A Decomposition Analysis of Capital Structure: Evidence from Pakistan’s Manufacturing Sector

Attiya Javid and Qaisar Imad ()
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Qaisar Imad: Assistan Treasury Officer, Finance Department, Government of Khyber Pukhtunkhwa, Pakistan.

Lahore Journal of Economics, 2012, vol. 17, issue 1, 1-31

Abstract: This study investigates the determinants of the various components of debt—short- and long-term debt and their categories—in the case of nonfinancial listed firms in Pakistan for the period 2008–10. We make a significant distinction between these determinants depending on the components of debt issued: long-term or short-term forms of debt. Our results show that large firms are more likely to have access to long-term debt borrowing than small firms and that, due to supply constraints, small firms resort to short-term forms of debt. Firms with higher potential for growth prefer using less long-term debt as well as debt with fewer restrictive arrangements in order to become more financially flexible. Firms with sufficient fixed assets can generate external finance more easily and at lower cost by using these assets as collateral, which supports the tradeoff theory. Firms generating high levels of profit, however, may choose to finance their investments using internal resources rather than by raising debt finance, which conforms to the pecking order theory. Our results also confirm the presence of the inertia effect and industry-specific effects, and are robust to alternative estimation techniques.

Keywords: Long-term debt; short-term debt; growth; firm size; profitability; Pakistan. (search for similar items in EconPapers)
JEL-codes: F23 G15 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: A decomposition analysis of capital structure: evidence from Pakistan’s manufacturing sector (2012)
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