Financial Reforms and Dynamics of Capital Structure Choice: A Case of Publically Listed Firms of Pakistan

Abstract

The present paper is an attempt to integrate financial reforms and corporate finance in a dynamic setup. Determinants of capital structure choice are analyzed dynamically using panel data of 374 non-financial firms listed on Karachi Stock Exchange (KSE) of Pakistan for the period 1988-2008. To capture the dynamic nature of capital structure choice the Arellano-Bond Dynamic Panel-Data Estimation technique is used to avoid the problems of endogeneity, heteroscedasticity and autocorrelation which arise due to dynamic panel data estimation. eforms, it is found, has a negative impact on leverage of the firm suggesting that with liberalization and strengthening of institutions, there is a massive decrease in leverage; indicating that firms shifted from debt to equity market once the financial constraints are eased out.