Analysis of the Factors Affecting Choice of Debt Capital: A Case Study of Multinational Corporations Operating in Pakistan

Abstract

The empirical studies have evidenced that in composition of optimum capital structure, the level of debt financing plays a vital role. The key objective of this study is to Identify the major sources of financing for MNCs and to investigate the factors that affect the leverage decisions of MNCs operating in Pakistan. By applying pooled panel least square regression, the impact of seven key factors (age, profitability, growth, size, business risk, non-debt tax shield and tangibility of assets) were analyzed. In total, seven hypotheses were developed. The regression estimates indicated that the seven factors explained approximately 83 percent of variation in leverage level of (MNCs) multinational corporations. Through Housman test it was determined that fixed effect model is appropriate in regression equation for MNCs in Pakistan. Jarque-Bera test of normality and Augmented Dickey-Fuller test of stationary were applied in order to check the normality and stationary assumptions. Statistical techniques such as DW statistics and VIF tolerance tests were used to check Autocorrelation and Multicollinearity and hence no such problem existed. Out of total seven hypotheses six were supported whereas hypotheses fifth was not supported. Age, profitability, growth, Size, Business risk, non-debt tax shield was found as significant factors of Leverage for MNCs whereas Asset tangibility was found to be statistically insignificant determinant of Leverage. This study has future implications for researchers, Policy makers, decisions regarding interest rate, monetary Policy will get support from the findings of this study.