The Determinants of Capital Structure: Pakistan Chemical Industry

Abstract

This study has analyzed the determinants of the capital structure by taking the chemical sector of Pakistan as a case study. The study has used linear regression model to measure the determinants of capital structure of the firms in the chemical industry. The aim of this study was to talk about the shortfalls of previous studies. Past research was done for less time period and on few data. Additionally, past researches have examine problem through pooled data and it was combine analysis of various sectors. After going through literature and different theories regarding capital structure it is observed that determinants that effect decision of creating ideal capital structure vary from industry to industry. Different determinants have different effect on the debt to equity of the company depending upon the sector in which company operates. This study also put emphasis on conducting research on other sectors as well to find out more. The result of the study shows insignificant relation among profitability and capital structure of the chemical firms which shows that pecking order theory hypotheses is accepted. The profitability of the firms are increases with the greater use of debt in capital structure but in case chemical industry of Pakistan it is negatively affected due to economic situation of Pakistan. Whereas, size of the firm and asset structure shows significant relation among capital structure. And size of the firms and its capital structure are directly proportional to each other because big sized firms always need heavy investment to flow smooth.