Capital Structure Determinants in Pakistan Textile Industry: An Empirical Examination through the Lens of Pecking Order and Trade-Off Theories.

Purpose—This study examines capital structure choices of textile firms and investigates the relationship between growth and financing behavior within the theoretical frameworks of the Trade-Off and Pecking Order theories. It specifically aims to highlight significant variations in capital structure decisions influenced by internal financial factors and the broader macroeconomic environment. Study Design/methodology/approach—Utilizing panel data from 150 listed textile firms over the period 2015–2024, this study employs a regression framework to analyze how firm-specific financial factors like size, profitability, asset tangibility, liquidity, and sales growth, alongside macroeconomic conditions, influence the choice between equity and debt in capital structure decisions. Findings—The empirical findings reveal that larger firms tend to favor external financing, due to their greater access to capital markets. As noted in the textile industry, high-growth firms tend to prefer internal financing over debt, supporting the Pecking Order Theory and demonstrating a risk-averse financing behavior. An increased proportion of tangible assets eases the borrowing of debt equity, reinforcing the Trade-Off Theory because of their ability to serve as collateral. The findings also emphasize that the overall economic environment and sectoral trends have a considerable impact on the decision-making processes concerning capital structure. Research Practical Implications—Decision-makers need to envision a more universal and adaptable financial environment to cater to the various capital requirements of the textile industry. This would be through the design of financial instruments, credit policies, and the regulatory environment, and thereby de-risk and capitalize the sector in a way that maximizes its contribution to the national economy. Originality/value—The originality of this research is that the authors explored the CSCs determinants in Pakistan’s textile industry, which is an important but relatively less studied sector, looking through the lens of a frontier economy. By adopting a contextual approach, the research provides fresh insights into how textile firms manage financing choices amid local economic conditions and regulatory challenges.