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Investigate Debt to Equity Ratio to Determine Firm Performance of Pakistani Companies Listed in Chemical, Food and Care Products, Cement, Pharmaceutical, Auto Assembler and Textile Sector

Autor:   •  October 11, 2018  •  16,011 Words (65 Pages)  •  125 Views

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While looking into the issue of capital structure it has always been considered a complicated issue for the strategic management of the company (Mujahid and Akhtar, 2010). As if a company does not adapt a mixture of debt and equity finance to addressing its financial needs within the time; for example, growth will be lead the company to lose worthy growth and expansion opportunities (Chinaemerem and Anthony, 2012). So for overcoming the issue and to take the opportunities, companies should make a blend of debt and equity to avoid the drawbacks of each other and come out with an ideal structure (Welch, 2011).

At the same time seeing the current capital structure trends of the Business world, companies those are relying more on Debt finance are basically exposing their assets and property to reclamation by the bank (Hiran and Sojatia, 2015). Furthermore, debt financing is also been borrowed against future earnings which means that besides using entirely the profit for growth or paying to shareholders, a portion has to be allocate for debt payments. Lastly, overuse of debts by companies in today's world can harshly limit their cash flows and stifle growth (Singh and Luthra, 2013).

While on the other hand, companies are relying more on equity finance are actually giving their partial ownership; which means there has been a share in profit as the investors will be expecting some share of profit against their investments (Coplan, 2009). Secondly, it has been resulting in the loss of control as the potential investors need to share the control of the corporation and more severely companies are facing potential conflicts for sharing ownership which leads to divergence and tensions if there is a difference between management styles, vision etc (bizshifts-trends, 2014).

The study will be compensating the researchers with the new dynamic and issues regarding capital structure. Further the study also shows the beneficial for the corporate sector in deciding an optimal capital structure under the current trends and dynamics of the present corporate world. This research will be important to the literature as it would support the finance researchers with their future researches by providing strong literature and firmed results through efficient conceptual framework. Secondly, it would also make an important contribution to the society in the course of creating an awareness regarding the formation of capital structure and the relation of debt and equity.

- Significance of research:

The problem that has been investigated in this research is whether determinants of Capital structure like Return on equity, Return on assets, Earnings per share, Marketing and Firm size are placing an impact on Firm’s Performance in different sectors in Pakistan. The studies have been conducted on Textile, food producing sector, non financial firms etc. Therefore, examining capital structure is still an issue in Pakistan as very nominal sectors are covered by the researchers.

Hence, measuring the impact of Capital structure on firm’s performance were restricted to limited industries and sectors so the findings of the previous studies cannot reveal the entire impacts of capital structure on firms’ performance in Pakistani industry. This is because different industries own different characteristics. Thereby this research would be helpful with providing knowledge of the impact of capital structure in Pakistani cement industry.

- Research Objectives:

- To identify and examine the impact of capital structure on ROE

- To identify and examine the impact of capital structure on ROA

- To identify and examine the impact of capital structure on EPS

- To identify and examine the impact of capital structure on Marketing

- To identify and examine the impact of capital structure on firm Size

- Research Questions:

- What is the impact of capital structure on ROE?

- What is the impact of capital structure on the ROA?

- What is the impact of capital structure on EPS?

- What is the impact of capital structure on the firm marketing?

- What is the impact of capital structure Firm size?

- Scope of Research:

This research is to examine the impact of capital structure on firm’s value in 6 major contributing sectors registered in KSE for the time span of 2010-2014. The measures used for conducting this research are ROE, ROA, EPS, Firm Marketing and Firm Size. The duration for this research is 6 months.

- Structure of the report:

The first chapter of my research will address the research background, research rationale and research objectives, discussing the industries and countries in detail where the studies are regarding the firm specific factors of capital structure.

The second chapter of the study will discuss different researches conducted on the impact of capital structure on firms’ performance based on the finding of the empirical research. Moreover, four theories (Modigliani and Miller, Agency Cost, Trade-off and Pecking Order) are critically evaluated and reviewed to construct an effective framework for measuring the impact of Capital Structure on Firm Performance.

The third chapter will be discussing the adapted methodology and research design which will be considered for the study. Hence, the sample and the sampling technique will also be addressed and this chapter will also discuss the ethical issues and limitations of the research.

While the last two chapters, which are four and five, will convert the data set into interpretable information through E-views to check the relevancy with the research topic. Lastly, a summarizing conclusion with a compressed set of recommendation will be mentioned to outline the research context.

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Chapter 2: LITERATURE REVIEW

- Definition of Capital Structure:

The term Capital Structure according to Weston and Brigham (1979) is referred as the financing of a company represented by Long term debt, net worth and preferred stock. Furthermore, Van Horne and Wachowicz (1995) define capital structure as a

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