Determinants of Capital Structure of Banks in Pakistan: An Empirical Approach

Abstract

Purpose – The purpose of this study is to identify the determinants of capital structure of banks and to determine the impact of determinants on bank’s financial leverage.

Design/methodology/approach – The study uses the sample of 21 banks of Pakistan listed on Karachi Stock Exchange (KSE) and data was collected from their annual reports during the period 2006-2010. These annual reports were gathered through KSE, different databases and websites of banks. The correlation and regression analysis are used to analyze the impact of determinants on bank’s financial leverage.

Findings – The study examines the impact of determinants on bank’s financial leverage. The result finds three independent variables (profitability, growth and tax) out of seven independent variables statistically significant related with leverage. The results also find remaining four variables (size, assets tangibility, Non-Debt tax shield and dividend payout ratio) statistically insignificantly related with leverage.

Originality/value – Most of the studies on capital structure determinants are with reference to developed countries. This study will contribute to the literature by determining the impact of determinants on bank’s financial leverage because very few studies have been conducted on the banking industry of developing countries like Pakistan. This study also adds a new variable of dividend payout ratio as determinant of capital structure of banks in Pakistan.

Keywords: Capital structure, KSE, Non-debt tax shield, Dividend Payout ratio, Leverage