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Capital Structure Dynamics and Sensitivity Analysis: A Case of Developing Country?

Author

Listed:
  • Muhammad Naveed

    () (Riphah International University)

Abstract

Key questions that policymakers facing today are how to mitigate the risk of global financial instability and how the firms? financial behavior to comply with different economic conditions. In this purview, this study contributes to the corporate finance literature by investigating the effects of different economic periods on financial behavior of listed companies across developing countries. By employing panel estimations over the period 2003-2011, our analysis incorporates the Global Financial Crisis (GFC) shock which appears to have affected the leverage mechanism of Pakistani listed firms. The study with specific focus on stable and crises period finds that the leverage mechanism distorted to a certain degree. Consequently, the notion of prevailing capital structure theories also become distorted whereby changes to capital structure come about because of the primary goal to survive, rather than managerial speculation. Based on sensitivity analysis, the association between firm characteristics and capital structure during both economic periods is mainly influenced by firm size, profitability, non-debt tax shield and tangibility. The sign and magnitude of coefficients clearly confirms the impact of different economic inferences on financial behavior of Pakistani listed firms across sugar and cement sectors. Taking altogether, the study evident that sectors? are unequivocally responsive to the effects of different economic periods in Pakistan. The study gained important measures that how Pakistani companies achieve financial flexibility during financial crises, and provides valuable intuitions for banking and corporate sector to develop lending and borrowing mechanism based on different economic conditions.

Suggested Citation

  • Muhammad Naveed, 2015. "Capital Structure Dynamics and Sensitivity Analysis: A Case of Developing Country?," Proceedings of International Academic Conferences 2603875, International Institute of Social and Economic Sciences.
  • Handle: RePEc:sek:iacpro:2603875
    as

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    File URL: https://iises.net/proceedings/17th-international-academic-conference-vienna/table-of-content/detail?cid=26&iid=062&rid=3875
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Global financial crises; leverage mechanism; financial behavior;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises

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