The moderating role of firm size and interest rate in capital structure of the firms: Selected sample from sugar sector of Pakistan

Abstract

The selection of financing is a top priority for businesses, particularly in short- and long-term investment decisions. Mixing debt and equity leads to decisions on the financial structure for businesses. This research analyzes the moderate position of company size and the interest rate in the capital structure over six years (2013–2018) for 29 listed Pakistani enterprises operating in the sugar market. This research employed static panel analysis and dynamic panel analysis on linear and nonlinear regression methods. The capital structure included debt to capital ratio, non-current liabilities, plus current liabilities to capital as a dependent variable. Independent variables were profitability, firm size, tangibility, Non-Debt Tax Shield, liquidity, and macroeconomic variables were exchange rates and interest rates. The investigation reported that profitability, firm size, and Non-Debt Tax Shield were significant and negative, while tangibility and interest rates significantly and positively affected debt to capital ratio. This means the sugar sector has greater financial leverage to manage the funding obligations for the better performance of firms. Therefore, the outcomes revealed that the moderators have an important influence on capital structure. © Sarfraz Hussain, Abdul Quddus, Pham Phat Tien, Muhammad Rafiq, Drahomíra Pavelková, 2020.