Mean Reverting Financial Leverage and Firm Life Cycle: Theory versus Evidence (Pakistan)

Tanveer Ahsan, Man Wang and Muhammad Azeem Qureshi

Emerging Economy Studies, 2016, vol. 2, issue 1, 19-26

Abstract: Abstract The purpose of the study 3 3 This article is a part of a PhD thesis submitted at School of Accounting, Dongbei University of Finance and Economics, Dalian, P. R. China. is to decide between two competing theories of capital structure (trade-off theory and pecking order theory) along a firms’ life cycle and to find out whether there exists a target capital structure or not. To carry out the purpose, we develop a database of 13,375 firm-year observations of non-financial firms listed on Pakistan Stock Exchange spread over 39 years (1972–2010). A multivariate approach has been followed to classify 13,375 firm-year observations into different life cycle stages, and Fisher type panel unit root test has been applied to check the mean reversion of financial leverage ratios. The results of unit root analysis for growing and mature firms clearly support trade-off financing behavior while for declining firms results do not support trade-off financing behavior.

Keywords: Target capital structure; firm life cycle; unit root analysis; panel data; Pakistan (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:emecst:v:2:y:2016:i:1:p:19-26

DOI: 10.1177/2394901515627750

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