Introduction:

Corporation is an artificial person formed by a group of people. It means that a corporation has all
the rights that a natural person has like owing property and suing in court etc. But yet it is not a natural
person that is why it is called artificial person. Corporation carry out their business similar to the natural
person sometimes, while carrying out the business operations there becomes a shortage of funds so
corporations feel that they need to finance themselves in order to perform their business operations.
Financing can be of two types:
1. Equity financing
2. Debt financing
Equity Financing:
Equity financing means that the corporation floats its share to general public at a certain price.
The general public becomes owner of the corporation and they have their share in profits of the
corporation. Equity financing can be of two types:
i. Preferred Shares.
ii. Common Shares.
Debt Financing:
Sometimes while financing themselves corporations do debt financing. They take debt or loan
this type of financing helps in reducing the amount of tax that corporations pay to government of country.
Debt financing can also be of two types:
i. Debentures
ii. Bank Loans
Debentures:
These are the written instruments that issued by the corporations to the general public in order to
raise their capital. In return the corporations also pay certain amount of interest with the principal amount
to the general public.
Bank Loans:
These are the sum of money that corporations borrow from commercial banks in order to raise
their funds for carrying out the business operations. In return corporations also give the certain amount as
interest which is mentioned in the agreement while taking loan.

This paper is being prepared to carry out the research about bank loans. The corporations take decision
about their capital structure that what ratio of debt and equity they are going to maintain while carrying
out the business operations. In this research we are going to highlight the relationship between the interest
rate at which the commercial banks offer loan to the corporations. We are going to study the history of
changes in the interest rate over the years from commercial banks and the impact that it has made on
corporations capital structure. It means that are corporation have altered the debt equity ratio because of
the changes in interest rates over the years.
This research examines the capital structure implications by answering these questions:
1. Do firms borrow more when interest rates are more favorable?
2. Do firms choose longer maturity while taking loans?
Up to this point of time capital structure study was based on two theories:
i. The pecking order theory
ii. Trade off theory
The pecking order theory was introduced by the Meyers (1984). This theory defines that corporations
decision of financing depends on the cost of financing. Internal funds are preferred by organizations
because of its cheapness while financing. If internal funds are insufficient than corporations prefer debt
financing over equity financing. Corporations only do equity financing when it becomes costly to borrow
from creditors.
The trade off theory perceives that observed capital structures are the result of individual firms
trading off tax benefits of increased debt usage against the increasingly severe financial distress costs that
result as debt ratios approach critical levels. This theory implies that in order to maximize an optimal debt
ratio. If random event takes the corporation away from its target debt level it will try to return its original
target level.
Literature Review:
There is a stream of literature that focused on testing there two theories Shaylm Sunder and
Myors (1999), Chirinko and Sigha (2006), Frank and Goyal (2009), Fama and French (2008), Irof (2010),
Lemmon and Zender (2010). Ieary and Roberts (2010) and Autore and Kovac (2012) they all compared
trade off and pecking order theories with empirical data. There statics end in a result, one theory is
superior to other in certain situations. Trade off theory elaborates the observed compute debt level in a
fair way and can better explain that how tax, bankruptcy, security issuance and investment opportunity
effects the organizations actual debt ratio while pecking order theory elaborates the observed capital
structure changes, especially those involving security issues. It better explains the types of securities
organizations choose to issue and markets response to these issues. It further elaborate, why profitability
and debt are not directly related, why market reaction is not positive to now equity issuance, why
managers take decision when they are forced by situation why they do not foresee things?
Theoretical Framework:
In this study we have extended to literature review to changes in interest rate over the year in
Pakistan and what will be the impact of these changes on corporate capital structure. Corporations can
raise their funds by debt financing or by equity financing.

Debt financing can be of two types:
1. Public Debt
2. Bank Loans
Usually corporations choose banks for debt financing in Pakistan because it leads to the
redemption in taxes etc. In this study we try to find out the relationship or the impact of the changes in
interest the corporations for loans that is and their impact on the capital structure. First we are looking to
find out that the higher interest rate lead to what? Are they just limits the amount of loan? Or are they
impacting the duration of loan taking on the overall loan taking by the corporations.
Secondly we are trying to find out that either the corporations have changed the debt equity ratio
because of the higher interest rates? Or are they same as the hire interest rate is not effecting the capital
structure while Baker and Wongrler (2002) find that interest rate has a persistent impact on capital
structure subsequent studies find why a short-run (i.e. two or three years) impact. With regards to debt
markets, none of the previous studies examine the relation between interest rate on corporate capital
structure in Pakistan. If firms try to reduce their cost of capital by borrowing in periods of low interest
rates, they would have relatively higher debt ratios compared to the firms that do not. Hence is there a
match between the loan decision making and the interest rate fluctuation means that is there anything like
that firms try to borrow more in the era of low and borrow less in the era of higher interest rates. This is
the question that will be answered in this paper.
In this article we are examining the relationship between the leverage ratios of the borrower in the
long run. Is there really a relation between interest rate and corporate capital structure? Do corporations
change their capital structure in the ear of low interest rates? In this we try to find out the answers to these
questions. In attempt to see in the impact of interest rates on corporate capital structure has been found in
Pakistan. To the best of my knowledge this study has been carried out for the first time in which the debt
market conditions at the time of borrowings have been linked to the capital structures of the borrowers in
the long run.
As evidence, we can say that the current capital structure of the corporations is the result of the
previous fluctuations in the bank rates. In other words we can say that firms do change the capital
structures which means the debt and equity ratios according to the functions in the interest rates. If thats
the case that our results would have an important implication as we are trying to find out the best capital
structure for the organizations.
As mentioned above our first objective is to see if corporations attempt to lower their cost of
capital by limiting the financing either debt or equity. Since corporations can better predict the
fluctuations in the interest rate for debt financing. So our focus is to find out that how the corporations can
achieve the better predict the best suited capital structure for themselves by keeping in view the previous
fluctuation in the interest rates in Pakistan.
Hypothesis:
In first part of the study we test for impact of the fluctuations in the interest rate on the
corporations capital structure more money borrowing during the period of low interest in Pakistan. Our
hypothesis is:
Ho : Corporations borrow more money when interest rate is low.
H1 : Corporations borrow less but for longer period when interest rate is low.
Variables:
Capital interest rate, size of corporation, profitability structure.
Methodology:
Now the stage is of finding out that the thing we have been assuming up till now, are they correct
or not for that we need to develop some numerical question and find out solution for that. For this purpose
we using a statistical tool which is known as multiple regression analysis so that we can find out whether
our results are significant or not.
Corporations capital structure can be effected by many thing we are not going to discuss each of
those things there. The main thing that we have been looking is interest rate either it has impact on the
corporations capital structure or not, It is going to denoted by I.R (Interest rate). The other thing that can
effect the capital structure is the size of the corporation because the corporation which is bigger in size
has more attention from the banks for getting loan because banks trust the size for the recovery of loan
and banks do issue more loans to corporations of bigger size. The size of corporation is denoted by
(SOC). The other variable that we are going to include is profitability of the corporation because the
corporations which are more profitable get more loan and healthy amount of loan from banks easily. This
has effects there capital structure because while making decisions about capital structure of the
corporations easy availability of loan also plays its part. We can denote profitability by (P).
Hence we can say that the interest rate (I.R), size of corporation (SOC) and profitability (P) are
the independent variables and capital structure is the dependent variable which is depending upon all
three of them so the equation for regression analysis is:
C.S= + 1 (I.R) + 2 (SOC) + 3 (P) + e