THE ENIGMA OF CAPITAL STRUCTURE THEORIES: AN EMPIRICAL INVESTIGATION BETWEEN PEER CORPORATIONS IN PAKISTAN

Capital Structure Theories become very useful for making systematic financial decisions and performing other business activities. For this purpose an empirical research has been undertaken to investigate the factors that influence the capital structure. The study critically analyzes various theories of capital structure namely (The Modigliani-Miller Theorem, The Trade-Off Theory, The Pecking Order Theory, and Agency Theory) and explores the significance of these theories and model with respect to corporate sector of Pakistan. The study executes panel data procedures for a sample of 100 Pakistan Stock Exchange (PSX) listed companies during 2009-2019. Interestingly, the empirical findings revealed that in Pakistan's corporate sector, tangibility of assets, liquidity, earnings volatility, and non-tax debt shield are negatively associated with leverage ratio. Whereas, profitability, firm value and firm size are positively associated with leverage. However, firms' liquidity, earning volatility and dividend per share are insignificant to the leverage. Thus, the outcomes of this research are reliable with the prophecy of the trade-off theory, pecking order theory, and agency theory and attempts to assist decision makers of corporate sector of Pakistan to make most favorable decisions for their companies. This is the first study in Pakistan which investigates the multiple significant factors of capital structure by using the recent data which computed from annual reports of financial statement.