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Business Review

Abstract

Capital structure alludes to how an organization finances its operations whether through shareholders equity, debt or a blending of both. This study was aimed to find out the determinants of capital structure in Manufacturing and Service Sectors of Pakistan and examine which capital structure theory (Trade off theory or Pecking order theory) is relevant in Pakistani context. For study secondary data was collected from financial statements of 30 Companies and then data was analyzed through Correlation and Multi Regression analysis. Results showed that leverage has negative significant relationship with tangibility in both sectors which conformed Pecking order theory is followed by firms in both sectors. Profitability has negative significant relationship with leverage in manufacturing sectors whereas it has positive non-significant relationship with leverage in service sectors. This result revealed that manufacturing sectors follow Pecking order theory whereas service sectors support Trade off theory. Moreover in manufacturing sectors growth and leverage have negative significant relationship whereas in service sectors both variables show positive non-significant relationship. Manufacturing sectors support Trade off theory but service sectors support Pecking order theory. Size and leverage show positive non-significant relationship in manufacturing sectors whereas show positive significant relationship in service sectors. Due to positive sign, they follow Trade off theory. Effective tax rate has positive non-significant relationship with leverage. Positive sign shows firms follow Trade off theory in both sectors but due to non-significant result the effective tax rate not found to be a significant determinant of capital structure. This study will help corporate managers and decision makers to make optimal capital structure decision.

Keywords

Capital structure, Trade off theory, Pecking order theory, Manufacturing sectors, Service sectors

Journal of Economic Literature Subject Codes

G3, G32

Creative Commons License

Creative Commons Attribution 4.0 License
This work is licensed under a Creative Commons Attribution 4.0 License.

Published Online

April 07, 2021

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