The Impact of Liquidity, Interest Rate, and Exchange Rate on the Capital Structure of Firms: Evidence from the Sugar Sector of Pakistan

Abstract

This study examines into how the capital structure of businesses in Pakistan's sugar industry is affected by interest rates, liquidity, and exchange rates. The study's secondary data, which spans 50 firm-year observations, was gathered from the annual reports of specific sugar firms and other macroeconomic sources. The debt-to-total-assets ratio was used to assess capital structure, and the current ratio was used to assess liquidity. Interest rates and currency rates were calculated using the annual State Bank of Pakistan policy rate and the average PKR/USD exchange rate, respectively. To investigate the associations between the variables, multiple linear regression analysis, Pearson correlation, and descriptive statistics were used with SPSS. The findings show that the regression model as a whole is statistically significant (F = 2.911, p = 0.044). With an adjusted R² of 0.105 and an R² of 0.160, the model's explanatory power is quite poor. Liquidity is one of the independent factors that significantly affects capital structure (β = -0.398, p = 0.005), indicating that enterprises with more liquidity are less dependent on debt financing. On the other hand, interest rates (p = 0.880) and exchange rates (p = 0.916) have no statistically significant impact on capital structure. The results show that enterprises' reliance on external debt is lessened by internally available cash, which supports the Pecking Order Theory. The study finds that while interest rate and currency rate variations have little effect on financing decisions throughout the study period, liquidity is a crucial factor in determining capital structure in Pakistan's sugar industry. Corporate managers, investors, and legislators can utilize these data to better understand the variables influencing businesses' financing decisions.