Did They Do It Differently? Capital Structure Choices of Public and Private Sectors in Pakistan

Muhammad Azeem Qureshi, Toseef Azid


Capital structure is one of the most complex areas of
strategic financial decision making due to its interrelationship with
other financial decision variables. For more than four decades
discussion in corporate finance concerns the question of optimal capital
structure: Given a level of total capital necessary for supporting
firm’s activities, is there a way of dividing this capital into debt and
equity which maximises firm value? And, if so, what are the critical
factors in setting the leverage ratio for a given firm? Corporate
finance literature is overwhelmed by this hot debate, which is still
going on, about firm value triggered by the two conflicting conclusions
of Modigliani and Miller (1958, 1963). For a comprehensive review of
this literature, see Harris and Raviv (1991). The theoretical and
empirical research about the optimal capital structure has so far been
inconclusive and conflicting. However, the capital structure approach to
firm value has been successful to replace heuristics with more
methodical approach to define capital structure of the firm. The
researchers have theoretically as well as empirically identified many
endogenous and exogenous factors affecting the firm’s leverage. They
have theoretically and empirically identified agency costs, information
asymmetry, taxes, non-debt tax shields, growth, firm size, assets’
collateral value and tangibility, profitability and liquidity, earnings
variability, expected costs of financial distress, industry
classification, country factor, and firm’s international activities as
the determinants of firm’s debt-equity choices.

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DOI: https://doi.org/10.30541/v45i4IIpp.701-709


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