Corporate Governance and Capital Structure Dynamics: Evidence from Pakistan

Abstract

This paper examines the capital structure dynamic of listed (Non-Financial) firms of Pakistan. We have used data of 173 firms for the period of 2008-2017 and GMM dynamic panel model for estimating the adjustment speed of leverage. Our findings show under-levered (below the target) firms adjustment speed is more compare with over-levered (above the target) firms. Under-levered firm’s adjustment speed is 68% and over-levered firm’s adjustment speed is 57% toward its target leverage. This finding indicates that listed firms of Pakistan inclined to taking benefits of debt (i.e., tax shield of debt) in its capital structure. Findings of this study suggest that corporate governance index, EBIT and size are important determinants for capital structure of listed firms of Pakistan. Our results support the forecast of pecking order theory and trade-off theory.