The impact of sensitivity and validity of debt signaling hypothesis in transitional and emerging market: Perspectives from Pakistan

This paper is an attempt to determine the effect of capital structure on market value of firms. Which lead to impact of sensitivity and validity of debt signaling hypothesis on transitional and emerging market. The underlying assumption is that, the choices in capital structure make changes in the market value of firms. The financial signaling factors examined in two stages. First we examined the relevant financial determinants of capital structure. Secondly we concerned with financial signaling determinants of market value of equity. In this study, we examine 60 firms in the non financial sectors listed at the Karachi Stock Exchange for the period 2004-2008 using multiple regression in a cross sectional data analysis. Seven repressors i.e. asset tangibility, size, growth, profitability, interest expense, tax effect and agency cost were employed to determine the effect on leverage. As for the relevant determinants of capital structure this paper analyzed the comprehensive determinants which have been examined in previous studies of capital structure concerned with three theories; static trade off theory, pecking order theory and signaling theory. The results suggested that three determinants i.e. asset tangibility, size and profitability are most relevant and significant in determine the financial signaling on market value of equity. The provide validity to research on capital structure for researchers, academician investors, analysts and managers in developing countries.