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Determinants of Capital Structure Decision of Pakistani Insurance Industry

Abstract

An optimal Capital Structure is the main decision for any business management to be taken for persistent growth and wealth maximization of the shareholders. The study is conducted to investigate firm-level characteristics and macroeconomic determinant that influence Capital Structure Decision of insurance industry in Pakistan from the study period of 1999 to 2013. The Hausman’s specification and Breusch, and Pagan Lagrange Multiplier Test are employed to find out the most appropriate models among fixed effects, random effect and pooled regression model. The tests confirm that pooled regression model and fixed effect model are the most prominent models for the study. In addition, the findings of the study reveals that profitability and business risk are inversely but significantly related with debt across both estimation techniques. The negative relationship of profitability and business risk with debt confirm Pecking Order Theory. However, tangibility of assets and inflation rate are positive and statistically significantly effect on Leverage, which supports Trade off Theory. Inflation rate is significant on pooled regression model however fixed effect estimation give insignificant result of inflation rate. Growth of the firm is also insignificant factor of Capital Structure in insurance sector of Pakistan across both regression models. According to the best knowledge of the authors, this is the first study, which considers both financial and economic variables of capital structure in insurance sector. The study is recommended that senior-mangers can make an optimal- mix of debt and equity by selecting endogenous (i.e. profitability, growth, tangibility and business risk) and exogenous factor like inflation of insurance sector of Pakistan.

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