Abstract
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.
