Capital Structure Dynamics and Bank Affiliation of Business Groups: Evidence from Pakistan

Objective – An empirical investigation to assess the impact of bank-affiliated business group on firm’s capital structure decisions.

Design/methodology/approach – A sample of 146 group affiliated firms and subsamples for bank and non-bank affiliated firms was analyzed with random-effect panel regression model to determine the relationship of bank-affiliated business group on firm’s capital structure determinants of listed firms in Pakistan using data for 2006-2011.

Findings – We have found that bank affiliated firms financing decisions are significantly different from that of non-bank affiliated firms with a common factor of internal capital market.  Bank affiliated firm capital structure determinants of growth, asset tangibility, non-debt tax shield and operating risk show significantly different association with choice of leverage compared to non-bank affiliated firms.

Policy implications – Our results show that group affiliated firms particularly bank affiliated firms are the reason of market imperfections and have successfully eliminated the market distortions keeping others on a disadvantage.  Hence, Policy makers are suggested to improve the regulatory system and its implementation.

Originality/value – According to best of our knowledge this is the first study to extend the literature of firm financing decisions in relation to bank-group affiliation in Pakistan.