Modeling Leverage Dynamics and Corporate Financial Policies (Empirical Evidence from Industrial Sector of Pakistan)

Abstract

In recent years, downfall in industrial sector of Pakistan has become an important issue in the economy of Pakistan. Therefore corporate financial policies of industrial sector are gaining more intention in the financial decision making regarding to the leverage dynamics. In this study we used the data from Chemical, Cement, and Fertilizer sector for the period 2006-2016. These three sectors consist of 42 companies which are listed on Karachi Stock Exchange (KSE). Abnormal return is taken as dependent variable while Change in cash to lagged market values, Change in EBIT to lagged market values, Change in dividend to lagged market value, Net Financing to lagged market value, Lagged cash values to lagged market values, Lagged cash values to lagged market values crossed by change in cash to lagged market value, Change in total assets net of cash to lagged market values, Change in interest to lagged market values, Operating leverage, Financial leverage, Total leverage, Leverage ratio, Leverage ratio to change in cash crossed by lagged market values and WACC are taken as explanatory variables. OLS, Fixed effect and Random effect models are used to express the impact of these variables on return. Hence it is concluded that modeling the leverage dynamics and corporate financial policies robust the results and this phenomenon can be implemented in diverse way for each sector of non-financials in Pakistan.