Determinants of Capital Structure : A Study of Chemical Sector of Pakistan Firms Listed on Pakistan Stock Exchange (PSX), Pakistan

Abstract

The main objectives of this study are to find out the determinants of capital structure of chemical sector firms’ listed on Pakistan Stock Exchange and also find out which theory of capital structure is dominating in chemical sector. In this study the firm’s profitability, size, growth opportunities, liquidity, size, assets tangibility and business risk are taken as independent variables while leverage is used as dependent variable. This research is done by using 132 observations and selected 22 firms of chemical sector of Pakistan, which are listed on Pakistan stock exchange (PSX), as sample and analyzed six years data from 2009 to 2014. The study used secondary data published by state bank of Pakistan (SBP) as Financial Statement Analysis of (Non-Financial Sector). The collected data analyzed by using a famous software known as SPSS by using the techniques of descriptive statistics, correlation and multiple regression. Findings of this study shows that profitability, size, liquidity and business risks have significant negative impact on leverage, which means if these independent variable(s) increases the dependent variable will decrease. Whereas, assets tangibility has significant positive impact on leverage, which means increase in tangibility will lead to increase in total debt. While growth opportunities has negative and non-debt tax shield has positive impact but statistically insignificant. And on the basis of results study found that both theory of capital structure i.e. pecking order and trade off theories are equally prevailing in chemical sector of Pakistan. Therefore, chemical sector firms should consider profitability, size, business risk, assets tangibility and liquidity when making their financial decisions.