The Determinants of Capital Structure: Evidence from Pakistani Manufacturing Companies

Financing decisions are one of the most vital decisions for companies. This research study is an attempt to examine the effect of business risk on debt ratio of the companies of different size like small, medium and large firms. This study also identifies the factors which are important in choosing optimum capital structure. A panel data set of 400 manufacturing firms of Pakistan for the period of 2001 to 2014 was selected to fulfil the objectives of the study. Ordinary Least Square (OLS), fixed effect and random effect estimation methods are used in the study for analysis. The results shows that profitability, cash ratio, and age have negative impact on debt ratio while tangibility, firm size, Tobin’s q and business risk has positive impact. Managers of the companies should dedicate their time and energies to those variables that have significant direct link between determinants of capital structure and debt ratio with the intention of minimizing the weighted average cost of capital which in turn will maximizes the wealth of shareholders.

Key words: Business risk, Capital structure, Firm size, Panel data, JEL Classification: C23, G32.