Capital Structure Determinants: Evidence from Banking Sector of Pakistan

Abstract

Using the firm level pannel data analysis, this study develops to explore the preliminary determinants of capital structure of banking firms of Pakistan.  The findings discover the idea of major determinants from the perspective of previous theories of capital structure are size of the firm, profitability in terms of return on assets and return on equity after taxes  and Gross Domestic Product GDP over a period of time. The capital choice decision for the banking firms in Pakistan is symmetric to the pecking order theory explaining the fact that there is negative and sigfncaint association between leverage and return on equity after taxes. The significant difference across the banking firms and some financial limitation are the factors which are influencing the decision of debt-to-equity mixture. We have used Pannel Data models like least square dummy variable model LSDVM, Fixed effect mode, random effect model and pooled regression mode. Through statistical tests our results are in favor of random effect regression outcomes. Furthermore outcomes are quite beneficial for the managers while defining the optimum level of debt to equity mixture especially in the banking sector.

Keywords: Leverage, GDP, size, pecking order, capital structure