Abstract—This study attempts to explore those factors that influence the capital structure choice of textile firms in Pakistan.The investigation is performed using panel data procedures fora sample of 75 firms listed on Karachi Stock Exchange during 2002-2007. The results suggest that leverage is negatively correlated with profitability, liquidity, and tangibility, and positively correlated with firm size and growth opportunities. In particular, the negative relationships of profitability and liquidity, and a positive relationship of growth opportunities with firm leverage confirm the predictions of pecking order hypothesis. A positive relationship of firm size with leverage confirms the predictions of trade-off theory. A negative relationship between tangibility and leverage is in contradiction with trade-off theory, however it seems to be consistent with the predictions of pecking order theory because of profound dependence of textile firms on short-term debt. Thus, these findings suggest that some of the insights from modern finance theory are portable to Pakistan in that certain firm specific factors that are relevant for explaining the capital structure undeveloped economies are also relevant in Pakistan.
Index Terms—Agency theory, Capital structure, Pecking order theory, Trade-off theory
Nadeem A. Sheikh is a senior Lecturer of Accounting and Finance at Institute of Management Sciences, Bahauddin Zakariya University, Multan Pakistan. At present, he is enrolled as Doctoral Degree Candidate in School of Management, Huazhong University of Science and Technology, Wuhan,(Hubei), P. R. China. (Phone: 0086-13437163895; Fax: 0086-27-87559091;e-mail:email@example.com)
Zongjun Wang is Professor of Finance and Enterprise Strategy at School of Management Huazhong University of Science and Technology, Wuhan,(Hubei), P. R. China. (e-mail:firstname.lastname@example.org)
Cite: Nadeem A. Sheikh and Zongjun Wang, " Financing Behavior of Textile Firms in Pakistan," International Journal of Innovation, Management and Technology vol. 1, no. 2, pp. 130-135, 2010.