Interaction of Leverage and Reforms Process Revisited Empirical Evidence from the Fuel and Energy Sector of Pakistan
Year: 2011
Type: article
Abstract: In the present paper the linkage between capital structure and Financial Reforms areanalyzed in a dynamic setup. The linkage is explored by using a panel data set, spanning 1988-
2008, of the Fuel and Energy industry of Pakistan by employing the Arellano-Bond Dynamic
Panel-Data Estimation technique to avoid the problems of endogeneity, heteroscedasticity and
autocorrelation which are usually associated with dynamic panel data estimation.The main
variable of interest, Financial Reforms, has a negative relationship with leverage as predicted by
theory. This negative relationship substantiate the fact that with liberalization and strengthening of
institutions, leverage has decreased due to shifting of the firms from debt to equity market once
the financial constraints got eased out. The positive relationship between leverage and lagged
leverage suggest costs of adjustment for capital structure, which delays the adjustment process.
Tangibility, confirming Pecking Order Hypothesis, has a negative correlation with leverage;
indicating that the firms of fuel and energy sector of Pakistan fail to use their tangible assets as
collateral for debt financing. Nevertheless, the results validate Pecking Order Hypothesis in case
of profitability. Profitability, as advocated by Pecking Order Hypothesis, is negatively associated
with leverage. That is highly profitable firms looks towards equity financing rather than debt
financing. Size as predicted by theory has positive relationship with leverage; bigger firms tend to be financed through debt. Ironically, the Growth variable has positive but statistically insignificant relationship with leverage.
Author: Shah Khalid
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W1515055844