Determinants of capital Structure in Automobile sector evidence from Pakistan

Abstract

The basic aim of current research is to empirically investigate the “Determinants of Capital structure in automobile sector of Pakistan” by testing two basic capital structure theories. 1: Packing Order Theory and 2: Trade-Off-Theory. Panel data regression is used for analysis and ordinary least square method (OLS) for regression, which minimizes error in estimation results. The data is taken from Secondary source such as “Financial statement of the firms in Automobile sector of Pakistan for the period of (2008-2015)”. The determinants of capital structure are growth, tangibility, size, tax, profitability and age, to check the impact of these variables on leverage. The analysis show the firms in automobile sector of Pakistan is not getting the tax shield benefit by using leverage, the firms usually use Packing order theory for their capital structure decisions mostly firms uses internal source of financing to take their capital structure and investment decisions. This may be the reason is that large number of firms in this sector are prefer to invest in long term asset by internal source of financing like retained earnings. According to findings four variables (Profitability, Size, Tax, and Age) are sustain packing order theory and only two variables (Tangibility, Growth) are supported trade off theory. The findings also suggest that while firms are making capital structure decisions Automobile firms should consider growth, tangibility, size and tax as all have statically significant these factor play an important impact on leverage, whereas, profitability and age have no significance or low significance they may impact the leverage in long run.