Investment Financing: An Evidence from Pakistani Firms

Abstract

This paper examines the contribution of various forms of capital which are utilized by Pakistani firms for the purpose of financing their investments. The study results generated using seemingly unrelated regression model indicate that Pakistani firms rely on long-term debt issuances to finance their investments followed by equity whereas cash holdings are used nominally. Firms tend to build up their cash reserves in order to pay back their debt obligations as they deem necessary to have leverage capacity while in the case of equity-based financing their focus is on paying dividends to their shareholders. Moreover, they actively use cash reserves to finance net working capital. Capital expenditures and comprehensive investments which are both used as investment financing measures in this paper are largely financed by debt followed by equity as Pakistani firms do not spend actively in areas such as R&D, so comprehensive investments are greatly influenced by capital expenditures.