Industry, Firm, and Country Level Dynamics of Capital Structure: A Case of Pakistani Firms

Idrees Liaqat,Judit Oláh,József Popp,Muhammad Asif Khan

doi:10.3390/jrfm14090428

Abstract

The capital structure appears to be one of the most researched and the most controversial areas in modern corporate finance. Prior literature on determinants of capital structure has concentrated on firm and country level factors by employing static modeling. Static modeling has certain limitations, which do not allow companies to establish an optimum capital structure in line with economic uncertainty. This study makes a worthy contribution to the existing body of knowledge by filling the gap in the evolution of capital structure by employing a dynamic framework of the financial sector of Pakistan. In addition, the study brings into focus sectors’ importance in determining the firm’s financial behavior. Based on secondary financial sector data from 2006–2019, the article addresses the issues by employing two-step system generalized method of moments (GMM). The findings of the study validated the existence of dynamic capital structure across the financial sector of Pakistan and reinforced the substantial impact of sectors’ unique environment on leverage mechanism. The results are robust under alternative estimation approaches and offer useful policy implications.

Highlights

This paper pertains importance because of three reasons
In our generalized method of moments (GMM) model, the results clearly show that Pakistani financial firms appear to have a dynamic capital structure
The study has essentially set out the importance of dynamic modeling in the financial sector of Pakistan

Summary

Introduction

The study uses dynamic modelling to check the financing behavior of the firms. Initial studies, focusing the capital structure determinants, have considered the observed leverage as an optimal leverage (Margaritis and Psillaki 2007; Rajan and Zingales 1995) and remained inclined towards static modeling. The static modeling encompasses certain limitations as it does not consider financial variations and observed leverage is treated as an optimal leverage. A more realistic approach necessitates the use of a dynamic model to investigate the dynamics of capital structure. Dynamic modeling got material importance in capital structure literature only across developed and emerging countries In the context of developing countries, the dynamic framework has received much too little attention. In order to fill this vacant spot, study brings into focus the dynamic modelling to check the factors affecting capital structure decision of Pakistani firms. As the capital structure research remained engrossed in the non-financial sector of the economies across the developed and developing world including

Methods

Results

Conclusion