Market power versus capital structure determinants: Do they impact leverage?

Abstract

The purpose of this study is to investigate the association between market power and capital structure. This study will further provide a logical explanation towards the factors affecting capital structure. This study analysed 176 non-financial Pakistani companies listed on Karachi Stock Exchange over the period of 2003–2012. Capital structure has been tried to investigate with a different perspective by investigating its association with market power. It has been seen that there is a significant and positive relation between market power and capital structure. Size and liquidity remained significantly negative with capital structure, whereas profitability and dividend payout remained significantly positive with capital structure. To the best of authors’ knowledge, this is the first study that investigates the relationship between market power and capital structure in any developing economy by employing the data of non-financial Pakistani firms.

Keywords:

• capital structure
• leverage
• corporate finance
• trade-off theory
• pecking order theory
• market power
• Pakistan

Public Interest Statement

Capital structure possesses a complex mechanism in the field of corporate finance, which has been studied since more than five decades. Because of its puzzling situation, the findings differ from one market to another. This study provides results on capital structure determinants by employing a unique and new dimension into it (i.e. market power), which has rarely been investigated in any developing markets yet. Results indicate that almost 50% of the assets of Pakistani firms are backed by debt during the period of this study. Findings further show that the larger firms having more liquid assets do not increase their debt levels. However, profitable firms which manipulate their market share prices and pay dividends tend to increase their debt levels. The data were gathered from eight different non-financial sectors, i.e. automobile & parts, chemicals, construction & materials, electricity, food processors, oil & gas, textile and household goods.

Cover image

Source: Authors.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Agha Jahanzeb

Agha Jahanzeb is a PhD student in Finance at Universiti Teknologi Malaysia. His specialties are corporate finance, financial management and financial economics. He is the main and corresponding author of this manuscript.

Norkhairul Hafiz Bajuri

Norkhairul Hafiz Bajuri is a PhD in Business Politics & Corp. Governance (Bangor University), MAcc (Universiti Kebangsaan Malaysia), ACCA (Graduate) and BA (Huddersfield). His specialties are corporate governance, corporate finance, financial management, and business politics. He is currently senior lecturer at Universiti Teknologi Malaysia.

Aisha Ghori

Aisha Ghori is a final-year student of Masters of Business Administration (MBA) at Jinnah University for Women Karachi Pakistan.