Capital Structure Determinants of KSE Listed Pharmaceutical Companies

Abstract

Capital structure of KSE listed pharmaceutical companies have been studied by taking leverage as the dependant variable. Regression is run by considering six explanatory variables that include firm's size, tangibility, growth, earnings volatility, profitability and tax rate. Further, this model is reduced to only four explanatory variables by removing tax rate and earning volatility to deal with the problem of multicollinearity. The proxies used in this study are total debt ratio for leverage, gross fixed assets for tangibility, effective tax rate for tax, natural log of sales for size, percentage in net profit margin for earnings volatility, sustainable growth rate for growth and operating profit margin for profitability. The time horizon selected for the study is from 2008-2011. It is found that growth and tangibility have positive relation while profitability and size have a negative relation with leverage. All 4 variables are found statistically significant at a significance level of 10%. VIF also comes out to be low, which indicates low multicollinearity in the model. The model explains 50% of the variation in leverage is significant at 1% significance level.

Keywords: Capital Structure, Leverage, Determinants, Pakistan, Pharmaceutical Sector, KSE