CAPITAL STRUCTURE DECISION: WHICH FIRM LEVEL AND COUNTRY LEVEL FACTORS ARE RELIABLY IMPORTANT IN NONFINANCIAL FIRMS IN PAKISTAN

Abstract

An optimal capital structure is essential for wealth maximization and value creation of any firm. The
current study is designed to evaluate the impact of financial and economic factors that influence
financing behavior of non-financial firms in Pakistan. Moreover, the current study implies pooled
regression and fixed effect models on the base of Hausman specification test and Chow test. The
solvin's sampling technique has adopted, while financial data and economic data have been selected
from the website of State Bank of Pakistan and world Bank, respectively. Findings of the study reveal
that profitability is significant but inversely related to Capital structure across both regression
models. Size and tangible are significantly and positively associated to debt ratio. Interest rate is
significant but inversely associated to debt ratio in pooled model, while insignificant in fixed effect
model. Additionally, business risk, economic growth and tax rate are insignificant factor of Capital
Structure across both estimation techniques. It is implies that the findings and relationship of the
study have supported the predication of pecking order, trade off and market timing theory. The
management of non-financial Pakistani firms is recommend to make optimal decision by selecting
internal and external factors such as profitability, tangibility, size and interest rate.