An Empirical Perspective on the Factors Affecting the Choice of Debt Capital: A Case Study of Domestic Corporations Operating in Pakistan

Abstract

One of the most controversial issues encountered by 21st century corporate manager is to identify optimal mix of financing sources in capital structure. There have been numerous existing capital structure theories predicting the behaviour of financing patterns and preferences of a corporation but there has not yet been universally accepted one. The results of panel data regression in this study show that age, size, growth, profitability, asset tangibility, business risk and Non debt Tax Shields (NDTS) are significant determinants of leverage ratio of domestic corporations operating in Pakistan. It is evidenced that majority of the important determinants to leverage ratio behave as per predictions of trade off theory of capital structure. The findings of this study have great implications to corporate managers, credit managers of lending institutions, government policymakers, investment analysts, investors, researchers, and academicians.