We form our variables using data derived from the financial statements contained in the Stock Exchange and company’s websites. Our sample consists of all Oil and Gas Marketing companies listed with Stock Exchange.

Following Table will make you understand about the Variables, Determinants, Measures and their references using the same measure.

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Measures used

Some refrence using the same measures


Total Liability – Equity ÷ Total Assets

Waliullah&Muhammad Nishat (2008), NikolaosEriotisDimitriosVasiliou and Zoe Ventoura-Neokosmidi(2007,Rajan and Zingales(1995), Shah and Hijaz(2004),


Log of sale

Titman and Wassels(1988), DebabrataDatta and BabitaAgarwal (2007),

Raul Seppa(2008)


EBT ÷ Total Assets

DebabrataDatta and BabitaAgarwal(2007), Rajan and Zingales(1995)

DBT_EQT(Debt to Equity Ratio)

Total Liability ÷ Common Equity

Ali Basharat (Lecturer) Air University Islamabad.

CR(Current Ratio)

Current Assets ÷ Current Liability

Ali Basharat (Lecturer) Air University Islamabad.


Fixed Assets ÷ Total Assets

Attaullah Shah and Safiullah Khan(

2007),Titman and Wessels (1988),Rajan and Zingales(1995),Fama and French (2000)

In order to comment on the capital structure of Oil and Gas firms in the perspective of the Pakistan economy, it is desirable to take into consideration all the sectors of the economy. Few of them are directly and indirectly keeping in mind this requirement we select five companies, as under this index all the major companies of important segments of the economy are listed. The source of our data is SEC Prowess data base.


We have taken six variables out of which leverage is taken as a dependent variable. We take the total Debt (Total Liability) to total asset ratio as proxy for Leverage (dependent variable). For potential determinants of leverage, we study five independent variables namely Tangibility, Size, Profitability, Debt to Equity ratio and Current ratio.

Explanation of Variables:

In their cross-sectional study of the determinants of capital structure, Rajan and Zingales(1995)examine the extent to which, ath the level of the individual firm, leverage may be explained by for key factors, namely, market-to-book ratio i.e. growth, size, profitability, and tangibility. Their regression analysis differ slightly across countries, they appear to uncover some fairly strong conclusion.

But our study of capital structure follows the framework of Rajan&Zingles(1995) Shah &Hijazi(2005), NikolaosEriotis& Zoe Ventoura(2007) and Jeam-Laurent Viviani(2008)that use tangibility of assets, Firm size, Profitabllity. But in our study we have also used two more variable that measure more reasonably leverage of firm i.e Debt to Equity ratio and Current Ratio.


Measure of Leverage (LG)

In the literature the term "Leverage" can be interpreted in different ways. The specific choice of the term leverage depends on the objective of the research. We take leverage as the ratio of total liability to net total assets. Net total assets are the total assets excluding all the fictitious assets and revaluation reserves and debit balance of profit and loss account. One question that arises in this context is whether one should take the book value or the market value of debt. Thies and Klock (1992) and Fama and French (2000) support the consideration of book value of leverage. As the market value of debt is dependent on so many exogenous factors, which are outside the control of an organization, book value better reflects the true value of the firm’s leverage. So, we take book value of debt (total liability proxy) as well as of net total assets.

Leverage refers to the percentage of assets financed by debt. Previous research studies have used different measures of leverage. Frank and Goyal (2003b) state that the difference between a debt ratio based on market value and one based on book values is that the former tends to regard the firm’s future situation whereas the later reflects the past situation. Fama and French (2002) point out some inconsistencies arising from the use of two different ratios. According to them, both theories (Pecking Order and Static Tradeoff) apply to the debt book value, and there are doubts if the predictions may be extended to the debt market value.

Following the previous studies on non-financial Pakistan’s listed firms by Shah &Hijazi (2005) we used the book value measure of leverage.

One more consideration in defining the appropriate measure of leverage is to take total debt or only long term debt as a percentage of total assets. Though capital structure theories consider long term debt as a proxy for financial leverage, we use the measure of total debt because in Pakistan firms have mostly short term financing as the average firm size is small. This makes access to capital market difficult in terms of cost and technical difficulties (shah and Hijazi 2005). In Pakistan firms usually prefer short-term borrowing, the reason being that commercial banks are the major lenders and they do not encourage long term loans. Up to 1994 firms did not rely on market based debt; in mid-1994 the government amended the company law to permit companies to raise debt directly from the market in the form of TFC (Term Finance Certificates)

Booth (995) had also mentioned this point that developing countries including Pakistan prefer short term financing than long term financing.


Tangibility of Assets (TG)

Titman and Wessels (1988), Rajan and Zingales (1995) and Fama and French (2000) support the importance of the tangibility (ratio of fixed to total assets) for leverage. The value of collateral of fixed assets for the gearing level of the firm is manifested by the tangibility of that firm. However, the direction in which it influences the level of leverage is not clear by any of these studies. Galai and Masulis (1976), Jensen and Meckling (1976) and Myers (1977) in their papers present the argument that stockholders of levered firms are prone to overinvest that gives rise to the classical conflict between shareholders and bondholders. But if the debt is secured against the fixed assets, the firm is restricted to use the borrowed funds for the same project for which it has borrowed. By this fact, creditors get an improved guarantee of repayment, and thus the chances of recovery are higher. Since this does not happen without collateralization of the fixed assets, the proportion of debt increases with the availability of more fixed assets in the balance sheet of the firm. Hence, the trade-off theory predicts a positive relationship between the tangibility and leverage in any firm.

In contrast, the agency cost model predicts a negative relationship of tangibility with leverage in any firm [Grossman and Hart (1982)]. We calculate tangibility by finding out the ratio of the total fixed assets (gross fixed assets excluding intangible assets) and 30 days average market capitalization of the firm.

Hypothesis 1: A firm with higher percentage of fixed assets will have higher debt ratio

Size (SZ)

Titman and Wessels (1988) argue in their paper about the negative relationship between sizes and probability of bankruptcy. Accordingly, trade-off theory predicts an inverse relation between size and bankruptcy and hence positive relationship between size and leverage.

On the other hand if we take size as a proxy for information asymmetry then large firms tend to disclose more information about their plans as they are closely watched by the capital Market analysts. So the information asymmetry between the insiders and investors in the capital market is less for large firm. Accordingly, the pecking-order theory predicts a negative relationship between size and leverage. We take natural logarithm of sales as the proxy of size, following Titman and Wessels (1988).

Profitability (PF)

According to the trade-off theory, there is a positive relationship between profitability and leverage. As the profit of the firm increases, its capacity of bearing the interest cost rises. Secondly, the bankruptcy cost of the larger firm is also less than that of small firm. Third reason is that as the profit of firms increases they feel greater need to have tax shield. So the level of leverage in the capital structure also increases. On the contrary, pecking-order theory

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