Open AccessIs Negative Profitability-Leverage Relation the only Support for the Pecking Order Theory in Case of Pakistani Firms?
Author(s) -
Attaullah Shah,
Jasir Ilyas
Publication year - 2014
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v53i1pp.33-55
Subject(s) - pecking order theory , pecking order , capital structure , profitability index , leverage (statistics) , economics , econometrics , financial economics , mathematics , macroeconomics , finance , debt , statistics , evolutionary biology , biology
Previous studies on capital structure in Pakistan havereported evidence in support of the pecking order theory. However, thisevidence is largely based on testing one dimensional relationshipbetween leverage ratios and firms’ profitability. The objective of thispaper is to extensively test the pecking order theory in Pakistan withwell-known pecking order testing models. Specifically, we use a sampleof 321 firms listed on the Karachi Stock Exchange from 2000 to 2009 andtest pecking order theory with models suggested by Shyam-Sunder andMyers, Frank and Goyal, Watson and Wilson, and Rajan and Zingales.Results of these models indicate that there exits only weak evidence insupport of pecking order theory in Pakistan. However, strong support isfound for pecking order theory when leverage ratios are regressed onprofitability ratio, along with a set of control variables. Thisdiscrepancy in the results of the two sets of models needs furtherinvestigation, as well as care in interpreting the results of existingstudies on capital structure in Pakistan. Our results show robustnesseven after controlling for possible profits understatements or weakcorporate governance practices. JEL Classification: G10, G21, G32Keywords: Pecking Order Theory, Profitability-Leverage Relation,KSE