Advisor Name : Sir Akbar Saeed Name : Syeda Saba Samreen Zaidi Registration #: 16468 Thesis Submitted On : 13 th June , 2014
Bahria University, Karachi Campus
2
DECLARATION
This thesis is submitted in the Bahria University, Karachi Campus for the MBA degree.
I, hereby, declare that no portion of the work referred to in this dissertation has been submitted in support of any application for another degree or qualification of this university or any other institution of learning.
First of all I would like to thanks to Allah, By the grace of Allah I have been able to complete this report. I owe many individuals with my immeasurable gratitude.
I would like to thanks my advisor Sir Akbar Saeed for providing me guidance throughout the making of my thesis.
In last but not the least would like to do thank my family and friends who have supported and helped me with their valuable advices.
4
Table Of Contents Contents 1 Introduction: .............................................................................................................................................. 7 Statement Of Problem .................................................................................................................................. 7 Significance Of The Study .............................................................................................................................. 8 Scope And Delimitation ................................................................................................................................ 8 2 Literature Review: ...................................................................................................................................... 9 1.1 Factors That Affects Capital Structure .................................................................................................... 9 1.2 Explanation Of Capital Structure By Theories ..................................................................................... 14 Miller's Capital Structure Theory ................................................................................................................ 14 Disadvantages Of This Theory: .................................................................................................................... 15 3. Research Methodology ........................................................................................................................... 20 RESEARCH DESIGN AND METHODS ............................................................................................................ 20 RESEARCH INSTRUMENTS/ SOURCES OF DATA .......................................................................................... 21 TREATMENT OF THE DATA/ INFORMATION ANALYSIS (spss) ..................................................................... 22 4.Data Analyses ........................................................................................................................................... 22 Conclusion ................................................................................................................................................... 28 Bibliography ................................................................................................................................................ 29
5
List of Tables And Matrices
Page #
Table 1 Variables Entered/ Removed 21
Table 2 Correlation Matrix 22
Table 3 Regression Results 23
Table 4 ANOVA 23
Table 5 Coefficients a 24
Matrix 1.1 Factors Affecting Capital Structure 9
Matrix 1.2 Explanation Of Capital Structure By Theories 14
List OF Figures Fig 1 Impact of D/E on Firms value 15
6
Abstract: Purpose: This study analyzes the relationship between dependent variable (Leverage) and Independent variables (Firm Size, Tangibility of Assets, Profitability, and Sales Growth, tax rate, earnings volatility), and how it affects any firm in terms of its capital structure. Methodology: This study is conducted to find the impact of determinants on capital structure decisions of 12 companies of Oil sector of Pakistan , listed in KSE. Time period which is selected for this study included data from 2006-2011. To analyze this research, ANOVA, Regression, Coffiecient, and Co llinearity Test are applied. Findings: The results drawn from this research shows that growth, tangibility of assets and profitability have positive relationship with leverage. On the other hand firms size, earning volatility and tax rate has a negative relationship with leverage. From regression results it shows that there is 42.7% impact of independent variables on dependent variables. Practical Implications: This study might help finance decision makers, economic and finance students, to understand the importance of determinant variable in making optimal capital structure of any firm. This study helps in order to give clear view of oil sectors capital structure.
CHAPTER # 1 Introduction: Finance is the key input to start any business and is required to meet the need of working capital along with long-term investments. Any business can get funds from different resources. A proportion of some of the funds are invested by the owners in the business and remaining portion is borrowed from others from investors and individuals, from which share capital and retained earnings are owned by business permanently , while remaining are held by the company for long time duration such as debt and debentures , then these all resources forms a composition of financial structure which includes short term borrowings as well. The capital structure is a combination of debt, equity and further sources of finance that it is used by company to fund for long-term asset. The decisions taken in capital structure is to decide how much proportion to be used to create a balance or best mix of financing between debt and equity. Optimal capital structure is a mix of debt and equity in such a way that the weighted average cost of capital (WACC) of a firm get minimized. The proportion of debt funding is measured by leverage. The capital structure is affected by internal as well as external factors , these factors are different industry to industry, country to country, some of these include taxes, state of industry, macroeconomic indicators, financial, social, legal and managerial factors. This study describes the effect of financial factors on capital structure decisions of companies of same industry. Statement Of Problem 8
Which of the following variables; profitability, firm size, tangibility, growth, earning volatility and tax rate impact the capital structure (leverage) of oil sector companies listed on the Karachi stock exchange? Significance Of The Study This study gives information that will help companies in taking capital structure decisions in listed companies of oil and gas sector of Pakistan, that helps them for maximizing of the firms value and minimizing of cost of capital, due to which investment in oil and gas sector will become more attractive Scope And Delimitation The current exploration is appropriate for oil sector of Pakistan only and is not applicable in financial sector as their capital structure is totally different from non-financial sector. The research includes the sample data from 2006 to 2011. And regression test is applied to analyze the results drawn.
Definitions Capital structure of firm can be explained by three major theories. Modigliani and Miller's Capital-Structure Trade-off theory Pecking order theory 9
CHAPTER # 2 Literature Review:
In previous researches it is found to be very difficult to identify criterias for the determination of capital structure and firm profitability, because some of the researches have shown positive results for use of debt financing by using data sample of some of the companies, while other researches have shown other side of the use of debt financing . This study tells us about The theory of capital structure and its relationship with the market value of the firm, which is very different because some analyst thought that capital structure can increase firm value by decreasing cost of capital, while some analyst thought in different way.
There is a vast impact of capital structure on the weighted average cost of capital and on the market value of the companies , (Saleem, 2006-2011) , he researched for the sample period of 2006-2011 It is very difficult for companies to create optimal capital structure in which there is a use of best mix of debt and equity. It is found that usually companies in their initial years rely more on debt financing as compared to equity financing. Capital structure decisions of private firms are different from public firms. Because private firms more rely on debt financing because of different factors faced by them , even not for companies or industries , capital structure decisions are different from country to country.
1.1 Factors That Affects Capital Structure The factors that affects the capital structure may include taxes, solvency risk, assets classification, financial costs, macroeconomic indicators, state of industry, financial limitations, 10
legal issues, behavioral and agency aspects of the firm, size of firms, tangibility, profitability. WACC is a cost of capital, minimum cost of capital leads to raise the value of firm. The use of more debt financing by the company may increase risk for the company , but when there is a higher risk so higher will be the return, but on other side, company gets tax benefit due to the tax deductibility of interest payment. (Saleem, 2006-2011) It is found that companies using low or zero debt can add more value to their firms. So debt financing has negative as well as positive impact on firms value, it can cause over investments as well as under investment problems , only the optimal capital structure can solve such problems. And it can be achieved when the financial benefits of debt financing exceed the financial costs of debt charged by debt providers. (Sabir, 2012) One of the research done by (Lasfer*, 1999), which states that capital structure , corporate debt borrowed , and determinants of firms are different according to their size . Many researches have been done to analyze the impact of companys size on its capital structure. Some researches found a positive relation between size and leverage of the company. According to these, since large firms are less likely to go bankrupt because of the high level of diversification therefore they are more capable to depend on leverage than small firms. (Saeed, 2007) (Lasfer*, 1999) Small firms rely more on debt which is secured , they use bank loans, while large firms relies on loan capital. The regression from his study shows that debt structure of large firms have significant impact on agency cost. The research done by (Garry, November 2003), (Twite, November 2003), (Fan, November 2003), states that financial decisions of different firms vary from country to country because of countrys different institutional structures. Among those factors are taxes , corruption . 11
Firms using more debt to get tax benefit rather than taking dividends . And in case of corruption , it effects legal systems of the country, which will increase financial leverage , so different factors of law system affects debt maturity structure of the firm, whether firm uses common law system , where there is more legal protection by unions but It does not effect equity choice of the firm. The next factor is intermediaries information which results in lower leverage, when they have equity analyst and audit firms , so they use trade credit. The next factor states that, if firms are having high level of funds available so they are said to be low leveraged firms. According to them , the development of banking sector , bond market and equity affects the decisions of capital structure. . (Zingales R. G., 1995) states in his research that capital structures of firms not only affected by internal factors of the firm , but by some definite factors of the country as well. (Maksimovic, [1996,1998,1999]), examines firms capital structure not only affected by certain factors of firm but also by countrys legal environment. (Maksimovic, [1996,1998,1999]) , In their study , they have identified that there are three main factors institutional factor , legal environment , financial market and banking sector , and macroeconomic environment .So that countries will use more debt , which are having weak legal systems because of laws enforcement. It is also found that economy of the firm also leads countries to use more debt , in a way that if the economy of the country is bank based so that firm will use more debt , and if the firm is of market based so that it will use less debt. And if there is liquid market for the firms to borrow debt so that , it leads firms to use more debt (Saeed, 2007) Profitability is one of the main factor, used as determinants in researching the capital structure of a industry. Profitability has different relation with the capital structure based 12
on different theories. According to Signaling theory by Ross, profitability has a positive relation with debt financing (leverage) since raising debt gives a good signal to the investors, about the performance of a firm . In contrast, Pecking order theory suggests a negative relation between profitability and leverage of a firm because this theory ask firms to prefer internal financing (retained earnings) over external financing i.e. debt and equity. In this case if the retained earnings of a firm is high then firm will most probably be using internal financing option instead of external financing. (Saeed, 2007) The Tangibility is also one of the factor that may impact the capital structure. If a firm has more tangible fixed assets then it would be easy for that firm to choose debt financing since those tangible fixed assets can be used to pay off the debt in case of bankruptcy. This reason predicts a negative relation between leverage and tangibility. (Philippe Gaud, 2003), researched on 106 listed companies on Swiss stock exchange from time duration (1991-2000), the variables used in his research were tangibility , profitability growth, business risk and size. Results calculated shows that firm size, tangibility and business risk have positive relation with leverage , while growth and profitability have negative relation with leverage. (Chen*, 2003), he researched on 88 Chinese listed companies from time period of 1995-2000. In this study he found that Chinese companies depends on short term debt more rather than long term debt. The economy of china is affected by bankruptcy cost which is not found to be significant. This research shows capital structure of Chinese economy , the impact of different factors on leverage, and the factors of capital structure of other developed countries are applicable for the economy of china. The Chinese firm follows new Pecking order theory in which states that retain long term debt. 13
(Song, 2005), his research is done to find out determinants of capital structure of Swedish firms , from time period of 1992-2000, which consist of total 6000 companies. And from this research it is identified that Swedish firms are highly leveraged firms . This study consist of determinants of total debt ratio, long term debt as well as short term debt ratio. Many capital structure theories are studied in this research which states different determinants of capital structure, they are proved to be relevant to the Swedish firms by the results drawn from the study. But the results drawn from three debt ratios were different , these ratios were interrelated to tangibility, profitability, size ,and variability of income, where growth was not interrelated with any of these ratios. This study also highlights some change in relationship of determinants with three ratios., like tangibility has a positive relation with long term debt , and having negative relation with short term debt. And tax shield has positive relation with short term debt, but with long term debt it is negatively correlated. And size is positively correlated with short term as well as total debt, but is negatively correlated with long term ratio. (Eriotis, 2007), This research has been done for 129 Greek listed companies on Anthens stock exchange during 1997-2001, and determinants of capital structure are analyzed on the basis of different explanatory theories of capital structure. In this research , they hypothesized that debt ratio at time t, is depending on firm, growth, quick ratio, interest coverage ratio at time t. From this research , it is found that debt ratio of the firm is negatively correlated with growth of the firm, quick ratio and interest coverage ratio, and debt ratio is positively correlated with size.
(Pertiwi, 2013) , this research is done to find optimal capital structure of Indonesian food and beverage industries , from time period of 2008-2011. For this research and findings , he used 14
WACC approach to calculate optimal capital structure at different level of debt, and found that optimal capital structure can be zero because these industries have high operating income . And there are many food industries which have low earnings, so such firms cannot go for using more debt. And the last factor is that these firms have high cost of equity so by use of debt , WACC will be high, which will not be good for food industries. (Oladele John Akinyomi, 2013) , this research is done to find the capital structure of 24 companies listed in Nigerian stock exchange , that are 24 companies with 240 observations Time sample of this research includes data of 10 years . Its findings shows that Leverage is negatively correlated with size and tax, while Leverage have positive relation with profitability, tangibility, and growth . Only tangibility and firm size have shown significant results with Leverage.
1.2 Explanation Of Capital Structure By Theories Capital structure of firm can be explained by three major theories
Miller's Capital Structure Theory According to his theory , he hypothesized that it does not matter that what capital structure any firm uses to run its operations in perfect markets. That means firm can create optimal capital structure , either by using debt or equity it has no impact on WACC of firm, means WACC of the firm will remain constant , with any change in capital structure or with no change , firm would not have any tax benefit from interest payments and thus no changes and benefits to the WACC of the firm. Some of the assumptions given by M&M are as follows. 15
No taxes No transaction costs No bankruptcy costs Symmetry Market information No impact of debt on companies earnings. (Miller, 2005-2010)
Disadvantages Of This Theory:
Disadvantages The theorem of Millers states that use of debt or equity proportion by the firm will not affect value of the firm, which cannot be justified in real world , because if firm will use more debt and become more leveraged firm so it will increase risk, uncertainty of the firm , which ultimately increase complexity of the firm.
Trade-off theory : It refers to the idea that how any company have decided to use debt and equity financing in different proportions to create an optimal capital structure , which balances bankruptcy cost and tax saving benefits of debt. It describes a balance between the costs of debt against the benefits of debt. Debt financing provide tax benefit and reduces agency cost. It states that corporation enjoy benefits of tax saving by using debt financing , but disadvantage of debt financing faced by companies is that by further increase in debt marginal benefit of firm declines, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on decision, when choosing how much debt and equity to use for financing. 16
(Frank, 2005)
As debt equity ratio increases , our leverage increases , so increasing value of firm , but creating a trade-off between the interest tax shield, and bankruptcy causing an optimal capital structure at point D/E*. fig 1 (Frank, 2005)
Pecking Order Theory (Majluf, 1984) This theory states that first firms must use their internal funds to fulfill their requirements, only then they must go for external financing. It states that financing comes from three sources, first from internal funds, debt and new equity. So companies must prioritize their sources of financing First, they must use internal financing then debt and in the last equity get to be utilized, this theory makes logic that first of all debt must be issued, and when no more debt can be issued 17
then in the end firms must go for equity financing. This theory gives an idea of importance of debt over equity financing . If external financing is required , so company will issue shares which means bringing external ownership into the company. So the form of debt a firm chooses acts as a signal of its need for external finance. Profitability and liquidity of any firm is represented by cash conversion efficiency, income to total assets and income to sales, income to total assets and income to sales and income to total equity Signaling Theory The Signaling Theory approach, developed by Ross (1977), (Rafiq, 1993-2004) explains that debt is considered to be a positive signal for investors because if a company issues the debt it provides a signal to the markets that the firm is expecting positive cash flows in the future, as the principal and interest payments on debt are fixed liability which a firm has to pay out of its cash flows. So that the higher level of debt shows the firms confidence in up coming future cash flows . Variables Explanation Leverage Researchers used long term debt to total assets for measuring long term leverage in the capital structure of non-financial companies of oil sector of Pakistan and used leverage as dependent variable.
Leverage = Long term debts / Total Assets
18
Profitability Profitability is defined as the earnings before interest and taxes to total assets. It shows the profitability of oil sector of Pakistan. It is one of the important factor which increases value of the firm. According to (Rafiq, 1993-2004) there is a negative relation between debt and profitability,. Profitability is calculated as:
Profitability = EBIT/Total Assets
Firms Size The size of the firm can be calculated either by log of sale or by log of assets. It helps to identify the size of firm. So the firms size is calculated as: Size = Log of total assets
Tangibility Tangibility of fixed assets is defined as gross fixed assets to total assets. This helps to analyze that how much a firm have fixed tangible assets in oil of Pakistan. Companies with High tangibility of fixed assets are more able to take long term loans for pay back in the end. can be calculated as:
Tangibility = Gross Fixed Assets / Total Assets
Growth 19
There are two ways to measure growth either by change in total sales or by change in total assets. This factor helps to measure the growth in oil sector of Pakistan. It is calculated as:
Growth = Change in total assets / Total assets
Tax Tax is defined as current years tax provision to earnings before tax. This variable helps to analyze the fact that long term debt (leverage) provides tax advantage in the form of interest which will decreases taxable income and ultimately decreases the tax payment. It is calculated as: Tax = Current years Tax provision / Earnings before tax (Ashraf, 2005-2010)
Myers (1984) observes that the higher the probability of a firm from the use of internal financing, the lesser the dependence on debt financing. Therefore, the amount of retained earnings available and the past profitability should be an important determinants of its current capital structure, (Titman, 1994) (Akhter, 2004-2009).
And their conclusion drawn from calculation shows that
o Financial cost shows a positive relationship with debt. o Growth has a negative relationship with the debt o Profitability shows negative relationship with debt. 20
o Size also shows a negative relationship with leverage of the firm o Tangibility is found to have a positive relationship with the leverage of the firm CHAPTER # 3 3. Research Methodology RESEARCH DESIGN AND METHODS Our study is explanatory , which shows casual effect The study on determinants of capital structure of oil companies listed in the KSE, Pakistan. It is a qualitative research. The objective of this study is to examine the relation between six explanatory variables and leverage. Firms size, tangibility of assets, growth, earnings volatility, profitability, and tax rate are the independent variables. The research is based on the 12 listed oil companies of KSE. This study covered the period from 2006-2011. This study is based on the assumption that the data published by State Bank of Pakistan for the listed companies reflected their accurate economic representation. Research Model Leverage = 0 + 1 (Size) + 2 (Tangibility) + 3 (Growth) + 4 (Earning volatility + 5
(Profitability) + 6 (Effective Tax rate) Formation Of Hypothesis On the basis of the review of literature above, following hypotheses have been developed Hypothesis-1 Ho: Tax benefit has a negative relation with leverage. 21
H1: Tax benefit has a positive relation with leverage. Hypothesis-2 Ho: Earning volatility of a firm has a positive relation with Leverage. H2: Earning volatility of a firm has a negative relation with Leverage. Hypothesis-3 Ho: Profitability of a firm has a negative relation with Leverage. H3: Profitability of a firm has a positive relation with Leverage. Hypothesis-4 Ho: Size of a firm has a negative relation with Leverage. H4: Size of a firm has a positive relation with Leverage. Hypothesis-5 Ho: Tangibility of a firm has a negative relation with Leverage. H5: Tangibility of a firm has a positive relation with Leverage. Hypothesis-6 Ho: Growth of a firm has a negative relation with Leverage . H6: Growth of a firm has a positive relation with Leverage .
RESEARCH INSTRUMENTS/ SOURCES OF DATA The type of data used in this study is taken from the secondary source name Financial Statement Analysis of Companies (Non-Financial) listed at Karachi Stock Exchange form 2006-2011. It is an annual publication of State Bank of Pakistan. 22
TREATMENT OF THE DATA/ INFORMATION ANALYSIS The software SPSS is used for Data regression analysis to examine the variables that describe the determinants of capital structure. The panel data analysis enables analysis of cross-sectional and time series data. Pooled regression type of panel data analysis is used in this study which is also called the Constant Coefficients model. Therefore, the regression model created to investigate the influence of various variables on leverage are as follows: Leverage = 0 + 1 (Size) + 2 (Tangibility) + 3 (Growth) + 4 (Earnings Volatility) + 5
(Profitability) + 6 (Effective Tax rate) Where 0 is constant.
CHAPTER # 4: Data Analyses
Table 1 Variables Entered/ Removed a
Mode l Variables Entered Variables Removed Method 1 TAX RATE, Tangibility, EARNING VOLATILIT Y, PROFITABI LITY, FIRM SIZE, GROWTH b
. Enter a. Dependent Variable: LEVERAGE b. All requested variables entered.
23
Correlation Matrix
Table 2: Correlation Matrix Mod el Dimensi on Eigenval ue Conditi on Index Variance Proportions (Consta nt) FIR M SIZ E Tangibil ity GROW TH EARNING VOLATILI TY PROFITABILI TY TAX RAT E 1 Constant 3.549 1.000 .01 .02 .01 .02 .00 .00 .02 Firm Size 1.024 1.862 .00 .00 .00 .00 .73 .16 .02 Tangibilit y .993 1.890 .00 .00 .00 .00 .17 .78 .01 Growth .697 2.257 .00 .67 .00 .02 .01 .02 .20 Earning vol .509 2.640 .02 .23 .02 .02 .02 .04 .62 Profitabil ity .183 4.405 .06 .06 .06 .94 .08 .00 .12 Tax rate .045 8.833 .91 .01 .92 .00 .00 .00 .01 a. Dependent Variable: LEVERAGE
Table 2 : Indicates that Firm size in row 2 , has no correlation with tangibility, and Firm size have no relation with Growth as well, but it has a strong relation with Earnings volatility, and have a weak relation with Profitability and Tax rate Tangibility has no relation with Growth, and having weak relation with earnings volatility and tax rate, while it has strong relation with profitability. Growth has weak relation with all the variables, i.e. earning volatility, profitability and with tax rate. Earning volatility has strong relation with tax rate but it has weak relation with profitability. 24
In case of Profitability , it has a weak relation with Tax rate. So that we summarize that Tangibility have strong relation with profitability, and Earning volatility have strong relation with Tax rate. From the above correlation matrix, it can be said that there is no multi collinearity exists between these variables.
Regression Analysis Table 3: Regression Results Model R R Square Adjusted R Square Std. Error of the Estimate 1 .653 a .427 .373 1.351 25
Then regression test was performed to study the impact of independent variables i.e. Firm size, Tangibility, Growth, Earning volatility, Profitability and Tax rate on Leverage. The summary of the results are shown in table 3, presented above. Table 3 , indicates that R is 65.3%, which shows that it is between 60%-70%, so it proves that there is a moderate relationship between Dependent variable i.e. Leverage and Independent variables i.e. Firm size, Tangibility, Growth, Earnings volatility, Profitability and Tax rate. Above results shows that R 2 is 42.7%, this R 2 is an explanatory power of Independent variable into Dependent variable, which means that the impact of all independent variables over dependent variable is just 42.7% .The results of Adjusted R 2 is 37.3%, which interprets that if any of the variable is added in our R 2 so it has a declining impact on R 2 , that our R 2 when adjusted with added variable so it will decline from 42.7% to 37.3%.
Table 4: ANOVA Model Sum of Squares df Mean Square F Sig. 1 Regression 86.928 6 14.488 7.943 .000 b
Residual 116.734 64 1.824
Total 203.662 70
a. Dependent Variable: Leverag b. Predictors: (Constant), Tax Rate, Tangibility, Earning Volatility, Profitability, Firm Size, Growth. 26
Table 4: Indicates the significance level of the model , in which dependent variable is Leverage and Independent variables are Tax rate, Tangibility, Earning volatility, Profitability, Firm size, Growth which indicated that over all model is significant.
Table 5: Coefficients a
Model Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF 1 (Constant) 2008.252 .554
Firm Size, Results shows that firm size has a negative relation with leverage, also it shows that it has insignificant impact on leverage , so null hypothesis is accepted, this study hypothesized , 27
that there is a positive relation between leverage and firm size. But the results are inconsistent with the hypothesis, (Zingales R. G., 1995) his studys results are consistent with the result of the hypothesis accepted, which is showing negative relation between Leverage and Firm size, because for larger firms it is very cheap for them to issue equity because of distribution of floatation cost among large equity offering, and because of reason of asymmetric information, it gets easy for larger firms to issue equity . Tangibility, Results shows that it has a positive relation with leverage and has insignificant impact on leverage, so null hypothesis is rejected, (Majluf, 1984) According to his research asset tangibility is positively correlated with leverage, and according to Trade off theory , that debt proportion will increase with fixed tangible assets. Growth, the table above shows that growth has a positive relation with leverage, and insignificant impact on leverage, so our null hypothesis is rejected, but we hypothesized alternatively according to Pecking Order Theory, companies in different phases of growth , they prioritize differently their sources of financing, like if company is in phase of high growth , it will prioritize debt over equity , to get high returns in future. (Majluf, 1984), Earning Volatility, The calculation shows that it has a negative relation with leverage, and proved to have significant impact on leverage. With these results , null hypothesis is rejected, because results shows that earning volatility has a negative relation with leverage and also significant impact on leverage, we hypothesized according to the theory if firms facing volatility in earnings so it will cause financial distress for the firm, it has high business risk, so in these circumstances firms are not in a position to raise debt. 28
Tax Rate, result shows that tax rate has negative relation with leverage, So by these results , our null hypothesis is accepted. According to trade off theory, which states that higher the tax rate, it will lead to higher level of debt , so hypothesis acceptance has no consistency with this theory (Frank, 2005).
Conclusion
This research has been carried out to determine the determinants of capital structure of oil sector of KSE listed twelve companies of Pakistan. Panel data was used for the research and the time period used in this research is from 2006-2011, in this research model is made to identify the impact of independent variables over dependent variables, by using regression test including profitability, tangibility, growth, size and earning variability, and tax rate are independent variables , their impact over leverage is studied. There was a multi co linearity test was also done in this study to identify the relationship among independent variables, summarizes that Tangibility have strong relation with profitability, and Earning volatility have strong relation with Firm size and Tax rate. Except this, none of the variables are strongly correlated with each other. Profitability, Result shows that, it has a positive relation with Leverage so our null hypothesis is rejected, because our profitability has positive relation with leverage. And has insignificant impact on Leverage. According to the Trade Off Theory, which states that when company more uses debt so it may reduces its agency cost , which ultimately results in high profitability. (Frank, 2005).
29
The regression results shows that our R 2 is 42.7%, which means that the impact of all independent variables over dependent variable is 42.7%. The coefficient results indicates that all the variables have insignificant impact on Leverage except earning volatility, while firm size and earning volatility and tax rate has a negative relation with Leverage, and tangibility , growth and profitability have positive relation with leverage.
Bibliography Akhter, P. (2004-2009). Determinants Of Capital Structure In Chemical Structure. Amjad, S. (2007-2011). Banking Sector. Ashraf, T. (2005-2010). Determinants Of Capital Structure In Auto mobile Sector, Pakistan. Chen*, J. J. (2003). Determinants of capital structure of Chinese-listed companies. Journal of Business research . 30
Eriotis, N. (2007). How firm characteristics affect capital structure: an empirical study. Emerald Group Publishing Limited . Fan, J. P. (November 2003). An International Comparison of Capital Structure and . Frank, M. Z. (2005). Trade Off Theory. Garry, S. T. (November 2003). An International Comparison of Capital Structure and. Lasfer*, M. A. (1999). Debt Structure, Agency Costs and Firms Size. An Empirical Investigation . Majluf, M. A. (1984). pecking order theory. Maksimovic, D.-K. a. ([1996,1998,1999]). Firm capital structure . Miller, M. A. (2005-2010). Financial Leverage And Capital Structure Policy. Oladele John Akinyomi, a. A. (2013). Determinants of Capital Structure in Nigeria. International Journal of Innovation and Applied Studies . Pertiwi, G. C. (2013). Optimal Capital Structure Analysis of Food and Beverages. Philippe Gaud, E. J. (2003). The Capital Structure of Swiss Companies: An Empirical Analysis using Dynamic Panel Data. Rafiq, M. (1993-2004). chemical industry. Sabir, M. (2012). determinants of capital structure, introduction. INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS . Saeed, A. b. (2007). Impact of company's size on its capital structure. Saleem, F. (2006-2011). Determinants Of Capital Structure In Oil Sector Of Pakistan. Song, H.-S. (2005). Capital Structure Determinants An Empirical Study of Swedish Companies. Titman. (1994). financial distress and corporate performance. journal of finance . Twite, J. P. (November 2003). An International Comparison of Capital Structure and. Zingales, R. G. (1995). Financial systems, industrial structure and growth. Oxford Review of economic policy . Zingales, R. G. (1995). Financial sytems , Industrial structure and growth . Oxford Review Of Economic Policy .