Factors determining capital structure of Pakistani non-financial firms.

This study is undertaken to discover the factors determining the capital structure decision of non-financial Pakistani firms. The capital structure irrelevance theory, trade off theory and pecking order theory stipulates different factors affecting a firm’s optimal debt/equity choice. However, the literature is still inconclusive about which factors and theories best defines the ideal capital structure mix. Thus, making it an unanswered, open empirical question, that, needs to be explored especially for sectors not previously studied. The effect of firm’s profitability, liquidity, size, tangibility and non-debt tax shield on capital structure decision of ten non-financial firms operating at Pakistan Stock Exchange is investigated for a period of ten years i-e from 2005-2014. By using fixed effects panel estimation method it is found that leverage ratio is inversely affected by profitability and current ratio of a firm. While, firm size, tangibility and non-debt tax shield positively effects leverage ratio. The influence of profitability is weakly significant whereas that of liquidity, size, tangibility and non-debt tax shield are strongly significant. The study also shows that results for profitability and liquidity are in accordance with the Pecking Order Theory and the result for size; tangibility and non-debt tax shield are in line with the Trade-Off Theory