Liquidity and Capital Structure: The Case of Pakistani Non-Financial Firms

Abdul Rashid () and Hira Mehmood ()
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Hira Mehmood: International Institute of Islamic Economics, IIU, Islamabad

Economics Bulletin, 2017, vol. 37, issue 2, 675-685

Abstract: This paper empirically examines the impact of equity market liquidity on firms' leverage decisions in Pakistan using a firm-level panel data covering the period 2000-2013. We use alternative measures of leverage and liquidity to ensure the robustness of equity liquidity effects. We find that equity market liquidity is significantly and negatively related to the leverage decisions of firms. We also show that firms with more liquid stocks are likely to prefer equity to debt financing. The negative effects of equity market liquidity on leverage decisions hold even after controlling for several firm-specific determinants of capital structure.

Keywords: capital structure; equity liquidity; leverage; debt-equity choice, liquidity measures (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2017-04-09
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