The Impact of Corporate Strategy on the Capital Structure of Pakistani Companies (Diversification and Capital Structure)

Abstract

Research into the capital structure of firms has been the subject of extensive empirical investigation. This study seeks to extend the debate by examining the endogenous influence of corporate strategy on financing decisions made by firms. Diversification is one of the corporate strategies that allow a company to enter business lines that are same or different from current operations as well as operate in several economic markets. Financial choices need to be evaluated because of their close interaction with management choices. Optimal capital structure plays a key role in achieving the overriding goal of financial management. The study sought to discover the impact of corporate diversification strategies on financial choices because study main focus is diversification strategy (A type of corporate strategy). For purposes of comparison, the current study used four of the nine Rumelt categories which correspond to Wrigley's original four, which were single product strategy, dominant strategy, related firm strategy and unrelated firm strategy. Panel data model was constructed and using a sample of 120 companies listed on the Pakistan Stock Exchange and data was obtained for companies with seven years’ quarterly data annually from 2010 to 2017. Using empirical tests, we found no relationship between diversification and leverage. Our analysis suggests that Diversifications strategy impact on capital structure indicate that this focus of enquiry has considerable potential for further resolution of the capital structure puzzle.