The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling

The purpose of the study is to explain adjustment rate towards target capital structure of Pakistani nonfinancial listed firms and to investigate the impact of financial liberalization (FL) on capital structure adjustment rate. We control for the unobserved heterogeneity and the fractional nature of adjustment rate by applying an unbiased dynamic panel fractional estimator on an unbalanced panel data of Pakistani nonfinancial firms listed during 1972-2010. We find that these firms adjust at an annual rate of 24-51% to reach their capital structure targets. We argue that in order to optimize the benefits of FL the government should strengthen financial as well as judicial institutions to enforce the creditors' rights that will enable access to more options to Pakistani firms to raise cheaper external financing.