DefinePK

Abstract

This study explores the impact of macroeconomic variables on a firm’s capital structure decisions. A balanced panel data of 10 firms from the Cement industry of Pakistan covering the period of 10 years from 2007 to 2016 is examined using a linear regression approach. The data was checked for multicollinearity and heteroscedasticity. The study reveals some interesting results suggesting that the firm-specific factor like a firm’s size is significantly and positively correlated to a firm’s choice of total debt over total equity (financial leverage). The country-specific factors like GDP and the inflation rate are significantly related to firms’ financial leverage. The exchange rate is found to have an insignificant but negative impact on a firm’s financial leverage. Furthermore, the impact of the real interest rate on the financial leverage of firms in the cement industry of Pakistan is found to be positive and insignificant, which is quite surprising. The study suggests that the management should consider the economic volatility while formulating the debt to equity proportion in capital structure composition.