Abstract
Debt structure composition is an essential topic of discussion for the management of capital structure decisions. Researchers made extensive efforts to understand the criteria for selecting debts, specifically, to know about the reasons for debt specialization, concealed in identifying its predictors. This question is essential not only for establishing the field of debt structure but also for the financial managers to design corporate financial strategy in a way that leads to attaining an optimal debt structure. Sophisticated financial modeling is applied to identify the core predictors of debt specialization, influencing the strategic choices of optimal debt structure to address this issue. Data were collected from 419 non-financial companies listed at the Karachi Stock Exchange from 2009 to 2015. This study has validated debt specialization by showing that short-term debts maintain their position over the years and remain the most popular type of loan among Pakistani firms. Further, it provides a comprehensive view of the cross-sectional differences among the firms involved in debt specialization by applying a holistic approach. Results show that small, growing, dividend-paying companies, having high expense and risk ratios, followed the debt specialization strategy. This strategy enables firms to reduce their agency conflicts, transaction costs, information asymmetry, risk management and building up their good market reputation. Conclusively, we have identified the gross profit margin, long-term debt to asset ratio, firm size, age, asset tangibility, and long-term industry debt to asset ratio as reliable and core predictors of debt specialization for sustainable business growth.
Highlights
IntroductionIn today’s competitive environment, financing decisions are of utmost importance for achieving sustainable business growth [1]
The t-test and Wilcoxon test are calculated to see the differences in debt specialization between the first and fourth quartiles of HHI. These results indicate that mature firms with more growth opportunities, maintaining high cash holding, current ratio and return on asset ratio, having a higher value of risk for earnings volatility, default risk, and return on asset volatility are significantly involved in debt specialization
This study provides new empirical evidence on the patterns of debt financing and antecedents of debt specialization
Summary
In today’s competitive environment, financing decisions are of utmost importance for achieving sustainable business growth [1]. That is why management put an effort to creativecommons.org/licenses/by/ 4.0/). Select the best combination of debt and equity that reduces agency conflicts and plays an essential role in building a good image of the company in the market. Financial decisions have become arduous due to the complex menu of choices. It has become difficult for managers to decide the best combination for debt structure in the modern business environment. Prior literature focuses on the broad capital structure alternatives; debt and equity [2,3]. Recent empirical studies are evident in the increasing tendency of debt financing among organizations over the century [4]
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