Abstract

For the past few decades, capital structure has maintained to be a vigorously researched area. A new stream in this area is the role played by environmental factors in driving leverage decisions. Based on above rationale, this study investigated various firm intrinsic and industry specific features of leverage using sample of 8 industries from non-financial sector of Pakistan. Secondary data was collected from annual reports for period from 2011 to 2015. As the data is of two levels, at level 1 there are firms whereas industries exist at level 2 and there exists a hierarchy so data being multi level in nature was analyzed using Hierarchical Linear Modeling (HLM). Software used for analysis is HLM 7. The analysis of variance breakdown unearthed that leverage variance is mostly caused by traits intrinsic to a firm i.e. to the extent of 89%. Out of the findings of random intercepts, two of firm specific traits i.e. profitability and distance from bankruptcy left their negative and significant influence on leverage whereas capital structure received positive influence from the factor i.e. size, asset structure appeared out to be negative and insignificant. Industry munificence was found to be positively and significantly whereas dynamism left its positive and insignificant impact on the leverage decisions. As far as results of random coefficients i.e. interaction variables are concerned, it was revealed that munificence made profitability less important in determining lower levels of leverage while outcomes related to dynamism were insignificant.

Key words: Hierarchical Linear Modeling (HLM), Firm & Industry Fixed traits, Capital Structure