This paper empirically investigates the dynamic causal relationship among corporate financing patterns, industrial growth, domestic credit, capital expenditures and market capitalization and the direction of causality in Pakistan for the 1975 to 2013 period. Our empirical results favour the presence of long run relationship among variables under the consideration. We found that the capital structure deviations from the long run equilibrium due to random economic shocks are corrected by the system at the rate of 17.42% per year. In the short run the causality runs from industrial growth, domestic credit and market capitalization to the debt financing and from the debt financing to the capital expenditure. In the long run the unidirectional causality runs from the domestic credit, capital expenditures and market capitalization to the debt financing. However, the industrial growth and debt financing have reciprocal causal relation in the long run. The presence of long run reciprocal causality indicates that a multipronged long-term financial policy may effectively contribute to the industrial development through efficient utilization of capital in Pakistan.
Keywords: Capital structure. Domestic credit growth. Capital expenditures. Speed of adjustment.