Growth opportunity has been considered as a significant determinant of capital structure. The literature generally favors the negative relationship between the growth opportunities and leverage of firms. However, another school of thought finding such a relationship to be positive also exists. The purpose of this study is to find out how growth opportunities in Pakistan are related to leverage decisions for the listed manufacturing corporate concerns. We use financial data from a sample of 110 manufacturing companies listed on Karachi Stock Exchange for 15 years (1982-1997) from 9 different sectors along with estimation of fixed-effects regression analysis to assess the subject relationship. We find a positive relationship between the growth opportunities and debt levels of the corporate firms. This positive relationship is highly significant for the segments of firms with ‘low’ and ‘medium’ growth opportunities. The reason for this finding may be that the owners of these firms view the available growth opportunities as unsustainable and more risky and intend to pass on that higher risk to the creditors. The socio-economic and political networks of such owners may help provide them easy access to credit market resulting in high debt level. Consequently, they might delay issuance of new common stocks to be issued at the future higher prices if the risky investment succeeds. We also observe a general tendency of the credit market, having limited options for profitable credit, to finance companies with little better future prospects. Moreover, unsustainable growth opportunities in economy, less developed capital markets, a high number of firms with low growth in Pakistan (in real terms) and their limited goodwill among the investors and general public (restricting them to issue shares of common stock) may also be the underlying reasons behind the corporate behavior causing such an overall positive relationship. Another important finding of this study is that industry type is also a relevant variable which affects the relationship between growth opportunities and leverage.
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