Impact of Investment and Dividend Decisions on Financing Decisions: Evidence from Pakistan

Abstract

Raising funds efficiently for the operations of the firm is considered a very important decision. Since 1960’s and after the emergence of different capital structure theories, many empirical studies have been conducted to determine the factors affecting the capital structure decisions. But the evidence regarding corporate investment and dividend decisions as determinants is limited and mixed. Empirical evidence from emerging economies is limited and this area is largely ignored. This study has mainly focused on the impact of corporate investment and dividend decisions on financing decisions of the firms in emerging economies. The panel data of non financial firms listed in Pakistan stock exchange is used. Panel data techniques i.e. OLS, fixed effect and random effect are used to estimate the results. The study also controls for the impact of profitability, size, liquidity and market to book ratio on the financing decisions. Findings showed that Investment is strong negative determinant of financing but dividend is irrelevant to the financing decisions. Profitability, liquidity and size of the firm have negative effect on leverage while growth opportunities has positive effect. He results have proved the application of pecking order theory in the context of Pakistan.