MACROECONOMIC DEVELOPMENTAND DEBT/EQUITY CHOICE OF THE FIRMS: A SECTOR WISE ANALYSIS OF KSE LISTED FIRMS

Abstract

The purpose of this study is to analyze the effect of macro-economic factors on debt
equity choices of the firms listed on KSE and to segregate the results on the basis of
sectors. All non-financial firms listed at KSE for the period of 10years (i.e. from 2000 to
2009) were considered and the panel data using SUR model was analyzed. Specific
variables of the firm showed significance with various capital structure ratios.
However, macro-economic variables showed a mixed relation with the debt/equity
choices of various sectors. E.g. the Bank-size is directly related with financial leverage
for KSE-All index. Market size is negatively associated with financial leverage for
Tobacco sector. Inflation rate proved a negative relationship with external financial
ratio and financial leverage for KSE-100 index, transport & communication, and
miscellaneous sectors. GDP per capita proved to be negatively related with financial
leverage and positively related with external financing ratio for KSE-100. Finally, the
Discount rate proved to be directly related with financial leverage and external
financing ratios for KSE-100, Paper & Board, Tobacco and Chemical sectors. All these
relationships exhibit the importance of macroeconomic factors in relation with the
capital structure determination of firms and open new horizons of research in this area
ultimately helping the practitioners and academicians.