Analyzing the Firm and Country Level Determinants of Capital Structure in the Dynamic Political Regimes: A Case of Emerging Market Economy

Capital structure acts as a backbone in the functioning of the firms. The disparities in the political system affect the whole economy of the country and this leads the firms to undergo financial stress and bankruptcy thus affecting their capital structure in several ways. This study analyzed and compared the firm level and country level variables of capital structure of firms during dynamic political regimes in the country. The sample comprised of secondary data of 50 companies from the 28 manufacturing sectors of Pakistan Stock Exchange for the time period 2005-2018. The data is divided into five regimes based on the tenure of the Prime Ministers of Pakistan. The results indicated that the manufacturing sector of Pakistan mostly relies on short term debt financing in all the political regimes. Firms which were highly profitable and had high liquidity did not rely much on the debt but in case of uncertain political conditions firms borrowed long term debt, when required, due to their high tangibility. The volatility risk of the firms was higher in regimes which comprised of global financial crises and the dismissal of the government. Due to high inflation and fluctuations in exchange rate the firms had to pay more interest on debt.