Financial Development and Firm Leverage in Pakistan: Conventional and Islamic perspective
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The purpose of this study is to examine the impact of Islamic finance vs conventional finance development on firms’ leverage and debt maturity in Pakistan.
We extract the annual data for the period 2010 to 2020. The final sample comprises 325 firms, after excluding financial firms, listed in Pakistan Stock Exchange (PSE). We use OLS and Fixed-Effects regression to estimate the impact of Islamic and conventional finance development on firm leverage and debt maturity. Our findings hold using battery of robustness check.
We demonstrate that stock market development has a negative impact on leverage while conventional bank development is positively linked with leverage. Further, we find that overall Islamic finance development (Islamic bank and Sukuk market) is positively associated with leverage and debt maturity, in contrast, conventional finance development is inversely linked with debt maturity. Collectively, our results support the importance of Islamic finance supply-side factors on firms’ capital structure decisions. Our findings require the attention of regulatory bodies for financial development in Pakistan.
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