Does Stock Return Volatility Affect Capital Structure Decisions? Non-Financial Firms Analysis from Pakistan

Abstract

This study investigates the stock return volatility impact on capital structure choices of corporate firm managers using the non-financial firms’ data from 2013 to 2018. We measure capital structure by four leverage ratios, DOL, DFL, DTL and D/E ratio. We use data from Pakistan Stock Market. We used the Reuters DataStream for data gathering. We have relied on GLS method for estimation of sample data analysis. The Hausman test value guided us for fixed affect method for data estimation. Our results show that volatility in stock prices does affect the capital structure choices of firms if we calculate capital structure choices using DOL, DFL, and DTL leverage ratios. If we calculate the finances choices using the Debt to Equity ratio, then volatility in stock prices does not significantly affect the capital structure decisions of corporate managers in the Pakistani corporate sector. We also added firm size and firm age as control variables to control the effect of firm size and age on the results.