Determinants of Capital Structure of Non-Financial Firms in Pakistan

Abstract

Capital structure decisions are some of the most vital financial decisions made by the firms since they determine directly the profitability, the risk, and sustainability. This paper examines the major predictors of the capital structure of non-financial firms in the Pakistani economy which is a developing country with institutional limitations, imperfect markets and unstable macroeconomic settings. The paper will make use of significant capital structure theories, which are the trade-off theory, pecking order theory and agency cost theory to understand the impact on leverage decisions of the firm-specific factors of profitability, firm size, asset tangibility, growth opportunities, liquidity and non-debt tax shields. Based on panel information of listed non-financial companies in Pakistan, the researcher seeks to deliver empirical evidence of whether Pakistan is functioning according to the conventional theoretical expectations on capital structure behaviour or based on country-specific forces. It is hoped that the findings will provide useful information to the corporate managers, investors, and policymakers by contributing to a better understanding of financing behavior in developing economies and assisting in making more informed financial decisions.