyei & Collins G. Ntim & Emmanuel Adegbite, 2021. "Capital structure revisited. Do crisis and competition matter in a Keiretsu corporate structure?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5073-5092, October.
    3. Rayenda K. Brahmana & Hui‐Wei You & Evan Lau, 2022. "Does reputation matter for firm risk in developing country?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2110-2123, April.
    4. Mudeer A. Khattak & Buerhan Saiti & Shabeer Khan, 2023. "Does market power explain margins in dual banking? Evidence from panel quantile regression," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1826-1844, April.
    5. Tarsisius Renald Suganda & Jungmu Kim, 2023. "An Empirical Study on the Relationship between Corporate Social Responsibility and Default Risk: Evidence in Korea," Sustainability, MDPI, vol. 15(4), pages 1-20, February.
    6. Vuong, Giang Thi Huong & Nguyen, Phuc Van & Barky, Walid & Nguyen, Manh Huu, 2024. "Stock return volatility and financial distress: Moderating roles of ownership structure, managerial ability, and financial constraints," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 634-652.
    7. Sardar Ahmad & Saeed Akbar & Devendra Kodwani & Anwar Halari & Syed Zubair Shah, 2023. "Compliance or non‐compliance during financial crisis: Does it matter?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2348-2366, July.

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