Credit Risk and Capital Structure Dynamics in Pakistan

Abstract

The research is conducted to investigate the impact of credit risk on capital structure of financial and non-financial companies in Pakistan. Data is collected from the financial statements of 100 companies, 20 from financial and 80 from non-financial sectors related. The data from 2001 till 2019 is collected to conduct the panel regression analysis (fixed and random effect models). The results are obtained from four model, first used to evaluate the relationship between credit risk and capital structure of the financial and non-financial companies combine. The second model is analyzed the data only from non-financial companies. In third model data from non-financial companies excluding data from the years of global financial crisis (2007 to 2009) is analyzed. In fourth model data is analyzed with SIC (standardized industrial classification) dummies where non-financial companies are segregated into 12 industries. Based on results financial companies have different capital structure which effect the results. On the other hand, credit risk negatively affects the capital structure of non-financial companies and leverage, tangible assets and profitability control this relationship. The negative relation is again confirmed when global financial crisis (2007 to 2009) period removed but this time tangible assets doesn’t have any controlling effect on the relationship while leverage, firm size and profitability makes the controlling effect. In the fourth model, results again confirm the negative relationship between the dependent and independent variables while leverage, firm size and profitability come out as effective controlling variables leaving tangible assets behind and there is no impact of SIC dummies.