No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
The Determinants of Capital Structure of the Chemical Industry in Pakistan
Abstract
This study is an attempt to determine the capital structure of listed firms in the chemical industry of Pakistan. The study finds that by studying a specific industry's capital structure, one can ascertain unique attributes, which are usually not apparent in the combined analysis of many sectors as done by Shah and Hijazi (2004). This study analyzed 26 of 39 firms in the chemical sector, listed at the Karachi Stack Exchange for the period 1993-2004 using pooled regression in a panel data analysis. Six regressors i.e. firm size, tangibility of assets, profitability, income variation, non-debt tax shield (NDTS) and growth were employed to examine their effects on leverage. The results show that these six independent variables explain 90% of variation in the dependent variable and, except for firm tangibility, results were found to be highly significant. The study has policy implications of importance for researchers, investors, analysts and managers.
... A measure generally referred to as 'Non-debt tax shields' (NDTS), which includes depreciation and investment tax credits, DeAngelo and Masulis(1980), Rafiq et al. (2008) and ...
... Income variation, whether it is considered due to the inherent business risk or as a result of inefficient management practices, or earnings volatility is a proxy for the probability of financial losses, and the cost of capital of the firms increase because such firms will have to pay premium in order to minimize the risk of outside funds providers. Rafiq et al. (2008) used the value of the deviations from mean of net profit divided by total number of years for each firm in the given year as a proxy for earnings volatility. Same measure as used by Rafiq et al. (2008) is used in this study. ...
... Rafiq et al. (2008) used the value of the deviations from mean of net profit divided by total number of years for each firm in the given year as a proxy for earnings volatility. Same measure as used by Rafiq et al. (2008) is used in this study. ...
The study is aimed at exploring the relationship between dividend payout and capital structure, and to explore the determinants of dividend policy and capital structure of manufacturing sector of Pakistan. Penal data ranging from 2006 to 2011 of selected 100 manufacturing firms of Pakistan is used in this study. Dividend policy and capital structure have their own determinants. Firm's size, profitability, liquidity, growth opportunities, tangibility and capital structure are used as determinants of dividend policy, while determinants of capital structure which are used in this study are firm's size, profitability, liquidity, growth opportunities, tangibility, tax saving other than debt and income variability and dividend payout. Two stages least square is used for estimation. Size, profitability, liquidity and leverage are found to have a positive significant impact on dividend policy whereas growth opportunities is found to have a negative significant impact on dividend policy and tangibility has no impact. On the other hand growth opportunities, tangibility and income variability are found to have positive significant relationship with leverage (capital structure), whereas firm's Size, profitability, liquidity and tax saving other than debt are found to have negative significant relationship with leverage. This study concludes that dividend policy and capital structure are positively correlated with each other. .
... The use of these models by practitioners may vary from one region to another, and across time (Rafiq et al. 2008). As an implication, some researchers have focused their studies on specific industries (Shanmugasundaram 2008;Jahan 2014;Kühnhausen and Stieber 2014;Mwangi et al. 2014). ...
... Some of those factors explain the existence of the POT, while others explain the existence of the STT. Some other studies, such as the one conducted by Rafiq et al. (2008), employed the same factors to indicate the existence of either the Pecking Order or Static Trade-off Theories, depending on the signs of those factors, i.e. positive or negative signs. The models may have employed parametric as well as nonparametric models. ...
... The above model can be extended by putting in three other independent variables. Rafiq et al. (2008) applied the portion of tangible assets as an explanatory variable. They argued that more tangible assets provided better opportunities for companies to borrow because they can use those tangible assets as collateral. ...
There are some issues about how companies consider their financing. These issues are related to the amount, source, type, and the structure of such financing. So far, there is no uniform model that is able to explain how companies deal with these issues. There are three competing, dominant theories of financing decision making, i.e. the Pecking Order Theory, the Static Trade-off Theory, and the Agency Model Theory. This study attempts to explore which theory explains the best way for companies in the consumer industry to decide their financing method. There are five hypotheses to be tested in this study. Using data from public listed companies on the Indonesian Stock Exchange from 2008 to 2011, it seems that the Agency Model Theory is more dominant than the other two theories in explaining the way companies fulfill their financing needs. © 2015, Gadjah Mada International Journal of Business. All rights reserved.
... Later on, previous work was extended by Shah and Khan in 2007 by using panel data regression analysis and new variables. Hajazi and Tariq (2006) conducted study by using cement industry data, and Rafiq et al. (2008) worked on Chemical industry data. Walliulah and Nishat (2008) worked on the dynamics of capital structure. ...
... In 2007 Shah analyzed textile industry data and used three explanatory variables (size, tangibility and profitability). In Pakistan Hajizi and Tariq (2006), Shah and Khan (2007), Rafiq et al. (2008), and Walliulah and Nishat (2008) used profitability, tangibility, size, growth, volatility of earning, and non-debt tax shields as explanatory variables in their studies. Ahmad et al. 11377 ...
... Long and Malits (1985), Baskin (1989), Michaelas et al. (1999), Al-Sakran (2001), Doberz and Fix (2003) and Chen (2004) have empirically proved negative relation between leverage and profitability. Studies conducted by using Pakistan firm's data by Shah and Hijazi (2004), Shah (2007), Hajazi and Tariq (2006), Shah and Khan (2007), Rafiq et al. (2008), Walliulah and Nishat (2008) empirically proved negative relationship between leverage and profitability. ...
This study tried to determine the influence of set of explanatory variables on the capital structure determination for Pakistani non-financial firms by using panel data. This study also finds the applicability of two capital structure theories (pecking order theory and trade-off theory) in Pakistani non-financial sector. This study used five previously studied variables (profitability, size, growth, tangibility of assets, non-debt tax shield), and added three new variables (tax, liquidity and payout), which were not used previously in Pakistani context. This research used data from 336 non-financial firms over the period of 5 years (2005-2009). This study used fixed effect random model regression analysis to analyze determinants of capital structure. The results showed that industry type play important role in determining capital structure. The results showed that out of eight variables five (size, tangibility of assets, non-debt tax shields, liquidity and payout) are statistically significantly related to leverage, remaining three are statistically insignificantly related with leverage. Two expected relation are accepted while six are rejected after empirical analysis. This study identifies that industry type, liquidity and payout ratio play important role, whereas tax does not play important role in identifying capital structure Pakistani non-financial firms.
... They took the sample of 445 non-financial listed firms from the period 1997-2001.Shah and Hijazi (2004) argued that the variables identifies by Rajan and Zingales (1995) makes a significant impact on capital structure of Pakistani firms except the firms tangibility and does not confirm to the trade-off theory which states that the firms debt financing increases with more tangible assets (Myers, 1977). Rafique et al. (2008) worked on the chemical industry of Pakistan. They took the sample of 26 firms from Karachi stock exchange and found a positive association of firm's size and growth with its leverage, while profitability was found to be negatively related with firms leverage. ...
... From t he literature we have analyzed different measures and definition of leverage. Leverage can be defined as " Percentage of assets financed by debt " (Rafique et al. 2008). Previously different measures of leverage have been used. ...
... Previously work done on non financial listed firms by Shah and Hijazi (2004) used the book value measures. There is a general consensus in the literature that the main advantage of debt financing is the interest tax shield i.e. interest payments are tax deductible and it results in cash savings and once the debt is issued the benefits of tax shield are unchanged by market value (Shah and ijazi,2004;Rafique et al.,2008;Banergee et al., 2000). So it clearly indicates that market value of the debt when measuring leverage is irrelevant. ...
With the application of regression with common effect this paper analyzed the empirical validity of two famous and formal theories (Trade off and Pecking order). We have selected four independent variables tangibility, size, profitability and growth and explored their relationships with the dependent variable leverage in textile sector companies. After proper filteration 132 firms were selected as final sample for analysis for the period of 2001-2009. Balance sheet analysis published by State Bank of Pakistan has been used for the purpose of collecting data. Among the four hypothesis, tangiblity and size of the company were supporting the trade off theory where as profitability and growth supported pecking order theory. To check the stationary of data six panel unit root tests have been applied which provided strong evidences of rejecting the unit root in the panel structure. The results of the regression showed that tangiblity is most influencial determinant in debt financing decision and positively associated with leverage which is a confirmation of hypothesized prediction of trade off theory. Size and profitability failed to support trade off theory with their negative coefficient and supported the hypothesized prediction of the Pecking order theory. Growth with its negative coefficient supported the trade off theory but the results are not realible as it was not statistically significant. Thus keeping in view the four hypothesis and based on their results there is stronger support for the Pecking order theory in textile sector of Pakistan.
... Empirical evidences have shown different impact of firm's characteristics on different component of debt (Bevan and Danbolt, 2000). Different capital structure theories are mostly relevant to long term debt as a proxy of leverage (Rafiq et al., 2008). Booth et al. (2001) also argue that use of short term financing is much higher than long term financing in developing countries including India. ...
... Literature review provides different measures and definitions of leverage. Rafiq et al. (2008) define leverage as "percentage of assets financed by debt." Frank and Goyal (2003) suggest the differences in debt ratios based on market value and book value to measure leverage. ...
... Mumtaz et al. (2013) showed that leverage and firm value has an inverse relationship. Rafique et al. (2008) found that by analyzing specific industry one can ascertain unique attributes that cannot be analyzed if all the industries considered. Similarly Awan et al. (2011) Presented the same findings as by the study of (Rafique et al.;. ...
... Rafique et al. (2008) found that by analyzing specific industry one can ascertain unique attributes that cannot be analyzed if all the industries considered. Similarly Awan et al. (2011) Presented the same findings as by the study of (Rafique et al.;. Sabir and Malik (2012) studied the determinants of capital structure in specific industry. ...
The aim of the study was to examine the most discussed relationship between capital structure and firm value by
investigating the intervening impact of various corporate governance measures. chief idea of the study was to
observe the moderating impact of chosen governance attributes (board size, board independence, CEO role
duality, managerial ownership and ownership concentration) on the relationship between capital structure
(leverage) and firm value (Tobin’ Q). The study used the 775 firm year observations of 155 non-financial
companies listed at Karachi Stock Exchange for financial years containing 2008 to 2012. Keeping in view the
nature of data (balanced panel), fixed effects regression method was employed to estimate the formulated
relationship. In finding moderation, this study found significant positive moderation for board independence and
ownership concentration. However for managerial ownership this study found significant negative moderating
effect between leverage and firm value.
... Studies on capital structure of Pakistani firms have mostly concentrated on the issue of Leverage ratio (Sheikh & Wang, 2010;Rafiq 2008; These studies treat all sources of debt as homogeneous group irrespective of whether the debt is from capital market or banks and other financial institutions. This is however, insufficient as bank debt is considered unique among many other forms of debt sources (James, 1987). ...
... There is a dearth of literature on this subject in the context of Pakistan. Although studies on Pakistan have identified different determinants of capital structure-including tangibility, firm size, growth, earning volatility, profitability, nondebt tax shield, and income variation (Hijazi & Tariq, 2006;Rafiq, Iqbal, & Atiq, 2008;Shah & Hijazi, 2004;Shah & Khan, 2007;Sheikh & Wang, 2011)-none incorporate stock returns as a determinant. Furthermore, no empirical work has been conducted on Pakistan that explains the effect of capital structure on stock returns. ...
This study uses a structural model to analyze the co-determinants of capital structure and stock returns. Applying a generalized method of moments (GMM) model to a panel dataset for 100 nonfinancial firms for the period 2006– 10, our results indicate that both leverage and stock returns affect each other but that the former has a dominant effect on the latter. The results illustrate that profitability, growth, and liquidity are significant determinants of leverage and stock returns. Profitability negatively affects leverage and positively affects stock returns. Growth has a positive effect, while liquidity has a negative effect on leverage and stock returns. Firm size does not have any significant effect on either capital structure or stock returns.
... Hence, firms use more debt. An empirical study by Barton and Gordon [38]; Kale et al. [48]; [49]; Rafiq [50] also indicate a positive relationship between business risk and capital structure. [39]mention that the relevant measure of capital structure in inconclusive and depends on each research objective. ...
The purpose of this research to analyze the influence of firm size, liquidity, growth opportunities, tangibility asset, and business risk to the capital structure of listed food and beverage manufacturing companies in Indonesia and Vietnam Stock Exchange from 2010 to 2016. The result shows that the fixed effects model should be appropriate for this study as compared to the random effect model. Capital structure significantly differences between the two countries. Firm size has a positive but insignificant influence on the capital structure in Indonesia, whereas it has a positive and a significant influence on the capital structure in Vietnam. Liquidity has a negative and significant influence on the capital structure both in Indonesia and Vietnam. Growth opportunities have a negative but insignificant influence on the capital structure both in Indonesia and Vietnam. Asset tangibility has a positive but insignificant influence on the capital structure in Indonesia, but it has the negative but insignificant influence on the capital structure in Vietnam. Ultimately, the business risk has a negative and significant influence on the capital structure in Indonesia but has a positive and insignificant influence on the capital structure in Vietnam.
... The existing literature shows that leverage is measured by three different capital structure-ratios: (1) debt to total assets, (2) debt to capital employed, and (3) debt to equity. Debt to total asset ratio has been widely used as a measure of financial leverage [Shah, et al. (2004), Shah and Khan (2007), Rafiq (2008), Ahmed and Wang (2011), Khan (2012), Saeed, et al. (2015)]. ...
This study is an empirical investigation into the impact of leverage deviations from the target on growth of companies listed on the Karachi Stock Exchange (KSE). It is posited that leverage variance impedes the growth of firms. The role of leverage deviations from the target on firms' growth is analyzed by applying dynamic panel methodology of firms' level annual accounting data. The results indicate that size of the firm, profitability, collateral values of assets, non-debt tax shield, firm-specific interest rate and spontaneous finance are significant determinants of the target leverage. It is found that firms, seldom have actual leverage equal to the target leverage, and more often the actual leverage deviate from the target level. This deviation, adversely affects the growth of firms. The empirical results indicate that upward deviation and downward deviation affect the company's growth, differently. It is concluded that over-levered firms' growth is more sensitive to leverage variance as compared to the under-levered firms.
... According to this theory firms preferred to employ internal source of financing which are retained earnings rather than getting debt from creditors and if more funds are required then they go for issuing external equity. The findings of this study also confirms this notion and consistent with the findings of previous studies like (Hijazi & Tariq, 2006;Rafiq, Iqbal, & Atiq, 2008). In addition to this, profitable firms are reluctant in taking loan in case of inefficient markets due to the risk of disciplinary role of debt which also predicts the negative relationship between leverage and profitability (Shah and khan, 2007). ...
Good corporate governance is considered a building block of success for microfinance institutions (MFIs) as it is presumed to help them in achieving their social and financial goals. This paper analyzes the corporate governance and financial performance relationship for MFIs in Asia. We make use of a panel dataset involving 173 MFIs in 18 Asian countries for the period 2007–2011. We construct a corporate governance index based on seven measures pertaining to board size and composition, CEO characteristics, and ownership type. We then estimate the two-way relationship between this index and each of five different financial performance indicators. To address the likely simultaneity between corporate governance and financial performance, we adopt a two-stage least squares estimation approach with instrumental variables. Our results confirm the endogenous nature of corporate governance and financial performance. We conclude that profitability and sustainability of MFIs improve with good governance practices and conversely that more profitable and sustainable MFIs have better governance systems.
... According to this theory firms preferred to employ internal source of financing which are retained earnings rather than getting debt from creditors and if more funds are required then they go for issuing external equity. The findings of this study also confirms this notion and consistent with the findings of previous studies like (Hijazi & Tariq, 2006;Rafiq, Iqbal, & Atiq, 2008). In addition to this, profitable firms are reluctant in taking loan in case of inefficient markets due to the risk of disciplinary role of debt which also predicts the negative relationship between leverage and profitability (Shah and khan, 2007). ...
The current study contributes to the existing literature on the relationship between corporate governance (CG) and social performance (SP) of microfinance institutions (MFIs) by introducing CG index for the first time purely in the perspective of Asian MFIs. Moreover, this research also investigates the existence of endogeneity by checking the reverse causality between CG and SP as many previous studies highlighted the endogenous nature of many governance and performance variables. Using a panel of 173 MFIs in 18 Asian countries for the period of 5 years, a comprehensive CG index (CGI) based on seven internal governance mechanism variables is constructed as an indicator of the overall CG mechanism of MFIs. By employing generalized least squares (GLS) model, our results indicate insignificant impact of CG on many SP variables which are attributed to the endogenous nature of this relationship as the significance of results improved by studying relationship in reverse direction by employing ordered logit model. Our results indicate that SP is an important determinant of CG mechanism of MFIs even after controlling for MFI-related characteristics.
... The collateral value of a firm's fixed assets significantly affect its ability to obtain debt financing (Rafiq, Iqbal & Atiq, 2008). Large firms tend to use retained earnings to finance their operations, which means that tangibility and assets are inversely related (Frank & Goyal, 2009). ...
This study explores firms' leverage behavior and speed of adjustment in the context of selected performance indicators in Pakistan's manufacturing industry. Leverage behavior is predicted using ordinary least squares, based on four performance indicators: profitability, tangibility, size and growth. The speed of adjustment of leverage is estimated using a general linear model and partial adjustment model. We find that profitability, tangibility and growth play a significant role in leverage behavior and the speed of adjustment, although both differ across sectors. Moreover, exponential leverage adjustment appears to be better than linear leverage adjustment.
... Profitable firms reduce the debt burden so, this is why, there is negative association, firms use internal fund first then go out side to raise funds. Previous research finds the similar relation of profitability and leverage Alti (2006) Rafiq et al., (2008). ...
This study fills a gap in capital structure literature by identifying conditions and mechanisms of equity markets that make Pakistani firms financing decisions more relevant and predictable. This study used the data of 104 non-financial firms listed at Karachi Stock Exchange for the period of 1999 to 2011 to identify that either firms in Pakistan time the equity markets or this phenomena is flat. The core principle of market timing theory that firms go for issuance of securities when their prices are high in the market has been observed in this study. The study found the evidence that in short run firms consider the market valuations if going to issue equity however the results lost the economic significance when test of persistence were applied. In short, our results developed the concept that firm in Pakistan may consider the market timing effect to change their capital structure decisions.
... Thereafter, it is further extended by the Hijazi & Tariq, (2006) by conducting research on the cement industry of Pakistan. Then further work was done by Rafiq, Iqbal, & Atiq, (2008) by targeting the the data on the chemical industry. Then by Waliullah & Nishat, (2008) and Ahmad et al (2011). ...
This study examines various determinants of capital structure in non-financial sector of Pakistan. Data are retrieved from the balance sheets, income statements and notes of 214 companies from non-financial sector in Pakistan. These companies were selected through random sampling. The data has been analysed through regression analysis (using the Random Effect Model) in order to evaluate the effects of various determinants. This study has evaluated the data of the organization lying in different age categories to evaluate either there is change in different determinants with maturity of the firm. The study finds that non-debt tax shield and liquidity are two most influential determinants of capital structure. However, there is a variation observed with respect to age categories.
... Asset tangibility enables the firm to sustain more leverage in its capital structure due to more security available to the lenders as a safeguard against their lending as indicated by Baker and Wurgler (2002), hence a positive association between asset tangibility variable and leverage. But in the empirical studies conducted by researchers revealed mixed results with regard to asset tangibility variable such as Shah and Hijazi (2004) and Rafiq at al. (2008) showed a positive relationship and Shiekh and Wang (2011) indicated a negative relationship. ...
The current study explores the impact of ownership structure on capital structure in textile sector and rest of the manufacturing sectors (non-textile) in Pakistan using regression analysis with fixed effect model. As textile sector is the largest manufacturing sector in Pakistan and having diversified financial characteristics, however, there exists a gap whether textile sector's ownership and capital structure relationship matches with other manufacturing sectors or not. Current study tries to fill this gap. The results indicate that in textile sector, no significant relationship exists between ownership concentration and capital structure whereas a significant negative relationship is found between these two variables in case of non-textile firms in Pakistan. However, institutional ownership variable was found to be non-significant in both textile and non-textile sectors. Other control variables were found to have the results as hypothesized. Period of study used in this study is 2006-2009 and sample comprises of KSE listed firms. INTRODUCTION The capital structure refers to the optimal mix of debt and equity financing structure used by a firm to support its financing needs. Literature supports the notion that an optimal capital structure can have a positive effect on the firm's value. But on the other hand there are different factors which effect the formation of the capital structure in diversified economic, legal and institutional frameworks. The ownership structure is one of the factors which cause an impact on the makeup of financing pattern of an organization (Santanu K. Ganguli, 2013). Debt financing attracts the managers on the ground that it carries a fixed cost; therefore, debt holders do no share in the excess profitability of the firm operations. Further, debt is generally a cheaper financing option if the tax savings on interest payments aspect are considered. But on the other hand, creation of leverage produces financial risk which is the additional risk beyond the business risk of the firm. Although under certain limits, leverage causes a reducing effect on the cost of capital rate of the firm, but after a particular level, it may become a reason to rise in the cost of capital rate due to worsening 'risk complexion' of the firm. This phenomenon is generally referred as financial distress or bankruptcy risk. Other effects of leverage are the excessive monitoring from the debt holders and imposition of stringent debt covenants on the firm, which impose constraints on the scope of certain managerial decisions. Firm's equity structure can take up a form of dispersed ownership structure at one end of the continuum to the concentrated one on the other end. As Indicated by La Porta (1999) and Shah (2007), Pakistani corporate sector is characterized with higher ownership concentration. On one hand a higher ownership concentration have a positive effect on the value of the firm as it bring in more monitoring feature to the managers of the firm (Shleifer and Vishny, 1986), on the other hand, owners in the highly concentrated firms gain so much power that they further use the firm according to their interests (Fama and Jensen, 1983) and these interests may be in contrary to the interests of minority shareholders. Textile sector is the biggest manufacturing sector in Pakistan as it constitutes almost 40 percent of the total manufacturing companies listed on Karachi Stock Exchange. The operating performance of textile sector has shown an unsteady history over the years. Other financial characteristics of this sector also reflect huge diversity such as there are some textile sector firms which are almost wholly family owned, on the other hand, in some Pakistani textile sector firms, a much dispersed ownership structure is present. As for size is concerned, there are some textile companies which are smaller in size with regard to capital base, turnover etc. and other are very large one on these parameters. On the basis of these reasons, the present research is divided into two parts: i-To check the relationship between ownership structure and capital structure in textile sector of Pakistan; ii-The relationship between
The purpose of the research is to study the determinants of capital structure of leasing companies in Pakistan listed on Karachi Stock Exchange during the period of 2006-2015. In this study data was collected from at Karachi Stock Exchange .In this study experts and professional can break down whether the practices in the exact corporate world are identified with the hypothetical perspectives of capital structure. This part of research provide us a review of the theoretical framework literature on capital structure whether the significance of leverage benefits and its cost will run the managers to make decisions based on leverage of capital structure and its market opportunities for guiding them to various debts and equity issues? Do managers have leverage targets change over the time or they adjust equity debt ratio continuously or they don’t have targeted leverage to maintain? The unit of investigation is the recorded firms in PSX record with the negligible specialists' impedance. Study defines adjusted panel information which was gathered from secondary sources. The study applies econometrics displaying utilizing both single condition and diminishes condition models for panel information. Panel econometric procedures specifically pooled common minimum squares, settled impacts, and irregular impacts were utilized to research the effect of capital structure on execution of finance related firms recorded on the Karachi Stock Exchange from 2006-2015
The aim of this study is to determine the financial factors that affect the capital structure of the firms in Borsa Istanbul (formerly IMKB) food industry (XGIDA). In this context, information obtained from the balance sheets, income statements and cash-‐flow statements of 19 firms were analyzed for 6 years (2007-‐2012) by using panel data analysis. In the study total debt to total asset ratio (leverage ratio) is used as the dependent variable while non-‐debt tax shield, size, profitability and asset structure are used as the independent variables. According to the findings, it is detected that non-‐debt tax shield, growth, profitability and asset structure had a significant negative effect on the leverage. The results of the study confirm the main aspects of Pecking Order Theory. On the other hand, the only result that supports Trade-‐off Theory is the non-‐debt tax shield.
The objectives of this study are to identify the significant determinants of capital structure of the listed manufacturing companies in Bangladesh and to test the relevant capital structure theories. This study used a panel dataset including 74 manufacturing companies listed under 8 industries in Dhaka Stock Exchange (DSE) for the period of 2002-2011. The Unit Root tests suggested that all series were stationary. Using Panel Corrected Standard Error Regression Model and Random Effects Tobit Regression Model, all selected variables were found significant. Managerial ownership positively and Growth rate, Profitability, Debt service coverage ratio, Non-debt tax shield, Financial costs, Free cash flow to firm, Agency costs and Dividend payment negatively affect the capital structure. Tangibility and Liquidity ratio have positive relationship with Long term debt and negative relationship with Short term debt and Total debt. It was also found that Pecking-order theory and Static Trade-off theory are the most dominant capital structure theories in Bangladesh. The policy implication is that the financial managers should consider these determinants as yardsticks before taking the leverage decisions in order to choose the most favorable capital structure for the company so that it maximizes the shareholders’ value.
The current study explores the impact of ownership structure on capital structure in textile sector and rest of the manufacturing sectors (non-textile) in Pakistan using regression analysis with fixed effect model. As textile
sector is the largest manufacturing sector in Pakistan and having diversified financial characteristics, however,
there exists a gap whether textile sector’s ownership and capital structure relationship matches with other
manufacturing sectors or not. Current study tries to fill this gap. The results indicate that in textile sector, no
significant relationship exists between ownership concentration and capital structure whereas a significant
negative relationship is found between these two variables in case of non-textile firms in Pakistan. However,
institutional ownership variable was found to be non-significant in both textile and non-textile sectors. Other
control variables were found to have the results as hypothesized. Period of study used in this study is 2006-2009 and sample comprises of KSE listed firms.
Keywords: Ownership concentration, capital structure, institutional shareholding.
Purpose-Purpose of this study is to investigate the determinants of optimal capital structuring that affect growth and financing behavior of textile sector firms in Pakistan keeping in view the important role capital structuring plays in any firm's financial management decisions and the positive contribution it makes to the creation of firms' value and profitability. Methodology/sample-Size of the firm (capital), profitability, fixed assets structure and taxes were used as control variables to investigate the determinants of optimal capital structuring of textiles companies. A sample size of 90 textile companies across the country were selected and their data for the 2005 -2010 period was used. The determinants of optimal capital structure were examined using correlation and regression analyses. F-value was calculated to test the fitness of overall model. Findings-Results of the study showed a negative relationship between dependent variable financial leverage and independent variables. The statistical analysis of spinning and composite unit also showed consistency of results with the overall textile sector but outcome of weaving unit showed a significantly positive relationship between dependent and independent variables. Practical Implications-The findings enhance the knowledge base of determinants optimal capital structure and are likely to help companies take effective decision related to capital structure needs. Furthermore, the study is likely to help the decision makers better adjust themselves towards adopting and considering proficient ways of managing capital structure of a firm.
The main purpose of this study was to identify the factors that influence the portion of debt financing. We have selected the whole fuel and energy firms for the purpose of analysis which comprises of 18 listed firms. The analyses are for the period 2006-2010. Regression results showed that profitability and Tangibility has a negative association with the debt financing and support Pecking Order Theory. The result of size shows positive relationship with leverage of the firm and supports trade off theory. The result of growth shows positive association and support Pecking order theory.
Current study provides the empirical evidence on firm level determinants of capital structure of insurance sector of Pakistan over seven years from 2001 to 2007. Debt ratio is used as dependent variable while profitability, size, tangibility, risk, liquidity are employed as explanatory variables. The results indicate that size, profitability, tangibility, risk and liquidity are important determinants of capital structure of insurance companies of Pakistan. In addition, the results indicate that profitable, more liquid, more tangible and risky insurance companies focus on retained earnings or equity rather than debt financing. Moreover, Pakistani insurance companies follow pecking order theory in terms of profitability, liquidity and risk while the relationship between size and debt ratio is consistent with trade-off hypothesis.
In this paper we analyze the leverage and dividend choices than 6,700 industrial corporations over a 30-year period. Our empirical analysis is designed to provide a basis for assessing the relative importance of the various factors - taxes, contracting costs (particularly, the financial distress costs and the "free cash flow" benefits of debt), and signaling effects - in explaining corporate financial behavior. Such findings can than be used to guide corporate managers in thinking about trade-offs among different leverage and dividend choices.
This paper attempts to determine the capital structure of listed firms in the cement industry of Pakistan. The study finds that a specific industry's capital structure exhibits unique attributes which are usually not apparent in the combined analysis of many sectors as done by Shah & Hijazi (2005). The study took 16 of 22 firms in the cement sector, listed at the Karachi Stock Exchange for the period 1997-2001 and analyzed the data by using pooled regression in a panel data analysis. Following the model developed by Rajan & Zingle (1995) it has chosen four independent variables i.e. firm size (measured by natural log of sales), tangibility of assets, profitability and growth and further analyzed the effects on leverage. The results, except for firm size, were found to be highly significant.
This study uses a new data set to assess whether capital structure theory is portable across countries with different institutional structures. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. Our findings suggest that although some of the insights from modern finance theory are portable across countries, much remains to be done to understand the impact of different institutional features on capital structure choices.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues track the financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.
This study investigates whether capital structure determinants in emerging Central and Eastern European (CEE) countries support traditional capital structure theory developed to explain western economies. The empirical evidence suggests that some traditional capital structure theories are portable to companies in CEE countries. However, neither the trade-off, pecking order, nor agency costs theories explain the capital structure choices. Companies do follow the modified “pecking order.” The factors that influence firms' leverage decisions are the differences and financial constraints of banking systems, disparity in legal systems governing firms' operations, shareholders, and bondholders rights protection, sophistication of equity and bond markets, and corporate governance.
The proof of Proposition I in the work of Modigliani and Miller (MM) (19581.
Modigliani , F. and
Miller , M. H. 1958. The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48: 261–97. [Web of Science ®]View all references) is based on the mechanism of arbitrage. Two cases are considered: first, the case where the value of the levered firm is larger than that of the unlevered one; second, the case where the value of the levered firm is smaller than that of the unlevered one. The first case involves the investor engaging in personal borrowing. This article shows that the amount borrowed is greater than the amount envisaged by MM, and that the proof of Proposition I is slightly altered.
Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm's security holders. One outcome has been the development of “behavioral” and “managerial” theories of the firm which reject the classical model of an entrepreneur, or owner-manager, who single-mindedly operates the firm to maximize profits, in favor of theories that focus more on the motivations of a manager who controls but does not own and who has little resemblance to the classical “economic man.” Examples of this approach are Baumol (1959), Simon (1959), Cyert and March (1963), and Williamson (1964b). More recently the literature has moved toward theories that reject the classical model of the firm but assume classical forms of economic behavior on the part of agents within the firm. The firm is viewed as a set of contracts among factors of production, with each factor motivated by its self-interest. Because of its emphasis on the importance of rights in the organization established by contracts, this literature is characterized under the rubric “property rights.” Alchian and Demsetz (1972) and Jensen and Meckling (1976b) are the best examples. The antecedents of their work are in Coase (1937, 1960). The striking insight of Alchian and Demsetz (1972) and Jensen and Meckling (1976b) is in viewing the firm as a set of contracts among factors of production.
Confirming predictions shared by the trade-off and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the trade-off model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. As the pecking order model predicts, short-term variation in [oplus ]investment and earnings is mostly absorbed by debt. Copyright 2002, Oxford University Press.
This paper analyzes the explanatory power of some recent theories of optimal capital structure. The study extends empirical work on capital-structure theory in three ways. First, it examines a broader set of capital-structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regards to different types of debt instruments, the authors analyze measures of short-term, long-term, and convertible debt rather than an aggregate measure of total debt. And third, the study uses a factor-analytic technique that mitigates the measurement problems encountered when working with proxy variables. Copyright 1988 by American Finance Association.
This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
The authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. The authors find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved. Copyright 1995 by American Finance Association.
This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. The authors postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. The authors characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc. Copyright 1990 by American Finance Association.
The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.
The aim of this paper is to examine the degree to which the determinants of SMEs' capital structures differ between European countries. The study is based on data for four thousand SMEs, five hundred from each of eight European countries. Regressions were run using short-term and long-term debt as dependent variables and profitability, growth, asset structure, size and age as independent variables. A key feature of this paper is the use of restricted and unrestricted regressions to isolate the country-effect from the firm-specific-effect. The results show that variations are likely to be due to country differences as well as firm-specific ones. Copyright Blackwell Publishers Ltd, 2004.
The common approach in empirical capital structure research has been to study the determinants of optimal leverage by studying the association between observed leverage and a set of explanatory variables. This approach has two major shortcomings. First, the explanatory variables explain the variation in the observed leverage which need not necessarily be the optimal leverage. Second, the empirical analyses, being effectively nondynamic, are unable to shed any light on the nature of dynamic capital structure adjustment by firms. In this paper, we use a dynamic adjustment model, and panel data methodology on a sample of UK and US firms to specifically establish the determinants of a time-varying optimal capital structure. In addition, the model allows for the possibility that at any point in time firms' observed leverage may not be optimal, and that firms differ in their speed of adjustment towards the optimal capital structure, which itself may be changing over time for the same firm. W...