Abstract
An optimal Capital Structure is the main decision for any business
management to be taken for persistent growth and wealth maximization of the
shareholders. The study is conducted to investigate firm-level characteristics
and macroeconomic determinant that influence Capital Structure Decision of
insurance industry in Pakistan from the study period of 1999 to 2013. The
Hausman’s specification and Breusch, and Pagan Lagrange Multiplier Test are
employed to find out the most appropriate models among fixed effects, random
effect and pooled regression model. The tests confirm that pooled regression
model and fixed effect model are the most prominent models for the study. In
addition, the findings of the study reveals that profitability and business risk are
inversely but significantly related with debt across both estimation techniques.
The negative relationship of profitability and business risk with debt confirm
Pecking Order Theory. However, tangibility of assets and inflation rate are
positive and statistically significantly effect on Leverage, which supports Trade
off Theory. Inflation rate is significant on pooled regression model however
fixed effect estimation give insignificant result of inflation rate. Growth of the
firm is also insignificant factor of Capital Structure in insurance sector of
Pakistan across both regression models. According to the best knowledge of the
authors, this is the first study, which considers both financial and economic
variables of capital structure in insurance sector. The study is recommended
that senior-mangers can make an optimal- mix of debt and equity by selecting
endogenous (i.e. profitability, growth, tangibility and business risk) and
exogenous factor like inflation of insurance sector of Pakistan.
Shams ur Rahman, Shahid Jan Kakakhel. (2016) Determinants of Capital Structure Decision of Pakistani Insurance Industry, Abasyn Journal of Social Sciences, Volume-09, Issue-1.
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