African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 3978

Full Length Research Paper

What determines leverage in Pakistan? A panel data analysis

Muhammad Azeem Qureshi1*, Muhammad Imdadullah2 and Tanveer Ahsan2
1School of Business, Oslo and Akershus University College of Applied Sciences, Oslo, Norway. 2Institute of Management Sciences, Bahauddin Zakariya University, Multan, Pakistan.
Email: [email protected]

  •  Accepted: 10 November 2011
  •  Published: 25 January 2012

Abstract

Most of the chemical sector firms in Pakistan have foreign ownership or collaboration with foreign companies. It may be hypothesized that the leverage behavior of such firms is likely to be in line with the results of international studies of leverage generally carried out in developed economies. But there are a number of factors which differentiate developed economies from the developing ones. Hence, we identify an interesting conjunction for our research to add to the existing body of literature empirical evidence as to what determines leverage in chemical sector firms of Pakistan which have generally foreign ownership/collaboration. For this purpose we use the data of all listed firms of chemical sector of Pakistan for the period 1988 to 2006 (19 years). We use the framework provided by two competing theories, trade-off theory (TOT) and pecking order theory (POT), to identify the determinants of capital structure in the sector by using panel data models to identify the determinants of leverage and nature of their relationship. We find a significant direct relationship between profitability, business risk and leverage. This finding is consistent with TOT and negates the findings of some of the earlier studies in Pakistani context. Further, we find an inverse relationship between size, growth and leverage which is consistent with POT. These findings suggest that most of the chemical sector firms of Pakistan, having foreign ownership/collaboration, use a mix of local and international strategies for their leverage formation in Pakistan.

 

Key words: Pecking order theory, trade-off theory, capital structure, chemical sector, foreign ownership, Pakistan.

  • Articles on Google by: