Determinants of Capital Structure in the Banking Sector of Pakistan

Abstract

This research identifies the most important determinants of capital structure of banking sector for the period 2009-2018. Five independent variables and three dependent variables have been tested using regression analysis. Using the banks level data, this study 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 liquidity, profitability in terms of ebit on total assets and growth change in total asset over a period of time. Hypotheses based on comparing the relationships between short term debt, long term debt, and total debt and 5 explanatory variables that represent liquidity, profitability, growth, tax rate and asset tangibility were developed to test which independent variable best explained the capital structure of banking sector of Pakistan. The capital choice decision for the banking firms in Pakistan is symmetric due to the pecking order theory. The significant difference across the banking firms and some financial limitation are the factors which are influencing the decision of total debt ratio, short term debt ratio and long term debt ratio. The study has concentrated on one economy rather than several and covers a horizon of 10 years covering two recessions. This has not been the case with previous studies since they faced the limitation of data not being available for the full period of the study to deal with negative events. For future research, the authors plan to study several macro-economic factors that influence capital structure decisions. This will include factors such as capital formation, stock market development, financial stability of country, corporate tax, terrorism threat, direct foreign investment, and so on. Researchers can utilize this paper to develop stronger models for research into the capital structure determinants for emerging economies.