Abstract:
Capital structure decisions are among the most important and crucial decisions for any business
because of their effect on value and cost of the company. The objective of every company is to
maximize its value with the minimum costs, and that is possible only when a company makes a
judicious mixture of debt and equity. For that reason, any company has to consider the important
factors of capital structure decision which helps in determining how much leverage a company
should employ. In this dissertation we have discussed the determinants of capital structure of
Pakistani firms and divided our sample in to two sub-samples of private and government owned
companies in order to make comparison between two sectors. In this regard we selected a
sample of 91 Pakistani companies out of which 80 companies are private and 11 are government
owned. We collected data of those firms during the period of 1999 – 2006. We used Tangibility,
Size, Growth rate, Tax Provision, ROA and Profitability as independent variables and Leverage as
our dependent variable. For analysis purpose we have used descriptive statistics, Spearman’s
correlation and Regression analysis. The results show that Tangibility, Size, Profitability and ROA
have negative relationship with Leverage where Tax provision and Growth rate has positive
relation with leverage. There seems to be a positive coefficient of tax rate of Tax provision,
Growth rate, and negative coefficient for ROA in private companies and government owned
companies. On the other hand, in government owned companies Tangibility is positively
correlated with debt, where in private companies it is negatively correlated. Size is positively
correlated with debt in private companies and negatively correlated in government owned
companies. Similarly in government owned companies Profitability is positively correlated and conversely in private companies it is negatively correlated. This may imply that government owned and private companies of Pakistan use different patterns of financing, and that government owned companies employ more leverage than private companies.
