Testing Trade-off and Pecking Order Predictions: Evidence from Pakistani Manufacturing Industry

This study empirically examines which theory best explains firms financing behavior; Trade off or Pecking order theory by employing fifty-three Pakistani public firms listed at Karachi stock exchange for the period of 2005 – 2016. Firms are heterogeneous in making their financing decisions as reported by prior literature. Using fixed effect regression model, the results reveal that Pakistani public firms are heterogeneous in their capital structure policies. Most probable reason for this kind of behavior could be the set assumptions on which capital structure theories work. Overall, the results of this study are largely consistent with the existing literature. The findings of the study contributed to the existing literature on capital structure by providing evidence from the perspective of Pakistani public listed firms. Capital structure is an important financing decision that each firm has to make. This study provides some useful information about the capital structure of firms in Pakistani manufacturing sector.