Impact of Macroeconomic Variables on Capital Structure Choice: ACase of Textile Industry of Pakistan

The financing decision of a firm is influenced by bothinternal (firm specific) and external (macroeconomic) factors. However,most of the empirical investigations have focus on internal factorswhereas the impact of macroeconomic variables on capital structuredecisions is somewhat under researched particularly in the context ofdeveloping countries. The aim of the study is to analyse the impact ofmacroeconomic variables on the capital structure decisions of all listedtextile firms in Pakistan for the period 2004-2013. Panel dataregression (fixed effects model) was used to estimate the effect ofmacroeconomic variables on capital structure. The findings of the studyreveal that public debt, exchange rates and interest rates arenegatively related whereas corporate taxes, stock market development,inflation rate and GDP growth rate are positively related with economicleverage. Moreover, the relationship of corporate taxes, stock marketdevelopment and exchange rates is significant with the economicleverage. JEL Classification: E44, E52, E62, F31, G32 Keywords: CapitalStructure, Interest Rates, Inflation, Public Debt, Exchange Rates, GDPGrowth Rate, Stock Market Development, Pakistan

Zia Ur Rehman