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Mean Reverting Financial Leverage and Firm Life Cycle: Theory versus Evidence (Pakistan)

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  • Tanveer Ahsan
  • Man Wang
  • Muhammad Azeem Qureshi

Abstract

The purpose of the study 3 3 This article is a part of a PhD thesis submitted at School of Accounting, Dongbei University of Finance and Economics, Dalian, P. R. China. is to decide between two competing theories of capital structure (trade-off theory and pecking order theory) along a firms’ life cycle and to find out whether there exists a target capital structure or not. To carry out the purpose, we develop a database of 13,375 firm-year observations of non-financial firms listed on Pakistan Stock Exchange spread over 39 years (1972–2010). A multivariate approach has been followed to classify 13,375 firm-year observations into different life cycle stages, and Fisher type panel unit root test has been applied to check the mean reversion of financial leverage ratios. The results of unit root analysis for growing and mature firms clearly support trade-off financing behavior while for declining firms results do not support trade-off financing behavior.

Suggested Citation

  • Tanveer Ahsan & Man Wang & Muhammad Azeem Qureshi, 2016. "Mean Reverting Financial Leverage and Firm Life Cycle: Theory versus Evidence (Pakistan)," Emerging Economy Studies, International Management Institute, vol. 2(1), pages 19-26, May.
    • Handle: RePEc:sae:emecst:v:2:y:2016:i:1:p:19-26
    DOI: 10.1177/2394901515627750
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    References listed on IDEAS

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    Cited by:

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    2. Tanveer Ahsan & Muhammad Azeem Qureshi, 2017. "The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling," Applied Economics, Taylor & Francis Journals, vol. 49(41), pages 4148-4160, September.
    3. Razali Haron, 2018. "Firm Level, Ownership Concentration and Industry Level Determinants of Capital Structure in an Emerging Market: Indonesia Evidence," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 14(1), pages 127-151.
    4. Umeair Shahzad & Fukai Luo & Jing Liu & Mahmood Faisal & Hafeez Ullah, 2022. "The most consistent and reliable predictors of corporate financial choices in Pakistan: New evidence using BIC estimation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 237-257, January.
    5. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.

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