Abstract
The aim of the current study is to examine the impact of capital market development on debt ratios of 150 manufacturing firms in Pakistan from 2006 to 2015. To measure the capital market development, two equally weighted indices are constructed over the 10-year period. This study uses dynamic panel data models. The results show a significant impact of capital market development on debt ratios of manufacturing firms. The results also reveal that manufacturing firms in Pakistan use stock market as a substitute for longterm financing. This study has not found a huge decrease in debt ratios in years with lower score of debt market index. The results of this study have implications for various policy issues. Manufacturing firms in Pakistan have confined themselves mainly to loans from banks. The regulatory authorities should take critical steps to promote all segments of financial markets so that firms have more choices to raise funds from financial markets
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