Muhammad Azeem Qureshi

Does pecking order theory explain leverage behaviour in Pakistan

This study uses a 34 years’ standardized balance sheet data of the manufacturing firms in Pakistan to know the leverage behaviour of these firms over time. The results indicate that leverage has two pervasive and significant relationships: one, negative relationship with current and past profitability; and two, positive relationship with past dividends. This provides empirical evidence to put forward strong support to Pecking Order Theory (POT) in context of profitability and dividends. Moreover, it provides empirical evidence to present a reasonable support to POT regarding growth. However, apropos size POT gets nominal empirical support from Pakistan.

Human development, public expenditure and economic growth: a system dynamics approach

Purpose – It is now widely recognized that human development (HD) and economic growth (EG) are intertwined in two-way feedback processes either leading to an upward spiral of development or a poverty trap. This concept is used to overcome one of the limitations of a previous study by Qureshi which assumes exogenous gross domestic product (GDP). With endogenous GDP formulation, the impact of public expenditure on HD and EG in Pakistan is examined. Design/methodology/approach – System dynamics approach is used to model, identify and help manage the development path of HD and EG in Pakistan given alternative policies for public expenditure on HD and EG. For this purpose the model endogenously determines path of population cohorts, and education, health and economic indicators. Findings – The simulation results suggest that the current level of public expenditure on HD is extremely low and any further decrease will have irreversible negative impact on HD and economic indicators, even if the resources so saved are effectively invested in EG. Further, higher public expenditure on EG may neither result into better HD indicators nor economic indicators. On the contrary, higher public expenditure on HD not only improves HD indicators but also supplements EG. The results of this study conform to the results of earlier research and challenge the very basis of fiscal policy in Pakistan which has continually ignored HD over decades. Research limitations/implications – The model boundary excludes possible causal links of public expenditure, HD and income distribution. Identification and inclusion of these causalities may improve understanding of perpetuating asymmetric income distribution in Pakistan its role in HD and EG trade-off. Practical implications – This paper suggests reorientation of fiscal policy in Pakistan and to anchor it to HD by allocating more public funds. Originality/value – The unique characteristic of this model is explicit modelling of population cohorts in a two-way feedback relationship with economic development considering the delays and non-linearities involved in this process.

Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan

This article aims to investigate whether corporate income taxes affect the capital structure of nonfinancial firms listed on Karachi Stock Exchange Pakistan during 1972–2010. Empirical results suggest that taxes are positively related to total debt ratio and short-term debt ratio, whereas they are negatively related to long-term debt ratio. The negative relationship between taxes and long-term debt ratio appears illogical considering the tax advantage of debt in the presence of the corporate income tax. However, the observed crowding-out of corporate debt financing due to the presence of nondebt tax shields provides some logic on the demand side. While on the supply side the banks shy away from long-term debt in peculiar socioeconomic realities of Pakistan. The mixed relationships of corporate income tax with different measures of capital structure partially confirm the prophecy of trade-off theory in Pakistan. In addition, we find that other firm-specific variables which appear to significantly influence the capital structure choice of firms are profitability, collateral value of assets and firm size.

What determines leverage in Pakistan? A panel data analysis

Most of the chemical sector firms in Pakistan have foreign ownership or collaboration with foreign companies. It may be hypothesized that the leverage behavior of such firms is likely to be in line with the results of international studies of leverage generally carried out in developed economies. But there are a number of factors which differentiate developed economies from the developing ones. Hence, we identify an interesting conjunction for our research to add to the existing body of literature empirical evidence as to what determines leverage in chemical sector firms of Pakistan which have generally foreign ownership/collaboration. For this purpose we use the data of all listed firms of chemical sector of Pakistan for the period 1988 to 2006 (19 years). We use the framework provided by two competing theories, trade-off theory (TOT) and pecking order theory (POT), to identify the determinants of capital structure in the sector by using panel data models to identify the determinants of leverage and nature of their relationship. We find a significant direct relationship between profitability, business risk and leverage. This finding is consistent with TOT and negates the findings of some of the earlier studies in Pakistani context. Further, we find an inverse relationship between size, growth and leverage which is consistent with POT. These findings suggest that most of the chemical sector firms of Pakistan, having foreign ownership/collaboration, use a mix of local and international strategies for their leverage formation in Pakistan.

Mean reverting financial leverage: theory and evidence from Pakistan

Abstract Grounding concepts of the two competing theories of capital structure (trade-off theory, pecking order theory) are quite opposite to each other. Trade-off theory claims that there is an optimal (target) capital structure and firms try to achieve that optimal (target) point. Whereas pecking order theory argues that there is no optimal (target) capital structure but the firms follow a specific pattern of financing. Using the two competing theoretic frameworks, this study applies Fisher-type panel unit root test to an unbalanced panel data of 13 115 firm-year observations of nonfinancial firms listed on Karachi Stock Exchange Pakistan spread over 38 years (1973–2010). Overall panel test results, for short-term, long-term, as well as total leverage support trade-off financing behaviour while individual firm results do not. Individual firm results show that only 16% of the firms have short-term target, 25% of the firms have long-term target and 12% of the firms have total target leverage ratio. Further, industry results explain that most of the industries do have target leverage ratios and classification of data into profitable and lossmaking firm-year observations explains that profitable firms clearly follow trade-off financing behaviour while the results for lossmaking firms do not support trade-off financing behaviour. Our study indicates that it is important for the government to ensure policies to develop well-balanced financial markets and to improve accountability systems.

How do they adjust their capital structure along their life cycle? An empirical study about capital structure over life cycle of Pakistani firms

Purpose The purpose of this study is to explain the adjustment rate made to target capital structures by listed non-financial firms in Pakistan during the courses of their life cycles and to determine what factors influence their adjustment rates. Design/methodology/approach The study used multivariate analysis to classify 39 years (1972-2010) of unbalanced panel data from listed non-financial Pakistani firms in terms of their growth, maturity and decline stages. Further, it used a fixed-effects panel data model to determine the factors that influence capital structure and adjustment rates during the life-cycle stages of firms. Findings The study observed a low–high–low leverage pattern during the growth, maturity and decline stages of businesses in line with tradeoff theory. Furthermore, the study observed an adjustment rate for growing firms of between 49.3-37.9 per cent, for mature firms of between 35.5-17.5 per cent and for declining firms of between 22.2-15.1 per cent toward their respective leverage targets. Furthermore, it was found that growing firms have higher leverage adjustment rates because, by having more investment opportunities, these firms can alter their capital structures easily by changing the composition of their new issues. Practical implications Erratic economic conditions in Pakistan have created an uncertain business environment. Therefore, even mature Pakistani firms remain skeptical about the sustainability of positive trends among current economic indicators. Furthermore, to avoid uncertainty, Pakistani firms grab short-term opportunities by using quickly available short-term debt as a main financing source. Government should introduce long-term policies that will stabilize the business environment and strengthen the financial, as well as the judicial, institutions of the country so that these firms may benefit from long-term investment opportunities and access more options for raising external financing. The results of this study will also help policymakers for other Asian economies where the capital markets are underdeveloped and where firms have higher leverage ratios, such as Thailand, Indonesia and Malaysia. Originality/value This is the first study in Pakistan that has used a multivariate approach to classify firms into their different life-cycle stages and to discover the leverage adjustment rates of firms during those life-cycle stages.

Firm, industry, and country level determinants of capital structure: evidence from Pakistan

Purpose The purpose of this paper is to find out firm, industry, and country level determinants of capital structure of Pakistani listed non-financial firms. Design/methodology/approach The authors use a fixed effects panel data model over a 39 years (1972-2010) unbalanced panel data of Pakistani non-financial listed firms to determine the factors that influence capital structure of these firms. Findings The authors find that Pakistani firms prefer retained earnings to finance their business projects, and debt is easily available for experienced firms. Moreover, socio-economic collusive networks, poor corporate governance mechanism along with weak legal system provide these firms an opportunity to pass on their risk to the creditors (banks). Research limitations/implications The data set does not contain factors characterizing inter-industry heterogeneity, therefore, the authors use mean industry leverage and mean industry profitability to explore if any relationship exists between leverage of firms, and their respective industry leverage/profitability. Practical implications Pakistani non-financial firms are highly leveraged increasing their probability to face financial distress in erratic economic conditions. As such, the policy makers need to develop capital markets of Pakistan to enable a resilient corporate capital structure. Further, erratic economic conditions of Pakistan create uncertain business environment yielding short-term opportunities and to finance them Pakistani firms use short-term debt as a main financing source. The policy makers need to improve corporate governance mechanism and strengthen legal system that will go a long way to develop Pakistani capital market on sound and sustainable footing. Originality/value This is the first study that uses an extended number of variables and discovers financial behavior of firms in a bank-based economy having limited financing options, and facing erratic economic conditions.

Determinants of capital structure of Islamic and conventional commercial banks: evidence from Pakistan

Purpose - The purpose of this paper is to investigate how conventional and Islamic commercial banks in Pakistan choose their capital structure and what are the most significant factors that affect their choice of capital structure. Design/methodology/approach - We took the data from annual reports of commercial banks listed on Karachi Stock Exchange Pakistan during 2004-2014. Panel data techniques namely pooled OLS, fixed effects and random effects used to estimate the relationship between book leverage and bank-specific variables such as profitability, size, growth, tangibility and earnings volatility. Findings - Descriptive statistics indicate that conventional commercial banks are more levered than Islamic commercial banks. Moreover, conventional commercial banks are larger, profitable and have relatively safe earnings than Islamic commercial banks. In contrast, Islamic commercial banks have relatively more fixed operating assets and growth in total assets compared to the conventional commercial banks. Regression results indicate that profitability, growth and tangibility are negatively whereas bank size and earnings volatility are positively related to book leverage of conventional commercial banks. On the other hand, only three variables namely profitability, bank size and tangibility have material effects on capital structure choice of Islamic commercial banks. Profitability and tangibility are negatively while bank size is positively related to book leverage of the Islamic banks. In sum, results of the study indicate that Islamic and conventional commercial banks have their own way to choose the capital structure than the non-financial firms however their choice is affected by the similar variables as identified for non-financial firms in Pakistan. Practical implications - Results of this study provide support to bank managers to understand the effects of bank-specific variables on capital structure and make them able to determine a balanced capital structure considering the regulations framed by the central bank of the country. Originality/value - This is the first study that investigates the factors that affect the capital structure of conventional and Islamic commercial banks in Pakistan. Moreover, findings of this study lay some foundation upon which a more detail analysis of capital structure of banks could be based.

The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling

ABSTRACT The purpose of the study is to explain adjustment rate towards target capital structure of Pakistani nonfinancial listed firms and to investigate the impact of financial liberalization (FL) on capital structure adjustment rate. We control for the unobserved heterogeneity and the fractional nature of adjustment rate by applying an unbiased dynamic panel fractional estimator on an unbalanced panel data of Pakistani nonfinancial firms listed during 1972–2010. We find that these firms adjust at an annual rate of 24–51% to reach their capital structure targets. We argue that in order to optimize the benefits of FL the government should strengthen financial as well as judicial institutions to enforce the creditors’ rights that will enable access to more options to Pakistani firms to raise cheaper external financing.

Stock Prices' Variability around Earnings Announcement Dates at Karachi Stock Exchange

The purpose of this study is to investigate how earnings announcement event affects stock returns at Karachi Stock Exchange (KSE). For this purpose we use the KSE-100 Index as our sample. We use the CAR Analysis to analyze the impact of earnings announcement over the stock returns around announcement dates. Our results suggest that KSE experiences abnormal stock returns around earnings announcement dates for the overall market and for different categories which indicate that efficient market hypothesis does not hold in Pakistani market and point out the presence of informational dissemination inefficiencies in the market.