Abstract

This study examines the nexus between stock market growth, as measured by total market capitalization, and corporate finance dynamics within the context of Pakistan. The empirical findings of this study support the assertion that stock market expansion facilitates enhanced access to equity capital for firms operating in Pakistan. This is represented by an increasing trend in the reliance of the average Pakistani firm on external equity as a component of its capital structure. In quantifiable terms, our analysis spanning the years 2000 to 2022 reveals an annual increment of 0.8 percentage points in the external-equity-to-assets ratio for the average Pakistani firm, coupled with a simultaneous annual reduction of 0.3 percentage points in the debt-to-assets ratio. This evidence of substitution of equity for debt is consistent with the view that stock market development matters to corporate finance or that stock market development matters more to corporate finance more than debt market development does. Furthermore, this study sheds light on the relevance of conventional determinants of capital structure. Notably, factors such as profitability, firm size, market-to-book ratio, and tangibility continue to exert influence in shaping firms' capital structure decisions, as established in prior corporate finance research.

Keywords: Pakistan, equity issuance, investments, financing, capital structure