Capital Structure Decisions and Firm Value: A Dynamic Panel GMM Analysis of Non-Financial Listed Companies on the Pakistan Stock Exchange

Abstract

This paper examines how capital structure decisions are related to firm value among non-financial firms in Pakistan Stock Exchange between 2016 and 2023. Based on 24 empirical studies validated, 15 of which were published within the last 24 years, the study is a dynamic panel Generalized Method of Moments (GMM) estimation of leverage decisions in relation to firm performance metrics. As shown in the analysis, there are strong negative correlations between the debt ratios and accounting measures of performance whereas market measures have mixed results, which are in line with the results of Modigliani and Miller (1958), Jensen and Meckling (1976), and Myers (1984). The research adds to the new market literature by presenting evidence on the changing financial situation in Pakistan during the post-liberalization reforms, infrastructure development projects and the effects of the COVID-19 pandemic. The findings show that Pakistani companies majorly use short-term debt financing, as well as, the capital structure decision making optimally depends on industrial sectors to a great extent.