Firm-specific and Macroeconomic Determinants of Capital Structure: Evidence from Pharmaceutical Industry in Bangladesh

Abstract

Purpose: This study explores the significance of firm-specific and macroeconomic factors to explain variation in leverage using a sample of twenty listed pharmaceutical firms in Dhaka Stock Exchange over a six year period of 2008-2012.
Design: In this study, panel data has been used and both firm specific and macroeconomic factors are analyzed as the determinants of leverage for pharmaceuticals firms in Bangladesh.
Findings: This study employs leverage measure (book leverage) as dependent variable and ten factors (liquidity, profitability, tangibility, debt coverage, growth rate, firm size, GDP growth, and inflation, interest rate, and stock market development) as determinants of capital structure. Around 51% variation in leverage is explained by selected macroeconomic and firm specific factors, while the remainder is explained by unobserved macroeconomic and firm specific differences.
Practical Implication: Estimated results show that GDP growth has significant positive association with the leverage. However, liquidity, profitability, tangibility, sales growth, inflation, interest rates, and stock market development reveal inverse relation with leverage. Finally the results suggest that that both trade-off and pecking order theories can explain financing decisions of listed pharmaceutical firms in Bangladesh.