Impact of Internal and External Factors on Leverage: A Case from Pakistan

Abstract

 Pakistan despite having largest irrigation system in the world, numerous mineral resources in its different geographical areas along with nuclear technology at its hand, is still facing severe energy crisis. Economy as whole is moving through a transitional phase of acquiring advanced machinery, technology for its goods and services which consequently has increased the demand for energy manifolds. A research therefore, is needed to be carried out pertaining to the energy sector of Pakistan to identify how the firms operating in the energy sector manage their capital structure, which factors are more influential in determining the level of their leverage. To achieve this goal, panel data of 19 firms within fuel and energy sector was taken to scrutinize the impact of some internal and external independent variables on leverage of the firm for the period of 1999 - 2012. The statistical facts and figures were obtained from State Bank of Pakistan's financial statement analysis of KSE listed joint stock companies'. The study concluded a negative yet significant relation of leverage with profitability, tangibility, liquidity and forex while it has positive but insignificant relation with size and inflation. Leverage is also negatively related to GDP but results are insignificant. The results suggest that Government should take steps to rescue the economy by keeping prices at a controlled level and should introduce reforms to have foreign exchange rate stable.