ISSN: 1998 - 4162

JISR MSSE Journal Contents

Volume 13, Number 2, July 2015


Capital Structure Theories and Leverage Behaviour of Pakistani Firms
Saqib Sharif - Institute of Business Administration (IBA), Karachi, Pakistan
Muhammad Nadeem Khan - Assistant Professor at Iqra University, Karachi, Pakistan


Abstract
This study examines the applicability of two competing capital structure theories; i.e., Pecking Order Theory (POT) and Trade-Off Theory (TOT). An extensive panel dataset of 293 non-financial firms listed on the Pakistan Stock Exchange (PSX) for the period 2001 to 2013 is analyzed in three phases. First, we check the leverage behavior of all listed non-financial firms of Pakistan. Second, we test the applicability of capital structure theories for manufacturing and non-manufacturing firms; and third, the data is segregated into large and small firms based on asset size. Two different models are applied to investigate the corporate leverage behavior. First model suggests negative relationship of profitability, size, and growth with the firm’s leverage, which confirms that, on average, Pakistani firms follow pecking order theory (POT). In the second model leverage has positive and significant relationship with last year dividend, which shows firms with higher dividend payout ratios borrow more in subsequent year/(s). Overall, the financing behavior is in favor of POT for the non-financial Pakistani firms. Lastly, this study contributes to the existing literature by testing the applicability of two traditional theories on two major sectors, i.e., manufacturing and services sector; and also on small and large firms.

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