Open AccessReasons for Debt Specialization: Understanding the Perspectives of Small and Large Organizations
Author(s) -
Kanwal Iqbal Khan,
Faisal Qadeer,
Shahıd Mahmood,
Sayyid Salman Rizavi
Publication year - 2017
Publication title -
the lahore journal of business
Language(s) - English
Resource type - Journals
ISSN - 2223-0025
DOI - 10.35536/ljb.2017.v6.i1.a5
Subject(s) - bankruptcy , business , debt , agency cost , agency (philosophy) , reputation , stock exchange , panel data , finance , industrial organization , monetary economics , economics , corporate governance , econometrics , philosophy , social science , epistemology , sociology , shareholder
Debt specialization (DS) has become widespread among organizations in recent years. However, the reasons for its existence and prevalence have yet to be fully examined, especially among small and large firms. This paper aims to empirically determine whether both small and large companies pursue DS strategies for similar reasons. We use seven years’ panel data for 2009–15 for 419 nonfinancial companies in Pakistan, listed on the Pakistan Stock Exchange. The results of the comparative analysis confirm the existence of DS across organizations. Small firms follow DS to reduce expected bankruptcy costs, economize information asymmetries and decrease agency conflicts due to limited ingress to the debt market. Large companies include fewer types of debt to reduce operational risk and flotation costs and for building a good reputation. We suggest several theoretical justifications for these results, based on tradeoff and agency cost theory.