Abstract:
Economic variables drive an economy towards a certain way and play an important role in impacting the firms’ choices of leverage. This study examines the effect of macroeconomic variables on Pakistan non-financial firm’s capital structure listed on KSE-100 index over the period of 2013-2017. In this study, we used two dependent variables as measure of capital structure that are debt to equity ratio and debt to asset ratio where four macroeconomic variables are used as independent variables: GDP growth rate (GDP), Inflation rate (IR), Real interest rate (RIR), Exchange rate (EXG). The investigation uses data from World Bank website and annual reports of listed non-financial firms from KSE website. The findings illustrates that GDP growth rate has significantly positive relation with capital structure whereas Exchange rate has significantly negative relation with capital structure. Real interest rate shows negative and insignificant relationship with debt to asset ratio while positive relation with debt to equity ratio. Result illustrates that inflation rate has negative and significant impact on both debt to equity ratio and debt to asset ratio it described that when inflation rate increases cost of debt increases results in reducing debt financing by company.
