An Empirical Analysis of the Determinants of Capital Structure in a Hyperinflationary and Politically Unstable Economy: A Case of Sugar Sector of Pakistan

Abstract

This research evaluates the choice of capital structure mix under hyperinflationary and unstable political economic conditions. In this study it is investigated whether which factors that influence the capital structure of firms in developed nations can also affect firms under distressed economic circumstances. A particular sample of non-financial public companies from the sugar sector of Pakistan that are listed on the Pakistan Stock Exchange (PSX) with duration from 2016 to 2021 is analyzed by operationalizing random effect regression method. The time frame is chosen to highlight the unique factors that affect capital structure during high inflation period and political instability. The empirical results demonstrate that only profitability has a direct association with the inclusion of debt in an organization’s capital structure, while liquidity, valuation, cash flows efficiency, and activity efficiency are negatively associated with debt inclusion. Finally, the study concludes that the capital structure choices made by the sugar sector of Pakistan is not significantly different from those of firms in developing but financially distressed economies.