Firm, industry, and country level determinants of capital structure: evidence from Pakistan

Abstract

Purpose The purpose of this paper is to find out firm, industry, and country level determinants of capital structure of Pakistani listed non-financial firms. Design/methodology/approach The authors use a fixed effects panel data model over a 39 years (1972-2010) unbalanced panel data of Pakistani non-financial listed firms to determine the factors that influence capital structure of these firms. Findings The authors find that Pakistani firms prefer retained earnings to finance their business projects, and debt is easily available for experienced firms. Moreover, socio-economic collusive networks, poor corporate governance mechanism along with weak legal system provide these firms an opportunity to pass on their risk to the creditors (banks). Research limitations/implications The data set does not contain factors characterizing inter-industry heterogeneity, therefore, the authors use mean industry leverage and mean industry profitability to explore if any relationship exists between leverage of firms, and their respective industry leverage/profitability. Practical implications Pakistani non-financial firms are highly leveraged increasing their probability to face financial distress in erratic economic conditions. As such, the policy makers need to develop capital markets of Pakistan to enable a resilient corporate capital structure. Further, erratic economic conditions of Pakistan create uncertain business environment yielding short-term opportunities and to finance them Pakistani firms use short-term debt as a main financing source. The policy makers need to improve corporate governance mechanism and strengthen legal system that will go a long way to develop Pakistani capital market on sound and sustainable footing. Originality/value This is the first study that uses an extended number of variables and discovers financial behavior of firms in a bank-based economy having limited financing options, and facing erratic economic conditions.

Political connections and corporate financial decision making

“…Easy access to finance is usually greater when the firm operates in a country with a high level of corruption among its officials, low protection of property rights, a high interventionist government, or a nondemocratic government (Pan and Tian, 2018;Faccio 2006). Moreover, in Pakistan the majority of corporate external financing is through the banking sector (Ahsan et al, 2016). As argued by Chava and Puranandum (2010), short-term debt is considered a riskier financing decision (compared to long-term debt) because it exposes firms to refinancing and interest rate risks.…”

Determinants of Capital Structure: A Conceptual Understanding of Oil and Gas Firms in Malaysia

“…Thus, it suggests that most of the firms use tangible assets as collateral to issue long-term debt, hence being less dependent on short-term debt. It is supported by Ahsan, Wang, and Qureshi (2016) as they found that firms tend to use their assets tangibility to pay-off their short-term debt and to issue long-term debt. In addition, Ting and Lean (2011) argued that the interest on the short-term debt are more volatile than long-term debt.…”

“…Growth opportunities refer to the new investment opportunities which can increase the firms' value (Saarani & Shahadan, 2013). Some previous researches defined growth opportunities in several ways such as percentage changes in total assets (Ahsan et al, 2016;Matias & Serrasqueiro, 2017;Ting & Lean, 2011;Titman & Wessels, 1988) and book value of total assets less the book value of equity plus the market value of equity divided by the book value of total assets (Deesomsak et al, 2004) as measurement of the variables. Pecking Order theory predicts growth opportunities to have a positive relationship with leverage level.…”

“…They argued that firms with high growth opportunities try to avoid the issuing of debt because they do not want to expose themselves to the rules and regulation that have been set by the creditors. Growth opportunities can be measured by annual percentage change in total assets (Ahsan et al, 2016;Kayo & Kimura, 2011).…”

Board Education, Growth and Performance of Family CEO Listed Firms in Malaysia

“…Growth opportunities are defined by the annual percentage change of total assets (Pandey, 2001;Pandey, 2004;Eriotis, Vasilious, & Ventoura Neokosmidi, 2007;Abor & Biekpe, 2009;Karadeniz Kandir, Balcilar, & Onal, 2009;Chadha & Sharma, 2015;Ahsan, Wang, & Qureshi, 2016;Ohman & Yazdanfar), as shown by:…”