Abstract
Empirical research has been conducted on 312 proprietary
companies’ data, collected from their annual reports, to test the
explanatory power of the Tradeoff Theory and Pecking Order
theory for their borrowing behavior. Established tests, for both
the theories, have been run concluding that in Pakistan the
Tradeoff theory provides a better explanation of borrowing
patterns of firms as compared to the Pecking Order Theory.
This was especially the case for seven industries namely
Automobile, Cement, Chemicals, Food, Technology, and
Others. Also, the Tradeoff theory had a higher explanatory
power for borrowing patterns of small and large sized firms as
compared to medium-sized firms.
Mehreen Furqan. (2018) Why Do Firms Borrow? Is it a Need or Simply a Pursuit of Optimal Debt Ratio?, Paradigms , Vol 12, Issue 2 .
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