Macroeconomic Conditions and Firm's Choices of Capital Structure: Evidence from Pakistan's Manufacturing Sectors

Progressive economic growth in a county is essential for effective and sound decision making of firm's financial policies. Capital structure is one of the most significant areas of firms' strategic financial decision making. Several financial, business and institutional factors influence the firms' choices of leverage. Economic indicators drive an economy towards a certain direction and play a vital role in influencing the firms' choices of leverage. The aim of this study is an attempt to investigate the role of key economic factors in strategic financial decisions of the listed firms from Pakistan's major manufacturing sectors. Empirical findings demonstrate that the key economic factors have an influence on capital structure decisions of Pakistan's manufacturing firms. Findings showed that GDP growth rate of Pakistan has a significant negative association with debt ratios whereas mix results are found while analyzing the relationship between lending rate and three debt ratios. A negative association of lending rate with debt ratios suggests lower demands of the firms for debt financing when lending rates increase. Contrary to this, it is already suggested that due to emerging capital markets in our country, it is difficult for the firms to bear high floatation cost while issuing the common equity. So, the main source of debt financing is commercial banks. Therefore a significant positive relationship might be also analyzed. Pakistan's manufacturing sector plays a vital role in our economic growth and progression as it remarkably contributes in country's GDP.