Is Negative Profitability-Leverage Relation the only Support for the Pecking Order Theory in Case of Pakistani Firms? (original) (raw)
Pakistan development review
Previous studies on capital structure in Pakistan have reported evidence in support of the pecking order theory. However, this evidence is largely based on testing one dimensional extensively test the pecking order theory in Pakistan with well-known pecking order testing models. Specifically, we use a sample of 321 firms listed on the Karachi Stock Exchange from the year 2000 to 2009 and test pecking order theory with models suggested Results of these models indicate that there exits only weak evidence in support of pecking order theory in Pakistan. However, strong support is found for pecking order theory when leverage ratios are regressed on profitability ratio, along with a set of control variables. This discrepancy in the results of the two sets of models needs further investigation, as well as care in interpreting the results of existing studies on capital structure in Pakistan. Our results show robustness even after controlling for possible profits understatements or weak corp...