External and Internal Ownership Concentration and Debt Decisions in an Emerging Market: Evidence from Pakistan

This study examines the effect of concentration of ownership both external block ownership and managerial share ownership on capital structure decision of Pakistani non-financial firms. The panel data is used to investigate the relationship between capital structure with external and internal ownership structure and fixed effect model gives a better explanation of the model. The relationship suggested by analysis between external ownership concentration and leverage ratio, patronage the “passive voting hypothesis” that large external shareholders select corporate managers through their voting power by ignoring the interest of the small shareholders. While large insider ownership significantly enhances the voting power and influence the corporate decisions.  Which result difficult to control managerial behavior of getting high level of debt in capital structure. The findings of joint model divulged that ownership variables, insider ownership and external block holders have positive and significant association with leverage. Our analysis also finds the relationship between external block holders and leverage fluctuates with the level of insider ownership and don’t support the “curvilinear relationship” among insiders ownership and leverage ratio. Large sized firms with more cash flows issue more debt. The profitable firms having earning volatility and non-debt tax shield and less dividend paying are less likely to choose higher debt which supports that firms follow the Pecking order theory in making financing decisions. The contribution of the present study is to give insight about capital structure and ownership structure to the investors and corporate managers and influence of ownership on corporate debt decisions. The finds of the present study will help both managers and investors in their investment decisions.. This is the first attempt to explore relation between concentration of ownership both internal and external and capital structure in case of Pakistani firms where ownership and financial structures are different relative to those in developed markets.