World Applied Sciences Journal 20 (11): 1478-1483, 2012 ISSN 1818-4952 © IDOSI Publications, 2012 DOI: 10.5829/idosi.wasj.2012.20.11.1788 Corresponding Author: Zeeshan Ullah, Department Management Sciences, University/Institution: Iqra University, Islamabad Campus Pakistan. Tel: +92 321 6360645. 1478 Managers’ Risk Taking Behavior for Adjusting Capital Structure Zeeshan Ullah, Muhammad Jamil, Ehsan Ullah Qamar and Usman Waheed 1 2 1 1 Department Management Sciences, University/Institution Iqra University, Islamabad Campus, Pakistan 1 Faculty of Management Sciences, International Islamic University Islamabad, Pakistan 2 Abstract: This study is aiming to check that how firms adjust their capital structure in relation to risk exposure. Manager’s behavior with respect to business risk is observed mainly, along with other variables namely profitability, size of the firm and sales growth in this study. Data of motor and vehicle sector of Karachi Stock Exchange over the period of 2006-2010 is used for this study. Results of this study show that managers are risk averse, whereas size and profitability are positively related to the capital structure. Profitable firms follow the tax based models. Sales growth is negatively related to capital structure. Firms with high sales growth have the agency problem. Key words: Business Risk Profitability Size Sales Growth Capital Structure INTRODUCTION needed to know that: Does risk exposure affect the capital Since the theory of irrelevance of firm’s value Exchange?. presented by [1], capital structure determinants have been This study is contributing in the existing literature by a core research topic for financial researchers. Numerous conducting research in the developing country and theories have explained the factors related to capital emerging economy regarding the effect of risk dynamics structure namely packing order theory, market timing on the financial policy of the firms. Role of business risk, theory, signaling theory, free cash flow theory, agency while forming capital structure by the managers is studied theory and trade-off theory. These theories attempt to in this paper. This paper explains that do the managers verify best combination of debt and equity and enhance adjust their capital structure in accordance with business the company's value. risk and how the profitability, size of the firm and sales There is a disagreement about the effect of business growth are contributing to the capital structure formation. risk on the optimal debt level. [2, 3] and [4] argued This paper also gives information to the analysts and favorably about the effect of business risk on debt equity investors about the agency problem by considering the mix; [5] found a negative effect; but [6, 7] and [8] conclude behavior of managers. that business risk have no significant relationship with Lenders, investors and financial analysts will get the leverage. This study provides a clear answer about the benefit by understanding the risk mechanism through this question of effect of business risk on optimal level of debt paper. This study will give them the information about the [9]. All these researches are indicating the importance of psychology of the management of the Motor and vehicle the business risk for the business. Therefore it is sector firms about the capital structure formation and risk important to consider the business risk factor for the firms taking behavior. This study gives the information about while increasing leverage. the lending behavior of the managers of motor and vehicle Risk is a critical factor in the capital structure sector firms. Lenders can use the information of this study decision. So it is needed to determine the level of risk for lending the money to motor and vehicle sector firms. while selecting the debt equity mix for the firm. This area For the effect of risk dynamics, this study is using the is of core concern now days when the uncertainty has data from five sectors of nonfinancial listed companies on increased and prevailing everywhere in the economy. It is Karachi Stock Exchange for the period of five years from structure of the non-financial listed firms at Karachi Stock