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Capital Structure Choice in an Emerging Market: Evidence from Listed Firms in Pakistan

This study empirically examines the determinants of capital structure choice of listed firms in Pakistan. A pooled sample of 535 public listed non-financial companies from 1988 to 2005 is used to establish the relationship between leverage and its determinants by using autoregressive distributed lag (ARDL) econometric framework. The results indicate that size of the firm and growth opportunities are positively related to debt ratio. A highly consistent result is that more profitable and highly liquid firms will avoid debt and will rely mainly on equity financing. Similarly firms with high risk and more tangible assets will use less debt. Moreover the results suggest that state owned firms have been financed heavily through bank loans and that there is a substantial decrease in leverage after the reforms in financial and corporate sector of 1990s in Pakistan. The secondary market development and financial liberalization has been associated with shift of firms from debt market to equity market. There is strong evidence indicating that choice of capital structure differs significantly across industries.