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Journal cover: Managerial Finance

Managerial Finance

ISSN: 0307-4358

Online from: 1975

Subject Area: Accounting and Finance

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Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan


Document Information:
Title:Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan
Author(s):Nadeem Ahmed Sheikh, (School of Management, Huazhong University of Science and Technology, Wuhan, People's Republic of China Institute of Management Sciences, Bahauddin Zakariya University, Multan, Pakistan), Zongjun Wang, (School of Management, Huazhong University of Science and Technology, Wuhan, People's Republic of China)
Citation:Nadeem Ahmed Sheikh, Zongjun Wang, (2011) "Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan", Managerial Finance, Vol. 37 Iss: 2, pp.117 - 133
Keywords:Capital structure, Manufacturing industries, Pakistan, Stock exchanges
Article type:Research paper
DOI:10.1108/03074351111103668 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Acknowledgements:We are thankful to Dr Don Johnson, Dr Muhammad Azeem Qureshi, and two anonymous reviewers for their detailed comments and suggestions that substantially improved the paper. We are also thankful to Ms Lisa Averill and Mr Javed Choudary for their comprehensive editing of the manuscript.
Abstract:

Purpose – The aim of this empirical study is to explore the factors that affect the capital structure of manufacturing firms and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Pakistani firms.

Design/methodology/approach – Different conditional theories of capital structure are reviewed (the trade-off theory, pecking order theory, agency theory, and theory of free cash flow) in order to formulate testable propositions concerning the determinants of capital structure of the manufacturing firms. The investigation is performed using panel data procedures for a sample of 160 firms listed on the Karachi Stock Exchange during 2003-2007.

Findings – The results suggest that profitability, liquidity, earnings volatility, and tangibility (asset structure) are related negatively to the debt ratio, whereas firm size is positively linked to the debt ratio. Non-debt tax shields and growth opportunities do not appear to be significantly related to the debt ratio. The findings of this study are consistent with the predictions of the trade-off theory, pecking order theory, and agency theory which shows that capital structure models derived from Western settings does provide some help in understanding the financing behavior of firms in Pakistan.

Practical implications – This study has laid some groundwork to explore the determinants of capital structure of Pakistani firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions.

Originality/value – To the authors' knowledge, this is the first study that explores the determinants of capital structure of manufacturing firms in Pakistan by employing the most recent data. Moreover, this study somehow goes to confirm that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.



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