Capital Structure Determinants in Pakistan's Textile Industry Unravelling the Pecking Order vs. Trade-Off Debate

This study investigates the determinants of capital structure in textile sector of Pakistan in context of trade-off theory and Pecking order theory debate. The research utilizes data from 114 textile firms with 22 years of data from 1998 up to 2020. an adjusted measure of leverage is also introduced to refine the debt-to-equity ratio as conventional measure of leverage suffer from issues. Fixed effect model is used to analyse the relationship between leverage and independent variables such as profitability, tangibility, size, and growth using both conventional and adjusted measure of leverage. The adjusted measure of leverage is found unrelated to profitability unlike the conventional measure which always show negative relationship in current as well as previous studies. The positive relation between leverage and size supports pecking order theory, while tangibility was found to be negatively related challenging theoretical interpretations. While no conclusive evidence is found in favour of any theory the study does provide a fresh perspective on the theoretical debate.