Country Level Governance as A Capital Structure Determinant: A Case of Pakistani Non-Financial Listed Firms

Abstract

Current paper investigated the effects of country governance indicators and firm level variables on the capital structure of non-financial listed firms registered with Pakistan Stock Exchange (PSX) for the interval of 2002-18. The collected panel data was analyzed by employing panel data analysis techniques e.g., pooled OLS, fixed effect and random effect (FR/RE) model and 2-step system GMM. The purpose of employing these techniques was to capture the un-observed heterogeneity and endogeneity in the model. FE model with robust standard error was applied to control the heteroskedasticity in the model. The suitability of pooled OLS and RE model was decided on the basis of P-value of “Breusch and Pagan Lagrangian Multiplier Test” (BPLM). The results revealed that corruption perception, country governance variables and firm level variables have a considerable impact on capital structure of non-financial registered firms. Equally theory and practice can benefit from the study's findings. The study aims to theoretically incorporate new independent variables into the capital structure literature in the context of Pakistan, including political patronage, democratic regime, rule of law, abuse of power, quality of regulation, stability of politics, voice and accountability, and government effectiveness. On the practical side, the findings provide guidelines for the firms to be careful about these determinants that may be helpful in minimizing the default risk associated while lending funds. Future research may be conducted by replicating in other sectors to validate the results.