ADJUSTMENT OF SPEED TOWARD TARGET CAPITAL STRUCTURE
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Date
2021-05-21
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UMT.Lahore
Abstract
In Corporate finance, we deal with companies' financial sources, their capital structure, and the
companies' investment decisions. The main thing in corporate finance is Capital Structure. We adjust
debt and equity to maintain expenses and benefits in the capital structure. So, a lot of companies set
their capital structure for balancing debt and equity, also called the target capital structure.
Companies observe that their observed capital structure varies from the target capital structure, which
could be because of financial constraints or External Financing. Therefore, companies have to adjust
the observed capital structure towards the target capital structure in adjusting costs. So, the purpose
of this study is to explore the consequences of financial constraints on the adjustment of speed
towards the target coital structure and whether these financial constraints positively or negatively
affect the target capital structure in Pakistan. For this piupose. Panel data of 57 nonfinancial Firms
registered in the Pakistan Stock Exchange from 2009-2019 are used. The estimations are performed
by using panel regression with fixed effects. It is observed that Distance to coital structure
positively affects our dependent variable the total leverage (TLEV). Similarly, Long Term Leverage
(LLEV) also leaves a positive effect on Total Leverage (TLEV) while the variable Tangibility is
negatively influencing our dependent variable i.e. Total Leverage (TLEV). Net Debt Tax Shield
(NDTS) is not showing any impact on Total Leverage (TLEV). After that. Size of the firm is
negatively affecting our dependent variable TLEV. Likewise, Profitability and Liquidity of firm are
also showing negative impact on our dependent variable, i.e., the total leverage(TLEV).