Javed, Attiya Yasmin and Imad, Qaisar (2012): A decomposition analysis of capital structure: evidence from Pakistan’s manufacturing sector. Published in: The Lahore Journal of Economics , Vol. 17, No. 1 (2012): pp. 1-31.
Download (430kB) | Preview
This study investigates the determinants of the various components of debt—short- and long-term debt and their categories—in the case of nonfinancial listed firms in Pakistan for the period 2008–10. We make a significant distinction between these determinants depending on the components of debt issued: long-term or short-term forms of debt. Our results show that large firms are more likely to have access to long-term debt borrowing than small firms and that, due to supply constraints, small firms resort to short-term forms of debt. Firms with higher potential for growth prefer using less long-term debt as well as debt with fewer restrictive arrangements in order to become more financially flexible. Firms with sufficient fixed assets can generate external finance more easily and at lower cost by using these assets as collateral, which supports the tradeoff theory. Firms generating high levels of profit, however, may choose to finance their investments using internal resources rather than by raising debt finance, which conforms to the pecking order theory. Our results also confirm the presence of the inertia effect and industry-specific effects, and are robust to alternative estimation techniques.
|Item Type:||MPRA Paper|
|Original Title:||A decomposition analysis of capital structure: evidence from Pakistan’s manufacturing sector|
|Keywords:||Long-term debt; short-term debt; growth; firm size; profitability; Pakistan|
|Subjects:||M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics
P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics
M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Nabeela Arshad|
|Date Deposited:||12. Jun 2012 13:28|
|Last Modified:||12. Feb 2013 06:50|
Agrawal, A., & Nagarajan, N. (1990). Corporate capital structure, agency costs, and ownership control: The case of all-equity firms. Journal of Finance, 45(4), 1325–1331.
Baral, K. J. (2004). Determinants of capital structure: A case study of listed companies of Nepal. Journal of Nepalese Business Studies, 1(1), 1–13.
Barclay, M. J., & Smith, C. W. (1999). The capital structure puzzle: Another look at the evidence. Journal of Applied Corporate Finance, 12(1), 8–20.
Barclay, M. J., Smith, C. W., & Watts R. L. (1995). The determinants of corporate leverage and dividends policies. Journal of Applied Corporate Finance, 7(4), 4–19.
Bevan, A. A., & Danbolt, J. (2000). Capital structure and its determinants in the United Kingdom: A decomposition analysis (Working Paper No. 2000/2). Glasgow, UK: University of Glasgow, Department of Accounting and Finance.
Black, F. (1976). The dividend puzzle. Journal of Portfolio Management, 2(2), 5–8.
Booth, L., Aivazian, V., Demirgüç-Kunt, A., & Maksmivoc, V. (2001). Capital structures in developing countries. Journal of Finance, 56, 87–130.
Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the existence of an optimal capital structure: Theory and evidence. Journal of Finance, 39, 857–878.
Brealey, R. A., & Myers, S. C. (1996). Principles of corporate finance (5th ed.). New York, NY: McGraw-Hill.
Cheema, A., Bari, F., & Siddique, O. (2003). Corporate governance in Pakistan: Ownership, control and the law. In F. Sobhan & W. Werner (Eds.), A comparative analysis of corporate governance in South Asia: Charting a road map for Bangladesh. Dhaka: Bangladesh Enterprise Institute.
Chen, J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research, 57(12), 1341–1351.
Chittenden, F., Hall, G., & Hutchinson, P. (1996). Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation. Small Business Economics, 8(1), 59–67,
Chung, K. H. (1993). Asset characteristics and corporate debt policy: An empirical test. Journal of Business, Finance, and Accounting, 20(1), 83–98.
DeAngelo, H., & Masulis, R. W. (1980). Leverage and dividend irrelevancy under corporate and personal taxation. Journal of Finance, 35(2), 453–464.
Delcoure, N. (2007). The determinants of capital structure in transitional economies. International Review of Economics and Finance, 16(2), 400–415.
Fama, E. F., & French, K. R. (2002). Testing tradeoff and pecking order predictions about dividends and debt. Review of Financial Studies, 15(1), 1–33.
Ferri, M., & Jones, W. (1979). Determinants of financial structure: A new methodological approach. Journal of Finance, 34(3), 631–644.
Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2), 217–248.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60, 187–243.
Harris, M., & Raviv, A. (1990). Capital structure and the informational role of debt. Journal of Finance, 45(2), 321–349.
Hart, O., & Moore, J. (1988). Incomplete contracts and renegotiation. Econometrica, 56, 755–786.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.
Hijazi, S. T., & Tariq, Y. B. (2006). Determinants of capital structure: A case for Pakistani cement industry. Lahore Journal of Economics, 11(1), 63–80.
Hsiao, C. (2003). Analysis of panel data (2nd ed.). Cambridge, UK: Cambridge University Press. Ilyas, J. (2005). The determinants of capital structure: Analysis of non-financial firms listed in Karachi stock exchange in Pakistan. Journal of Managerial Sciences, 2(2), 279–307.
Javid, A. Y., & Iqbal, R. (2007). External financial resource management by listed Pakistani firms. Pakistan Development Review, 46(4, Pt. 2), 449–464.
Javid, A. Y., & Iqbal, R. (2008). Ownership concentration, corporate governance and firm performance: Evidence from Pakistan. Pakistan Development Review, 47(4), 643–659.
Javid, A. Y., & Iqbal, R. (2010). Corporate governance in Pakistan: Corporate valuation, ownership and financing (Working Paper No. 57). Islamabad: Pakistan Institute of Development Economics.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76, 323–339.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Kester, C. W. (1986). Capital and ownership structure: A comparison of United States and Japanese manufacturing corporations. Financial Management, 15, 5–16.
Lui, Y., & Ren, J. (2009). An empirical analysis on the capital structure of Chinese listed IT companies. International Journal of Business and Management, 4(8), 46–51.
Miller, M. H. (1977). Debt and taxes. Journal of Finance, 32(2), 261–275.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48(3), 261–297.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53, 433–443
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39, 575–592.
Myers, S. C., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information investors do not have. Journal of Financial Economics, 13(2), 187–222.
Oyesola, S. R. (2007). An empirical analysis of the capital structure of selected quoted companies in Nigeria. International Journal of Applied Economics and Finance, 1(1), 16–28.
Rafiq, M., Iqbal, A., & Atiq, M. (2008). The determinants of capital structure of the chemical industry in Pakistan. Lahore Journal of Economics, 13(1), 139–158.
Rajan, R., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50, 1421–1460.
Ramlall, I. (2009). Determinants of capital structure among non-quoted Mauritian firms under specificity of leverage: Looking for a modified pecking order theory. International Research Journal of Finance and Economics, 31, 83–92.
Scott, D., & Martin, J. (1975). Industry influence on financial structure. Financial Management, 4(1), 67–73.
Serrasqueiro, Z., & Nunes, P. M. (2008). Determinants of capital structure: Comparison of empirical evidence from the use of different estimators. International Journal of Applied Economics, 5(1), 14–29.
Shah, A., & Hijazi, S. T. (2004). The determinants of capital structure of stock exchange-listed non-financial firms in Pakistan. Pakistan Development Review, 43(4), 605–618.
Shah, A., & Khan, S. (2007). Determinants of capital structure: Evidence from Pakistani panel data. International Review of Business Research Papers, 3(4), 265–282.