Vous êtes sur la page 1sur 31

1

DETERMINANTS OF CAPITAL STRUCTURE IN OIL SECTOR


OF PAKISTAN



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.

Signatures: ________________________
Name: ____________________________ Date: _________________________


_





3

ACKNOWLEDGEMENT:

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.

Keywords: Leverage, Determinants, Pakistan, Oil Sector, KSE.
7



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

a. Predictors: (Constant), Tax rate, Tangibility, Earning volatility, Profitability, Firm size, Growth

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

3626.837 .000

FIRM SIZE -.017 .021 -.078 -.807 .422 .965 1.036
Tangibility .014 .077 .017 .176 .861 .919 1.089
GROWTH .011 .008 .146 1.377 .173 .798 1.253
EARNING
VOLATILITY
-.022 .004 -.599 -6.151 .000 .944 1.060
PROFITABILITY 2.838E-006 .000 .041 .436 .665 .991 1.010
TAX RATE -.004 .005 -.085 -.828 .411 .859 1.164
a. Dependent Variable: LEVERAGE

Y=a+bx1+cx2+dx3+ex4+fx5+gx6
Y=constant + firm size + tangibility + growth + earning volatility+
Profitability + tax rate
Y=0.00825+ (-0.17)+ 0.14+0.11+(-0.022)+0.000838+(-0.04)
Table 5: Indicates that

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 .


31

Vous aimerez peut-être aussi