Unlocking the Link Between Firm Level Factors and Capital Structure: "An Industrial Analysis"

Abstract

This study investigates the influence of firm level factors on capital structure. The determinants of the study are profitability, liquidity, cash gap, cash productivity of asset and firm valuation that effect the capital structure. The population used is the construction sector of Pakistan and the cement sector was selected as the sample size for period of 2016 to 2021. The random effect model is operated as data analysis technique to empirically examine the relationship of variables. The findings show that all predictors influenced the capital structure. The results obtained infer that profitability and cash gap are positively associated with capital structure. Whereas, liquidity, cash productivity of assets and firm valuation is negatively related with capital structure. The two fundamental theories of capital structure, trade-off theory and pecking order theory are used in this study. It emphasizes the significance of probability in determining the capital structure decisions as increased debt usage can lead to tax deductions due to interest payments. The aim is to enhance the company's profits, which in turn will raise the company's worth through optimal selection of capital structure. Our study recommends that companies in construction sector should increase their profitability and manage cash gaps efficiently to leverage positive impact on capital structure and to regularly evaluate form valuation to ensure it aligns with capital structure decision.