DETERMINENTS OF CAPITAL STRUCTURE DECISION Case of Pakistani Government Owned and Private Firms

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.