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Credit supply and corporate capital structure: evidence from Pakistan

Amjad Iqbal (School of Accounting, Dongbei University of Finance and Economics, Dalian, China)
Tanveer Ahsan (School of Accounting, Dongbei University of Finance and Economics, Dalian, China)
Xianzhi Zhang (School of Accounting, Dongbei University of Finance and Economics, Dalian, China)

South Asian Journal of Global Business Research

ISSN: 2045-4457

Article publication date: 16 June 2016

864

Abstract

Purpose

The purpose of this paper is to investigate the relevance of credit supply for corporate capital structure decisions of manufacturing firms in Pakistan.

Design/methodology/approach

The implicit assumption in much of the work on capital structure is that for a firm, the availability of incremental capital depends solely on its characteristics. However, the capital market frictions suggest that suppliers of credit may also affect firms’ ability to borrow. The authors investigated this intuition by employing dynamic panel data estimators using 8,984 firm-year observations for the period 1990-2010.

Findings

The results show that short-term debt is a major source of financing in these firms. Further, credit supply plays a significant role in these firms’ capital structure decisions and hence, they increase their short-term debt (main financing source) with an increase in credit supply in the market while payoff their long-term debt with internal funds.

Practical implications

The findings of this study can enhance the practitioners’ and analysts’ understanding of capital structure of manufacturing firms in a bank dominated financial system, like Pakistan. Also, it can provide them more insight in understanding the alternative choices of financing and the reasons why firms prefer one over the other.

Originality/value

To the authors’ best knowledge, this is the first study in Pakistan that considers both supply-side as well as demand-side factors of capital structure and applies dynamic panel data techniques.

Keywords

Citation

Iqbal, A., Ahsan, T. and Zhang, X. (2016), "Credit supply and corporate capital structure: evidence from Pakistan", South Asian Journal of Global Business Research, Vol. 5 No. 2, pp. 250-267. https://doi.org/10.1108/SAJGBR-03-2015-0029

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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