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Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan

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  • Nadeem Ahmed Sheikh
  • Zongjun Wang
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    Abstract

    Purpose – The aim of this empirical study is to explore the factors that affect the capital structure of manufacturing firms and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Pakistani firms. Design/methodology/approach – Different conditional theories of capital structure are reviewed (the trade-off theory, pecking order theory, agency theory, and theory of free cash flow) in order to formulate testable propositions concerning the determinants of capital structure of the manufacturing firms. The investigation is performed using panel data procedures for a sample of 160 firms listed on the Karachi Stock Exchange during 2003-2007. Findings – The results suggest that profitability, liquidity, earnings volatility, and tangibility (asset structure) are related negatively to the debt ratio, whereas firm size is positively linked to the debt ratio. Non-debt tax shields and growth opportunities do not appear to be significantly related to the debt ratio. The findings of this study are consistent with the predictions of the trade-off theory, pecking order theory, and agency theory which shows that capital structure models derived from Western settings does provide some help in understanding the financing behavior of firms in Pakistan. Practical implications – This study has laid some groundwork to explore the determinants of capital structure of Pakistani firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions. Originality/value – To the authors' knowledge, this is the first study that explores the determinants of capital structure of manufacturing firms in Pakistan by employing the most recent data. Moreover, this study somehow goes to confirm that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 37 (2011)
    Issue (Month): 2 (February)
    Pages: 117-133

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    Handle: RePEc:eme:mfipps:v:37:y:2011:i:2:p:117-133

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Capital structure; Manufacturing industries; Pakistan; Stock exchanges;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Cited by:
    1. Hamid Ahmad & Bashir A. Fida & Muhammad Zakaria, 2013. "The Co-determinants of Capital Structure and Stock Returns: Evidence from the Karachi Stock Exchange," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 81-92, Jan-June.
    2. Mazlina Mustapha Author_Email: mazlina05@gmail.com & Hashanah Bt Ismail & Badriyah Bt Minai, 2011. "Determinants Of Debt Structure: Empirical Evidence From Malaysia," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-490, Conference Master Resources.
    3. Naeem Ul Hassan & Malik Muhammad Imran & Muhammad Amjad & Mehboob Hussain, 2014. "Effects of Working Capital Management on Firm Performance: An Empirical Study of Non-financial listed Firms in Pakistan," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(6), pages 114-132, June.

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