Extension of determinants of capital structure: Evidence from Pakistani non-financial firms

This study tried to determine the influence of set of explanatory variables on the capital structure determination for Pakistani non-financial firms by using panel data. This study also finds the applicability of two capital structure theories (pecking order theory and trade-off theory) in Pakistani non-financial sector. This study used five previously studied variables (profitability, size, growth, tangibility of assets, non-debt tax shield), and added three new variables (tax, liquidity and payout), which were not used previously in Pakistani context. This research used data from 336 non-financial firms over the period of 5 years (2005-2009). This study used fixed effect random model regression analysis to analyze determinants of capital structure. The results showed that industry type play important role in determining capital structure. The results showed that out of eight variables five (size, tangibility of assets, non-debt tax shields, liquidity and payout) are statistically significantly related to leverage, remaining three are statistically insignificantly related with leverage. Two expected relation are accepted while six are rejected after empirical analysis. This study identifies that industry type, liquidity and payout ratio play important role, whereas tax does not play important role in identifying capital structure Pakistani non-financial firms.