Debt Specialization within Profitability Sub-Groups: A New Perspective of Debt Structure Choices

This paper empirically investigates how the degree of debt specialization varies because of profitability levels, affecting the organizational determinants and debt structure choices. Using a novel data of 419 firms from 2009 to 2015, we find a significant difference in the usage of debt types between the profitability sub-groups. Low profitable businesses incline more towards debt specialization than high profitable firms. However, short-term debts remain a prevalent source of borrowing regardless of profitability level for Pakistani companies. Our evidence also suggests that among the low profitability subsample, larger, riskier, growing companies with high expense ratios are more likely to be involved in the higher degrees of debt specialization, as compared to highly profitable businesses. Consistently, the preeminent reasons for debt specialization are information asymmetry, expected default risk, good reputation and accessibility to the debt market.