Tanveer Ahsan

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.

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.

Credit supply and corporate capital structure: evidence from Pakistan

Purpose – The purpose of this paper is to investigate the relevance of credit supply for corporate capital structure decisions of manufacturing firms in Pakistan. Design/methodology/approach – The implicit assumption in much of the work on capital structure is that for a firm, the availability of incremental capital depends solely on its characteristics. However, the capital market frictions suggest that suppliers of credit may also affect firms’ ability to borrow. The authors investigated this intuition by employing dynamic panel data estimators using 8,984 firm-year observations for the period 1990-2010. Findings – The results show that short-term debt is a major source of financing in these firms. Further, credit supply plays a significant role in these firms’ capital structure decisions and hence, they increase their short-term debt (main financing source) with an increase in credit supply in the market while payoff their long-term debt with internal funds. Practical implications – The findings of thi...

Equity and Debt Financing Strategies to Fuel Global Business Operations During Crisis

We use panel data techniques to analyze the debt and equity financing strategies of the non-financial firms operating in the G8 countries and the selected emerging economies and compare them with those adopted during the financial crisis of 2007–2008. For this purpose, we analyze corporate financial data of 9952 firms in the G8 and 10,531 firms in the emerging economies over 12 years (2003–2014) to understand the corporate financing strategies in two different business environments. We find an increase in corporate debt financing in the G8 as well as the emerging economies during the period of financial crisis. Specifically, the firms operating in the G8 increased short-term debt financing whereas the firms operating in the emerging economies increased long-term debt financing. We also find institutional factors playing their role significantly but differently during the period of financial crisis.

Mean Reverting Financial Leverage and Firm Life Cycle: Theory versus Evidence (Pakistan)

Abstract The purpose of the study 3 3 This article is a part of a PhD thesis submitted at School of Accounting, Dongbei University of Finance and Economics, Dalian, P. R. China. is to decide between two competing theories of capital structure (trade-off theory and pecking order theory) along a firms’ life cycle and to find out whether there exists a target capital structure or not. To carry out the purpose, we develop a database of 13,375 firm-year observations of non-financial firms listed on Pakistan Stock Exchange spread over 39 years (1972–2010). A multivariate approach has been followed to classify 13,375 firm-year observations into different life cycle stages, and Fisher type panel unit root test has been applied to check the mean reversion of financial leverage ratios. The results of unit root analysis for growing and mature firms clearly support trade-off financing behavior while for declining firms results do not support trade-off financing behavior.