Abstract
The purpose of this study is to investigate capital structure in the Pakistani corporate sector in light of the interest rate gap with other countries and emerging Islamic banking in the country. The study investigates the effect of leverage on firm value (Tobin’s Q) and how other variables impact this relationship. The study used the System-GMM-Fixed effect model for linear analysis and fixed effect panel threshold regression model by Hansen (1999) for quadratic analysis using data from nonfinancial firms listed on the Pakistan Stock exchange for the period 2005 to 2019. The results show that there is a negative relation between leverage and the value of the firm. In contrast, debt and non-debt tax shields have a positive relationship with the value of the firm. The study also found that there is quadratic nature of leverage with the value of the firm. The study supports Trade-off theory, pecking order theory, while it doesn’t support agency theory.
Recommended Citation
Alamgir, Muhammad and Cheng, Ming-Chang, "Effect of Leverage on Firm Value and How the Contextual Variables Affect This Relationship: A Case of Pakistan" (2021). ICEB 2021 Proceedings (Nanjing, China). 44.
https://aisel.aisnet.org/iceb2021/44