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Factors determining capital structure of Pakistani non-financial firms

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  • Shah, Mumtaz Hussain
  • Khan, Atta Ullah

Abstract

This study is undertaken to discover the factors determining the capital structure decision of non-financial Pakistani firms. The capital structure irrelevance theory, trade off theory and pecking order theory stipulates different factors affecting a firm’s optimal debt/equity choice. However, the literature is still inconclusive about which factors and theories best defines the ideal capital structure mix. Thus, making it an unanswered, open empirical question, that, needs to be explored especially for sectors not previously studied. The effect of firm’s profitability, liquidity, size, tangibility and non-debt tax shield on capital structure decision of ten non-financial firms operating at Pakistan Stock Exchange is investigated for a period of ten years i-e from 2005-2014. By using fixed effects panel estimation method it is found that leverage ratio is inversely affected by profitability and current ratio of a firm. While, firm size, tangibility and non-debt tax shield positively effects leverage ratio. The influence of profitability is weakly significant whereas that of liquidity, size, tangibility and non-debt tax shield are strongly significant. The study also shows that results for profitability and liquidity are in accordance with the Pecking Order Theory and the result for size; tangibility and non-debt tax shield are in line with the Trade-Off Theory.

Suggested Citation

  • Shah, Mumtaz Hussain & Khan, Atta Ullah, 2017. "Factors determining capital structure of Pakistani non-financial firms," MPRA Paper 82015, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:82015
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    References listed on IDEAS

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    Cited by:

    1. Shah, Mumtaz Hussain, 2018. "Corruption & Foreign Direct Investment: The Case of South Asia," MPRA Paper 107253, University Library of Munich, Germany.
    2. Shah, Mumtaz Hussain & Azam, Ayesha, 2018. "Financial Development and Investors Location Choice in The Arab World," MPRA Paper 107245, University Library of Munich, Germany.
    3. Shah, Mumtaz Hussain & Khan, Faisal, 2019. "Telecommunication Infrastructure Development and FDI into Asian Developing Nations," MPRA Paper 107255, University Library of Munich, Germany.
    4. Shah, Mumtaz Hussain & Lala, Gule, 2017. "Autocracy, Democracy and FDI inflows in Asian Developing Countries," MPRA Paper 107248, University Library of Munich, Germany.
    5. Shah, Mumtaz Hussain, 2016. "Financial development and foreign direct investment: The case of Middle East and North African (MENA) developing nations," MPRA Paper 82013, University Library of Munich, Germany.
    6. Tahmeena Bibi & Prof. Dr. Muhammad Hanif Akhtar, 2024. "Determinants of Capital Structure: Evidence from Securities Companies," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(1), pages 22-28.
    7. Apichat Pongsupatt & Tharinee Pongsupatt, 2019. "Determinants of Capital Structure: An Empirical Analysis of Listed Companies in Thailand Stock Exchange SET 100 Index," Proceedings of International Academic Conferences 9811664, International Institute of Social and Economic Sciences.
    8. John Kwaku Amoh & Abdul-Mumuni Abdallah & Richard Amankwa Fosu, 2019. "Does Foreign Direct Investment Cause Financial Sector Development €“ Evidence From An Emerging Economy," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 23, pages 33-55, June.
    9. Shah, Mumtaz Hussain & Khan, Fiaz, 2018. "Profitability and Working Capital Management Nexus: Evidence from Food & Personal Care Products Sector Firms Listed on Pakistan Stock Exchange," MPRA Paper 107254, University Library of Munich, Germany.
    10. Shah, Mumtaz Hussain & Zeb, Aisha, 2017. "Prudent Macro Management of the Economy and Inward FDI in ASEAN Member States," MPRA Paper 107249, University Library of Munich, Germany.
    11. Mohammad AL-Gharaibeh & Aamir Ali & Umar Farooq & Lara Alhaddad, 2023. "The Interaction Between Asset Tangibility, Cash Holdings, and Financial Development: An Evidence from Emerging Economy," Advances in Decision Sciences, Asia University, Taiwan, vol. 27(4), pages 114-132, December.

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    More about this item

    Keywords

    Capital Structure; Profitability; Tangibility; Size; Liquidity; Non Debt Tax Shield and Panel Data.;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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