Determinants of Capital Structure: Evidence from Pakistani Panel Data

Using two variants of panel data analysis, we attempt to find the determinants of capital structure of KSE listed none-financial firms for the period 1994-2002. Pooled regression analysis was applied with the assumption that there were no industry or time effects. However, using fixed effect dummy variable regression, the coefficients for a number of industries were significant showing there were significant industry effects hence we accepted the later model for our analysis. We used six explanatory variables to measure their effect on leverage ratio. Three of our variables were significantly related to leverage ratio whereas the remaining three variables were not statistically significant in having relationship with the debt ratio. Our results approve the prediction of trade-off theory in case of tangibility variable whereas the earning volatility (EV), and depreciation (NDTS) variables fail to confirm to tradeoff theory. The growth (GT) variable confirms the agency theory hypothesis whereas profitability (PF) approves the predictions of pecking order theory. Size (SZ) variable neither confirms to the prediction of tradeoff theory nor to asymmetry of information theory.