Determinants of Capital Structure: A Theoretical Review

The study aimed to determine the capital structure determinants of the firm. By using previous literature results have shown that firm size, profitability, and earning volatility, Firm age and tangibility are negaatively related to capital structure. Liquidity, non-debt tax shield, and growth are positively related to capital structure. Profitability is inversely associated with capital structure because internal financing has been preferred by firms and this argument supported by pecking order theory. Positive association exists between liquidity and capital structure because firms quickly convert their assets into liquidity instead of using debt. Results conclude that the financing behavior of firms in developed countries is not aligned with the financing of firms in developing countries like Pakistan. Results will be beneficial for all stakeholders of a firm including all academicians and all industries