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How do they adjust their capital structure along their life cycle? An empirical study about capital structure over life cycle of Pakistani firms

How do they adjust their capital structure along their life cycle? An empirical study about... PurposeThe purpose of this study is to explain the adjustment rate made to target capital structures by listed non-financial firms in Pakistan during the courses of their life cycles, and to find out what factors influence their adjustment rates.Design/methodology/approachThe study used multivariate analysis to classify 39 years (1972-2010) of unbalanced panel data from listed non-financial Pakistani firms in terms of their growth, maturity and decline stages. Further, it used a fixed effects panel data model to determine the factors that influence capital structure and adjustment rates during the life cycle stages of firms.FindingsThe study observed a low-high-low leverage pattern during the growth, maturity and decline stages of businesses in line with trade-off theory (TOT). Furthermore, the study observed an adjustment rate for growing firms of between 49.3-37.9%, for mature firms of between 35.5-17.5% and for declining firms of between 22.2-15.1% towards their respective leverage targets. Furthermore, we have found that growing firms have higher leverage adjustment rates because, by having more investment opportunities, these firms can alter their capital structures easily by changing the composition of their new issues.Practical implicationsErratic economic conditions in Pakistan have created an uncertain business environment. Therefore, even mature Pakistani firms remain skeptical about the sustainability of positive trends amongst current economic indicators. Furthermore, to avoid uncertainty, Pakistani firms grab short-term opportunities by using quickly available short-term debt as a main financing source. Government should introduce long-term policies that will stabilize the business environment and strengthen the financial, as well as the judicial, institutions of the country so that these firms may benefit from long-term investment opportunities and access more options for raising external financing. The results of this study will also help policy-makers for other Asian economies where the capital markets are underdeveloped and where firms have higher leverage ratios, such as Thailand, Indonesia and Malaysia.Originality/valueThis is the first study in Pakistan that has used a multivariate approach to classify firms into their different life cycle stages and to discover the leverage adjustment rates of firms during those life cycle stages. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

How do they adjust their capital structure along their life cycle? An empirical study about capital structure over life cycle of Pakistani firms

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1558-7894
DOI
10.1108/JABS-06-2015-0080
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this study is to explain the adjustment rate made to target capital structures by listed non-financial firms in Pakistan during the courses of their life cycles, and to find out what factors influence their adjustment rates.Design/methodology/approachThe study used multivariate analysis to classify 39 years (1972-2010) of unbalanced panel data from listed non-financial Pakistani firms in terms of their growth, maturity and decline stages. Further, it used a fixed effects panel data model to determine the factors that influence capital structure and adjustment rates during the life cycle stages of firms.FindingsThe study observed a low-high-low leverage pattern during the growth, maturity and decline stages of businesses in line with trade-off theory (TOT). Furthermore, the study observed an adjustment rate for growing firms of between 49.3-37.9%, for mature firms of between 35.5-17.5% and for declining firms of between 22.2-15.1% towards their respective leverage targets. Furthermore, we have found that growing firms have higher leverage adjustment rates because, by having more investment opportunities, these firms can alter their capital structures easily by changing the composition of their new issues.Practical implicationsErratic economic conditions in Pakistan have created an uncertain business environment. Therefore, even mature Pakistani firms remain skeptical about the sustainability of positive trends amongst current economic indicators. Furthermore, to avoid uncertainty, Pakistani firms grab short-term opportunities by using quickly available short-term debt as a main financing source. Government should introduce long-term policies that will stabilize the business environment and strengthen the financial, as well as the judicial, institutions of the country so that these firms may benefit from long-term investment opportunities and access more options for raising external financing. The results of this study will also help policy-makers for other Asian economies where the capital markets are underdeveloped and where firms have higher leverage ratios, such as Thailand, Indonesia and Malaysia.Originality/valueThis is the first study in Pakistan that has used a multivariate approach to classify firms into their different life cycle stages and to discover the leverage adjustment rates of firms during those life cycle stages.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Aug 1, 2016

References