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Determinants of Capital Structure
Nayyar & Muzammil
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I ntroduction
~ Attaullah Shah & Safiullah Khan~ Capital Structure
DebtEquity
~ Lower cost of capital~ Maximizing shareholder wealth~ Optimal capital structure
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VARIABLES AND HYPOTHESES
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Dependent and I ndependent Variables
LEVERAGE
Tangibility of Assets(TG)
Non Debt Tax Shields
Size (SZ)
Growth (GT)
Profitability (PF)Earning Volatility
(EV)
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Measure of Leverage (Dependent)
~ Three methods to measure leverageMarket based
Book value basedTotal debt/total asset based measure
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Tangibility of Assets (TG) I ndependent
~ Large amount of fixed assets, borrow atlower rate of interest.
~
Assets provide security to creditors.~ Positive relation between tangibility of assetsand Leverage.
H1:A firm with higher percentage of fixed assets will have higher debt ratio.
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Size (SZ)
~ Two conflicting view pointsDont considered direct bankruptcy cost as anactive variable.There is less asymmetrical information aboutlarger firms.
~ This means, there is negative relationshipbetween size and leverage.
H2: There is negative relationshipbetween size and leverage of the firm.
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Growth (GT)
~ Bond holders fear of risk~ Might invest in risky projects~ High lending rates~ Firm will prefer internal funding
H3: Firm with higher growth rate will have lower leverage
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Profitability (PF)
~ High profitability high the internal funding,followed by low leverage
~ So negative inverse relation betweenprofitability and leverage
H4: firms with higher profitability will
have lesser leverage
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Earning Volatility (EV)
~ Business risk due to inefficient managementpractices
~ Firm should have to pay risk premium toexternal fund providers
~ So firm will prefer internal funding just toreduce cost of capital
H5: Earning Volatility is negatively related to leverage
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Non Debt Tax Shields
~ Firms use more debt for tax savings~ Because interest is paid on debt that will
decrease firms EBT so there would be lesstaxable amount
H6: NDTS are negatively related toleverage.
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Descriptive Statistics
And Models
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Leverage Ratios of firms
oTextile industry has average of 0.723 leverage againstthe mean leverage of all industries i.e 0.666
oProfitability of power sector is 0.055
oCement industry tangibility 0.655
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Model Specifications
~ Panel data is used~ I t combines the features of time series and
cross section.~ Panel data usually provides the researchers
a large number of data points, increasing thedegree of freedom and ambiguity among
explanatory variables.~ I mprove the efficiency of econometric
estimates.
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Constant Coefficient Model
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The Fixed Effects Model
~ I ndividual firm effects, time, or to controllomitted variables, that differ among firms
but are constant over time.
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Discussion of the results
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