Does the Internal Borrowing of the Pakistani Government affect Corporate Leverage?

Saeed Ahmad, Muhammad Aamir and Muhammad Umer Quddoos ()
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Muhammad Umer Quddoos: Department of Management Sciences, COMSATS University Islamabad, Pakistan.

Pakistan Journal of Economic Studies, 2020, vol. 3, issue 2, 149-163

Abstract: For the past few years, the government of Pakistan has increased its domestic borrowing to a record level. This increased government internal borrowing could have reduced funds for non-financial corporate sector. In this study, we empirically examined the influence of government domestic debts on corporate leverage in Pakistan. Thisstudy examined the data of 07 non-financial major sectors listed at Pakistan Stock Exchange from 2009 to 2018. The firm-level panel data was analyzed through the fixed-effect method. Results revealed that government domestic borrowings have a negative influence on corporate borrowings. Commercial banks in Pakistan have heavily invested in government debt securities which are the substitute for corporate debts due to the high rate of return and low risk of default. This study recommends that the government of Pakistan should strengthen Fiscal Responsibility & Debt Limitation Act 2005 to safeguard against the adverse effects of government internal borrowing on the financing of the corporate sector. Further, the government should prepare effective fiscal and monetary policies to promote the growth of corporate sector.

Keywords: Capital structure; Corporate leverage; Crowding out; Deficit budget; Government domestic borrowing (search for similar items in EconPapers)
JEL-codes: E50 G32 H32 H74 L60 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:akw:iupjes:v:3:y:2020:i:2:p:149-163

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