Capital Structure Theories and Leverage Behaviour of Pakistani Firms PDF Download

Author: Muhammad Khan
Publisher:
ISBN:
Category :
Languages : en
Pages : 23

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Book Description
This study examines the applicability of two capital structure theories; i.e., Pecking Order Theory (POT) and Trade-Off Theory (TOT). An extensive panel dataset of 293 non-financial firms listed on the Karachi Stock Exchange (KSE) for the period 2001 to 2013 is used to test those hypotheses. The data is analyzed in three phases. First, we check the leverage behavior of all listed non-financial firms of Pakistan. Second, we test the applicability of capital structure theories for manufacturing and non-manufacturing firms separately, and third, the data is segregated into large and small firms based on asset size to test the relevance of theories. Besides, firm-specific variables, three macroeconomic variables are also included, such as lending rate, inflation, and market capitalization to GDP to observe how such factors influence the leverage behavior of Pakistani firms. Two regression techniques are applied to investigate the relationship: 1) Panel regression with industry fixed effects and 2) Heteroskedasticity & Autocorrelation (HAC) consistent standard errors regression. Moreover, the validity of two hypotheses are tested based on two equations/models. Evidence of first model suggests negative relationship of profitability, size, and growth with the firm's leverage, which confirms that, on average, Pakistani firms follow pecking order theory. In the second model leverage has positive and significant relationship with last year dividend, which shows firms with higher dividend payout ratios borrow more in subsequent year/(s). Lending rate has a positive impact on leverage, whereas, inflation, and market capitalization to GDP have insignificant impact on firms' leverage. Overall, the financing behavior is in favor of POT for the non-financial firms listed at KSE.

Author: Farhan Iqbal
Publisher: GRIN Verlag
ISBN: 3668169403
Category : Business & Economics
Languages : de
Pages : 23

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Book Description
Wissenschaftlicher Aufsatz aus dem Jahr 2015 im Fachbereich BWL - Investition und Finanzierung, , Sprache: Deutsch, Abstract: This paper is an attempt to determine the capital structure of listed firms of the cement industry in the Pakistan stock exchange (KSE). The main objectives of this empirical study is to forecast the relationship of dependent variable (financial leverage) with independent variables (size, tangibility, profitability, liquidity, tax rate and growth rate). The study showed a positive and significant association of firm size, tangibility and tax rate with financial leverage of the firm but in contrast to this, profitability, liquidity and growth rate showed a negative relationship with financial leverage.

Author: Farah Yasser
Publisher:
ISBN:
Category :
Languages : en
Pages : 23

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Book Description
To have an ideal mix of debt and equity in a balance sheet of an entity is till to date a very complicated issue for managers as there is no such rule to predict an optimal capital structure. An in-depth understanding is required for the corporate culture, the degree of the development of the capital market and the economy in which the firms operate. This study seeks to investigate the leverage composition of Pakistani corporations through their determinants. Fixed effect regression is used to show the relationship of determinants of capital structure on leverage corporations listed on Karachi Stock Exchange (KSE) for the period of 2006 to 2013. The results suggest that agency cost, growth, age, and size are significantly and negatively associated with the capital structure of Pakistan firms, however, collateral value of asset is significantly but positively associated with the capital structure of the firm. On the other hand, free cash flows, non debt tax shield, profitability, business risk and bankruptcy cost are not significantly associated with leverage composition of the firms and are against the signaling theory and peaking order theory. The key importance of this study is that no prior research was done for determinants like agency cost, free cash flows, bankruptcy cost and age as determinants of capital structure for Pakistani firms among other determinants. Further, this study does not confine to a particular sector rather it covers all companies listed by Karachi Stock Exchange.

Author: Mumtaz Hussain Shah
Publisher:
ISBN:
Category :
Languages : en
Pages : 14

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Book Description
This study is undertaken to discover the factors determining the capital structure decision of non-financial Pakistani firms. The effect of firm's profitability, liquidity, size, tangibility and non-debt tax shield on capital structure decision of ten non-financial firms operating at Pakistan Stock Exchange is investigated for a period of ten years i-e from 2005-2014. By using fixed effects panel estimation method it is found that leverage ratio is inversely affected by profitability and current ratio of a firm. While, firm size, tangibility and non-debt tax shield positively effects leverage ratio. The influence of profitability is weakly significant whereas that of liquidity, size, tangibility and non-debt tax shield are strongly significant. The study also shows that results for profitability and liquidity are in accordance with the Pecking Order Theory and the result for size; tangibility and non-debt tax shield are in line with the Trade-Off Theory.

Author: John Joseph
Publisher: GRIN Verlag
ISBN: 3668733074
Category : Business & Economics
Languages : en
Pages : 32

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Seminar paper from the year 2018 in the subject Business economics - Business Management, Corporate Governance, , language: English, abstract: The International Financial Reporting Standards (IFRS) is a high quality and principle based reporting standards that remove many accounting alternatives. It is therefore, consequently expected to limit the management’s discretion and lessen practices on earnings management. Quite the opposite, some researchers argue that the flexibility in IFRS and its fair value pre-eminence might afford greater opportunities for firms to manage earnings. It is this inaptness which incited and aggravated the conduct of this study. This study applies a desktop review to investigate the worldwide existing empirical research evidence on the effect of IFRS on earnings management post- IFRS adoption and in relation to other reporting standards and reports whether the results are indistinguishable between developed and developing economies. Accounting research in developed economies has long identified earnings management as a means by which managers manipulate financial reports to mislead other stakeholders on the underlying economic performance of the firm. However, earnings management research did not receive much attention in developing countries such as Nigeria until recently. The findings reveal that the existing empirical crams and conclusions there on are mixed, inconsistent and difficult to generalise. This indicates the pressing need for country, especially Nigeria to engage on studies of this nature. The study further, stumbles on the fact that IFRS can indistinctly benefit both developing and developed markets when coupled with appropriate effective enforcement machinery. Substantially, the results entail that IFRS is a critical determinant for quality reporting but not a ‘prima facie’ guarantor for quality reporting.

Author: Kashif Ghani
Publisher:
ISBN:
Category :
Languages : en
Pages : 9

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This study is aimed at determining the capital structure of listed energy sector companies in Pakistan, with a view to finding out the impact of four variables, i.e. tangibility, size, growth and profitability of the firms on their leverage. The sample included data for 20 companies for the period spanning 2004 to 2008. Our results show that all these factors affect the leverage of a firm in some degree. We found that tangibility and size have positive association with leverage which supports the predictions of Static Tradeoff Theory. On the other hand, profitability was found to have negative relationship with a firm"s level of debt, a finding that supports the viewpoint presented by Pecking Order Theory. Growth had positive relationship with leverage thus supporting the simple version of Pecking Order Theory.

Author: Muhammad Khurram Shabbir
Publisher:
ISBN: 9783668781894
Category :
Languages : en
Pages : 24

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Book Description
Project Report from the year 2014 in the subject Economics - Finance, grade: A-, course: Adavance research methodology, language: English, abstract: The decisions relating to the capital structure have been one of the most important decisions that have to be taken by the financial managers in any organization. The cement sector of Pakistan plays a vital role in economic development. Hence the importance of decisions pertaining to its capital structure can't be denied. This study investigates the effect of profitability, tangibility, size and liquidity on capital structure decisions of the listed companies in Karachi stock exchange of cement sector in Pakistan. This research study provides the information that would help the management of cement industry to make better decisions related to the capital structure. Its provides a deep insight of an optimal capital structure for the cement industry. Which will then support in maximization of the share value of firms on the one side and the minimization of cost of capital on the other side, and overall it would have a significant effect on the firm's profitability which is the main objective of any organization. The variables include leverage, profitability, liquidity, Size, and tangibility.

Author: Attaullah Shah
Publisher:
ISBN:
Category :
Languages : en
Pages : 36

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Book Description
Previous studies on capital structure in Pakistan have reported evidence in support of the pecking order theory. However, this evidence is largely based on testing one dimensional relationship between leverage ratios and firms' profitability. The objective of this paper is to extensively test the pecking order theory in Pakistan with well-known pecking order testing models. Specifically, we use a sample of 321 firms listed on the Karachi Stock Exchange from the year 2000 to 2009 and test pecking order theory with models suggested by Shyam-Sunder and Myers, Frank and Goyal, Watson and Wilson, and Rajan and Zingales. Results of these models indicate that there exits only weak evidence in support of pecking order theory in Pakistan. However, strong support is found for pecking order theory when leverage ratios are regressed on profitability ratio, along with a set of control variables. This discrepancy in the results of the two sets of models needs further investigation, as well as care in interpreting the results of existing studies on capital structure in Pakistan. Our results show robustness even after controlling for possible profits understatements or weak corporate governance practices.

Author: Ashiq Ali
Publisher:
ISBN:
Category :
Languages : en
Pages :

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The study examines the applicability of static trade-off determinants regarding capital structure phenomena in the context of Pakistan. Panel data analysis method is used the sample of 31 listed chemical firms' for the period 2001-2005. The findings of study indicated that there exists a partial support favoring static trade-off theory toward capital structuring. It was found that firms follow their capital structure dilemma with respect to static trade-off theory. The testing revealed negative relation exists between leverage level and profitability, liquidity support trade-off theory of capital structure. The relationship between assets growth and leverage were found insignificant. Contradictory results were found regarding sales, size and assets tangibility as they denied static trade-off phenomena used for optimal capital structuring. The limitation of study that we only considered sample of chemical sector listed firms.

Author: Maria Amin
Publisher:
ISBN:
Category :
Languages : en
Pages : 31

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Book Description
The study explores whether the firm's financial decisions are affected by the peer firm's financial decisions. Book leverage is used as a dependent variable against two sets of independent variables; 1) Firm specific characteristics (equity shocks, size, tangibility, profitability and book-market ratio) and 2) peer firms averages (equity shocks, tangibility, profitability and book-market ratio). The results reveal that peer firms equity shocks negatively associated with book leverage but statistically insignificant. This implies that peer effect through the actions of peer firms is not present in Pakistan. Peer firms' market-to-book ratio, profitability and tangibility are significantly and negatively associated with book leverage. These results suggest that the peer firm effect operates in Pakistani selected industries through peer firm characteristics as opposed to peer firm actions (peer firm equity shocks). Among firm specific variables, i.e. profitability, tangibility, market-to-book ratio and size, only profitability has a significant negative relationship with book leverage. It provides evidence that in selected industries more profitable firms follow the suggestions of pecking order theory.