Sector analysis on determinants of capital structure and human capital among non-financial listed firms in Pakistan

Abstract

Capital structure provides a way of controlling and directing financial mechanism that helps a firm in achieving its desired objectives for maximizing stakeholders‘ wealth. Past studies on aligning the reasonable or optimal capital structure with firm‘s operating, investing and financial requirements are still rare in developing countries and in Pakistan particularly. The current study provides a dynamic framework to investigate the sensitivity of capital structure and how various factors influence the nature of debt and equity financing. The study investigates the relationship of several independent firm-level variables such as, size, tangibility, profitability, growth, non-debt tax shield, dividend payout, firm age, business risk, uniqueness and liquidity with capital structure of firm. Furthermore, this study explores the different dimensions where human capital relation was also examined with all the three measures of dependent variable, i.e., short-term debt, long-term debt and total debt ratios. Analysis was conducted by using the ten years (2003-2012) data of 176 non-financial companies from eight different sectors (i.e., automobile and parts, chemicals, construction and materials, electricity, food processors, oil and gas, personal goods and household goods) listed on Karachi Stock Exchange (KSE). Three different methodologies were employed, i.e., pooled data estimation, panel data estimation and dynamic panel data estimation. Analysis showed that the different sectors behaved differently towards capital structure. However, overall analysis of 176 companies showed that the firm size, profitability, dividend payout and liquidity remained significantly correlated to capital structure. While applying Generalized Method of Moments (GMM), results of long-term debt show that all the variables remained significant except uniqueness of firm. Moreover, firm size also played significant role as a moderator between human capital and capital structure. The findings of this study are discussed in terms of theoretical, practical and conceptual implications for both scholars and policy makers to better understand decisions related to capital structure with a view for future researchers.