Financing Pattern in Developing Nations Empirical Evidence from Pakistan

Abstract

Financing pattern of firms from developing nation always remains a mystifying area of finance. Present study aims to investigate the determinants of capital structure. Moreover, it is also tried to answer that how these potential determinants can affect financing pattern of developing nation firms. To achieve research objectives data for 323 Pakistani manufacturing firms have taken for the period of 1998-2009. Exploration is performed by using panel econometrics technique. Different theories regarding capital structure i.e. trade-off, pecking order, agency and signaling theories are reviewed. Most of the researchers focused on debt ratio as a measure of leverage. They circumvent the verity of profound dependence of Pakistani firms on short term debt. Present study surmounted this problem by taking three different measures of dependent variable Leverage. i.e. debt ratio, short term debt ratio and long term debt ratio. Explanatory variables are Profitability, Tangibility, Liquidity, Size and Growth Opportunities. Results of present study confirms that Pakistani manufacturing firms are following the financing pattern given by pecking order theory and trade-off theory and their financing models are adopted from western nations. Moreover, it also provides empirical evidence that heavy use of short term debt in capital structure by developing nations is the main difference of financing pattern of developing and developed nation firms.

Keywords: Corporate Finance, Capital Structure, KSE Pakistan