Growth and Financing Behaviour of Firms of Textile Industry in Pakistan: A Panel Data Analysis.

Ijaz Hussain


High economic growth, extremely low nominal interest rate and
negative real interest rate gave a boost to financial leverage (gearing
ratio) of the textile sector to its peak in 2005. Firms are now are
facing the consequence of high gearing. An explosion in their financing
costs along with removal of textile quota from 2005 onwards and later on
an acute energy crisis hampered their profitability and ability to repay
their debt. This in turn contributed to non-performing loans which is
now is likely to pose a big challenge for financial sector and push
economy into another crisis. Most of the previous studies including a
very few on capital structure of Pakistani firms focus on understanding
only the firm specific determinants of financial leverage and completely
ignore macroeconomic or institutional factors. Findings of this paper
prove that all firm specific determinants including profitability and
efficiency, firms‘ growth, risk and collateral excluding size
significantly influence corporate financial leverage of textile industry
in Pakistan. All macroeconomic variables including overall economic
growth, equity market conditions and nominal cost of debt also have
significant impact on corporate gearing. Negative sign with the
composite measure of profitability and efficiency implies that banks are
compelled to fund inefficient and unprofitable firms because demand for
loans comes more from inefficient and unprofitable firms. Positive sign
with growth and negative sign with risk is indicative of the fact that
banks prefer to lend to growing rather than riskier firms. JEL
classification: C13, C23, C51, L65, G10, G30 Keywords: Capital Structure
Determinants, Corporate Financial Leverage, Corporate Gearing

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