Effects of Development in Capital Market on Firms’ Financing Patterns

The current study is eyeing to examine the effects of development in capital market on debt ratios of manufacturing firms in Pakistan. This study will cover the period from the year 2001 to 2010. Two equally weighted indices are constructed over the 10-year period for the measurement of the capital market development. This study uses dynamic panel data models. The results show a significant impact of capital market development on debt ratios of manufacturing firms. The results also reveal that manufacturing firms in Pakistan use the stock market as a substitute for long-term financing. This study has not found a huge decrease in debt ratios in years with lower score of debt market index.