Impact of Stock Liquidity on Capital Structure Decision: The Case Study of Manufacturing Firms in Pakistan

Abstract

The core objective of this study is to explore the relationship between stock liquidity and capital structure decision of manufacturing firms in Pakistan. A sample data of 133 companies listed on the Pakistan Stock Exchange have been taken for analysis. The sample data collected was for the six years’ period from 2016-2021. To investigate the relationship 3 regression models, Fixed-Effect Model, Random-Effect Model, and Weighted Least Square Model were utilized to evaluate the collected data. The result showed by Weighted Least Square Model suggested that there is a positive and significant relationship between stock liquidity and the capital structure of firms. The results were consistent with those of Abdullah and Ebrahim (2020) and Sharma and Paul, (2015). Moreover, it can be interpreted that firms have lower leverage when they have higher liquidity of stocks. (Dang et al. 2019).

Keywords: Stock liquidity, Capital structure decision, manufacturing firms, leverage