Revealing the Financial Strategies of Multinational Giants and Local Enterprises in Pakistan: A Deep Dive into What Drives Their Leverage Choices
Abstract
The current research comparatively explored the factors affecting the capital structure of domestic corporations (DCs) and multinational corporations (MNCs) in Pakistan for the period 2016-2021. It found that MNCs hold a higher ratio of debt to equity in their mix of capital structures than DCs. Using the fixed effects model, this study established that older firms manage to capitalize their debts. At the same time, the large size of firms and higher bankruptcy costs cause a high debt ratio in the capital structure of both types of corporations. The results also revealed that free cash flows are inversely and significantly associated with the capital structure of DCs. On the contrary, non-debt tax shield, collateral value of assets, and foreign exchange risk are directly and significantly associated with DCs only. This study also found that profitability and agency cost are not significant determinants of capital structure in either type of firms. Significant policy implications stem from the results, particularly in the areas of taxation, international trade, and financial regulation. Moreover, the findings provide insight into the complex interaction of factors influencing the capital structures of DCs and MNCs, which would be helpful for policymakers.
Downloads
References
Afza, T., & Hussain, A. (2011). Determinants of capital structure across selected manufacturing sectors of Pakistan. International Journal of Humanities and Social Science, 1(12), 254–262.
Aggarwal, R., & Harper, J. T. (2010). Foreign exchange exposure of “domestic” corporations. Journal of International Money and Finance, 29(8), 1619–1636. https://doi.org/10.1016/j.jimonfin.2010.05.003
Ahmed, A. M., Nugraha, D. P., & Hágen, I. (2023). The relationship between capital structure and firm performance: The moderating role of agency cost. Risks, 11(6), Article e102. https://doi.org/10.3390/risks11060102
Ahmed, N., Ahmed, Z., & Ahmed, I. (2010). Determinants of capital structure: A case of life insurance sector of Pakistan. European Journal of Economics, Finance and Administrative Sciences, 24, 7–12.
Akhtar, S. (2005). The determinants of capital structure for Australian multinational and domestic corporations. Australian Journal of Management, 30(2), 321–341.
Akhtar, S., & Oliver, B. (2009). Determinants of capital structure for Japanese multinational and domestic corporations. International Review of Finance, 9(1‐2), 1–26. https://doi.org/10.1111/j.1468-2443.2009.01083.x
Alnori, F. (2023). Financial shock and the United States multinational and domestic corporations leverage. Cogent Economics & Finance, 11(1), Article e2210364 https://doi.org/10.1080/23322039.2023.2210364
Bradley, M., Jarrell, G. A., & Kim, E. (1984). On the existence of an optimal capital structure: theory and evidence. The Journal of Finance, 39(3), 857–878. https://doi.org/10.2307/2327950
Burgman, T. A. (1996). An empirical examination of multinational corporate capital structure. Journal of International Business Studies, 27(3), 553–570. https://doi.org/10.1057/palgrave.jibs.8490143
Chen, J. J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research, 57(12), 1341–1351. https://doi.org/10.1016/S0148-2963(03)00070-5
Choi, J. J., & Jiang, C. (2009). Does multinationality matter? Implications of operational hedging for the exchange risk exposure. Journal of Banking & Finance, 33(11), 1973–1982. https://doi.org/10.1016/j.jbankfin.2009.04.014
Cooke, T. E. (1991). The evolution of financial reporting in Japan: A shame culture perspective. Accounting, Business & Financial History, 1(3), 251–277. https://doi.org/10.1080/09585209100000038
Dougherty, C. (2011). Introduction to econometrics. Oxford University Press.
Eldomiaty, T. I. (2008). Determinants of corporate capital structure: Evidence from an emerging economy. International Journal of Commerce and Management, 17(1/2), 25–43. https://doi.org/10.1108/10569210710774730
Fatemi, A. M. (1988). The effect of international diversification on corporate financing policy. Journal of Business Research, 16(1), 17–30.
Graham, J. E., Jr. (1988). Domestic and multinational caital structure: Theory and evidence (Working Paper). University of Chicago.
Harris, M., & Raviv, A. (1991). The theory of capital structure. The Journal of Finance, 46(1), 297–355. https://doi.org/10.1111/j.1540-6261.1991.tb03753.x
Himmah, E. F., & Dianty, A. (2020, November, 14–15). Analysis of capital structure on multinational corporation: trade off theory and pecking theory perspective [Paper presenation]. 1st International Conference on Science, Technology, Engineering and Industrial Revolution, Bandung, Indonesia.
Imelda, E., & Dewi, A. (2018, November 8–9). Capital structure, corporate governance and agency costs [Paper presentation]. 7th International Conference on Entrepreneurship and Business Management, Jakarta, Indonesia.
Jensen, M. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76(2), 323–329.
Kanagaraju, P., & Sathya, S. (2021). A study on capital structure of domestic and multinational companies. Journal of Contemporary Issues in Business nad Government, 27(5), 1146–1151.
Karmestål, V., & Rzayev, M. (1996). A study of the effects of free cash flow and capital structure on profitability of Nasdaq Stockholm companies [Master thesis, Umeå Universitet]. Digital Scientific Archive. https://www.diva-portal.org/smash/record.jsf?pid=diva2%3A1767431 &dswid=-343
Lee, K. C., & Chuck, K. (1988). Multinational corporations vs. domestic corporations: International environmental factors and determinants of capital structure. Journal of International Business Studies, 19(2), 195–217. https://doi.org/10.1057/palgrave.jibs.8490381
Lehn, K., & Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions. The Journal of Finance, 44(3), 771–787. https://doi.org/10.1111/j.1540-6261.1989.tb04390.x
Lei, L. (2020). Research on the impact of tax shield effect on corporate capital structure—empirical analysis based on a-share listed companies. Modern Economy, 11(1), 126–139. https://doi.org/10.4236 /me.2020.111012
Madura, J. (2020). International financial management. Cengage Learning.
Maheswari, K., & Gayathri, J. (2019). Determinants of capital structure for multinational and domestic companies in India. International Journal of Management, IT, and Engineering, 9(1), 63–79.
Mahmud, M., & Qayyum, A. (2003). The relationship between economic growth and capital structure of listed companies: Evidence of Japan, Malaysia, and Pakistan [with Comments]. The Pakistan Development Review, 42(4),727–750.
Mehmood, S., Javeed, A., Kaleem, M. S., & Ahmad, M. (2020). Capital structure and firm profitability - A focus on the family firms in textile sector of Pakistan. International Journal of Advanced Research in Engineering and Technology, 11(7), 851–859. https://doi.org/10.34218 /IJARET.11.7.2020.084
Melgarejo, D. M., & Sheryl-Ann, S. (2020). Internationalization and the capital structure of firms in emerging markets: Evidence from Latin America before and after the financial crisis. Research in International Business and Finance, 54, Article e101288. https://doi.org/10.1016/j.ribaf.2020.101288
Mittoo, U. R., & Zhang, Z. (2008). The capital structure of multinational corporations: Canadian versus US evidence. Journal of Corporate Finance, 14(5), 706–720. https://doi.org/10.1016/j.jcorpfin.2008.09.012
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175. https://doi.org/10.1016/0304-405X(77)90015-0
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574–592.
Park, S. H., Suh, J., & Yeung, B. (2013). Do multinational and domestic corporations differ in their leverage policies? Journal of Corporate Finance, 20, 115–139. https://doi.org/10.1016/j.jcorpfin.2012.08.001
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3–37.
Qureshi, M. A., Akhtar, W., & Imdadullah, M. (2012). Does diversification affect capital structure and profitability in Pakistan? Asian Social Science, 8(4), 30–42. http://dx.doi.org/10.5539/ass.v8n4p30
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421–1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Reeb, D., Kwok, C., & Baek, Y. (1998). Systematic risk of the multinational corporation. Journal of International Business Studies, 29, 263–279. https://doi.org/10.1057/palgrave.jibs.8490036
Reindl, J., Stoughton, N. M., & Zechner, J. (2013). Market implied costs of bankruptcy (Working Paper No. 2013/27). Goethe University Frankfurt, Center for Financial Studies (CFS). https://www.econstor.eu/handle/10419/88432
Shah, A., & Hijazi, S. (2004). The determinants of capital structure of stock exchange-listed non-financial firms in Pakistan. The Pakistan Development Review, 43(4), 605–618.
Shah, A., & Khan, S. (2007). Determinants of capital structure: Evidence from Pakistani panel data. International Review of Business Research Papers, 3(4), 265–282.
Shapiro, A. C. (1978). Financial structure and cost of capital in the multinational corporation. Journal of Financial and Quantitative Analysis, 13(2), 211–226. https://doi.org/10.1016/B978-0-408-10841-6.50028-2
Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2), 117–133. https://doi.org/10.1108/03074351111103668
Somanath, V. (2011). International financial management. IK International Pvt Ltd.
State Bank of Pakistan. (2021). Financial statement analysis of non financial companies listed at pakistan stock exchange. https://www.sbp.org.pk/departments/stats/FSA(Non).pdf
Suzulia, M. T., Sudjono, & Saluy, A. B. (2020). The effect of capital structure, company growth and inclation on firms value with profitability as intervening variable. (Study On Manufacturing Companies Listed On Bei Period 2014 - 2018). Dinasti International Journal of Economics, Finance &Amp; Accounting, 1(1), 95–109. https://doi.org/10.38035/dijefa.v1i1.226
Thomas, K. T., Chenuos, N. K., & Biwott, G. (2014). Do profitability, firm size and liquidity affect capital structure? Evidence from Kenyan listed firms. European Journal of Business and Management, 6, 119–124.
Titman, S. (1984). The effect of capital structure on a firm's liquidation decision. Journal of Financial Economics, 13(1), 137–151. https://doi.org/10.1016/0304-405X(84)90035-7
Vernon, R. (1979). The product cycle hypothesis in a new international environment. Oxford Bulletin of Economics and Statistics, 41(4), 255–267.
Wang, Z., Ettinger, M., Xie, Y., & Xu, L. (2020). The cost of capital: U.S.-based multinational corporations versus U.S. domestic corporations. Global Finance Journal, 44, Article e100443. https://doi.org/10.1016/j.gfj.2018.07.002
Wright, F. W., Madura, J., & Wiant, K. J. (2002). The differential effects of agency costs on multinational corporations. Applied Financial Economics, 12(5), 347–359. https://doi.org/10.1080/09603100210124984
Xu, J. (2012). Profitability and capital structure: Evidence from import penetration. Journal of Financial Economics, 106(2), 427–446. https://doi.org/10.1016/j.jfineco.2012.05.015
Yasser, F. (2016). Investigating the leverage composition of Pakistani firms through their determinants. Journal of Management and Research, 3(1), 18–32. https://doi.org/10.29145/jmr/31/0301004
Zaheer, R., Ahmad, S. A., Ali, S. R., & Aleem, A. (2021). Determinants of capital structure-evidence from oil and gas tradable sector index of Pakistan stock exchange. Journal of Contemporary Issues in Business Government, 27(1), 129–142.
Copyright (c) 2024 Farah Yasser
![Creative Commons License](http://i.creativecommons.org/l/by/4.0/88x31.png)
This work is licensed under a Creative Commons Attribution 4.0 International License.
JFAR follows an open-access publishing policy and full text of all articles is available free, immediately upon acceptance. Articles are published and distributed under the terms of the Creative Commons Attribution 4.0 International License. Thus, work submitted to UMT Journals implies that it is original, unpublished work of the authors; neither published previously nor accepted/under consideration for publication elsewhere. On acceptance of a manuscript for publication, a corresponding author on the behalf of all co-authors of the manuscript will sign and submit a completed Author Consent, Copyright, and Declaration Form.